Crawl Across the Ocean

Monday, January 31, 2005

Sticks and Carrots May Break My Bones…

...but words will never motivate me.

With the date when the Kyoto Accord comes into force approaching (Feb 16), the next couple of weeks should see the Federal government once more try to come up with a sensible plan for how to implement it.

So far their approach has consisted primarily of spending money to repeatedly ask people to stop emitting so many greenhouse gases. To nobody's surprise this campaign of words has accomplished nothing and the time is coming to bring in the sticks and carrots.

(Note: a stick is when the government makes the emitter pay and a carrot is when they make the taxpayers pay)

An article in the Globe today suggests that the government is mainly looking at carrots (subsidies for 'green' vehicles, lower taxes on co-generation plants, rebates on energy efficient appliances, extending the Wind Power Production Initiative to include not just wind but other renewables and so on).

But after talking about the various carrots for the whole article, the last line is:
The government is considering forcing auto makers to make a 25-per-cent improvement in fuel efficiency by 2010, and compelling business emitters to meet greenhouse reduction targets

so there may be some sticks in the plan as well.

If the Liberals are looking for ideas, the NDP has lots. As far as I can tell, their plan has 44 points, and seems at times to be simply a list of anything any government somewhere has ever done to try to reduce fossil fuel use.

Still, like a man with a machine gun in a shooting gallery, they do manage to make a few direct hits (such as implementing an emission trading system for large emitters and mandating appliances to meet energy-star standards), and the Liberals could do worse than to cherry-pick the ideas they like from the NDP plan (they'll probably need NDP support to get the budget passed anyway).


In trying to decide what makes a good plan vs. what makes a bad one, I was forced to think about why we need the government to intervene in the first place.

I see three reasons: The primary one is that our pricing system is not working properly. Our emitting of greenhouse gases carries a cost, but that cost is not captured in the price we (or industry) pays to emit. That is, when you buy gas, the price doesn't include the potential cost of the planet's climate changing.

The second one is that it seems like industry often needs a push from government before it will develop new, more efficient ways of doing things. It seems odd, and certainly I'm not saying that business doesn't innovate, because it does constantly, but when government comes in and sets a standard, it focusses attention on that issue, and also reassures companies that they won't be losing a competitive advantage by pursuing something their competition is not spending any money on.

The third reason is that people tend to be irrational when they buy things in that they put more weight on the up-front cost then they do on the life-cycle cost. i.e. They buy the cheap appliance without thinking about how much they're going to spend on electricity or they buy the gas-guzzler and don't worry about the cost of gas.

Keeping these problems in mind, I generally prefer solutions which try to fix the inaccurate pricing signals or which set standards that force industry to innovate and at the same time prevent people from making the worst of their irrational purchasing decisions.

What I don't like is when the government comes up with a whole pile of one-off incentives and rebates for specific items which they have decided would be the best things to focus on to reduce emissions.

As an example, the government may decide that the best way to get me to cut back my emissions may be to give me an incentive to buy a hybrid vehicle. Or they may decide that the best way is to make bus tickets tax free so I can take the bus to work. Or they may decide the best route is to subsidize me renovating my house to make it more efficient or to subsidize me buying a more efficient washing machine. But really, why not just raise the price of emitting across the board and let me decide for myself where I want to cut back. It seems like I know what would be a smaller sacrifice for me better than the government does.

So to make a long story short, my recommendations for implementing Kyoto would be as follows:

1) Raise the federal gas tax by 10c/L, and simultaneously cut the GST to 6%. The intention is to make this a purely revenue neutral change. Not a tax increase or a tax cut, just a redirection of taxes from general goods to gas.

2) Implement an emissions trading system (with a suitable time-lag to allow industry time to prepare for it). The trading system would allow for a certain total amount of industrial emitting (with the total allowed declining over time) and auction off the rights to emit. That way whoever the emissions are worth most to (i.e. whoever is producing the most value) gets them.

3) Honour and build on the existing commitments to expand the Wind Power Production Initiative to provide a 1c/kWh for any new green energy sources up to a cap of 10000 MW. The current plan, provides a roughly 1c/kWh subsidy to the cost of wind power for the first 10 years of operation for any new wind plants, up to a limit of 1000 MW.

4) All new appliances should be mandated to meet energy-star requirements within 3 years. Because people are irrational and will take the lower upfront cost even though it means higher energy costs down the road, I think the government needs to enforce a higher standard in this area.

5) Match California vehicle standards for fuel efficiency and emissions. In order to allow auto manufacturers to be reasonably efficient, it's helpful for them not to have to deal with too many different sets of rules. By matching our standards to some of the toughest ones in the U.S. we can help create a common market for carmakers to target.

6) Reduce investments in road projects and divert infrastructure money to transit projects and an expanded hydroelectric grid. Almost everyone agrees that government has a role to play in building infrastructure. What's not so clear is how much of a role the federal government should have. But given that they already spend a lot on infrastructure projects around the country, it makes sense for them to refocus from building more roads to building more transit and supporting development of renewable energy sources.

For example, a hydroelectric link between Manitoba and Ontario could potentially allow Southern Ontario to close down some of its coal plants which are among the biggest emitters in the country.


I guess the biggest problem with this plan is that it could be political suicide, but hey I'm an optimist (plus, I'm not going to be up for re-election). As this random example I came across on the web indicates, raising gas taxes (even in a revenue neutral way) may not be all that popular. Reading stuff like that just leaves me amazed that the country is in as good shape as it is.

So far, the various details which have been leaking out seem to suggest a reasonable plan, but I hope the Liberals don't chicken out and go with all carrots and no stick, and I hope they don't just put together a laundry list of small targeted subsidies and rebates and tax breaks and programs and incentives rather than sending clear across the board pricing signals and demanding that industry meet a higher standard where that is appropriate. I guess we'll see.

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Sunday, January 30, 2005

Did it Go Something Like This?

I'd been avoiding commenting on the whole same-sex marriage debate since it seemed like it was already getting more coverage than it merits, but the more I thought about the Conservative plan to target 'multicultural' groups with ads opposing same-sex marriage, the more I realized I had to post something.

Not being particularly multi-cultural myself (as these things go), I may never get to see the ads, but in my mind, I see the message going something like this....

Dear Sir or Madam,

If you are receiving this message, you have been identified as a member of a homophobic 'multicultural' group who may be receptive to our message. As you may or may not be aware, the Conservative Party of Canada counts among its members a number of people who both fear to see society change and are suspicious of those who are different / abnormal / unnatural.

Now I know what you're thinking, if it had been up to those people, we never would have let you in to this country in the first place but - given the magnitude of the potential crisis we are facing - we need to bury the past behind us, and look to the future. We need your help to fight the greatest current threat to the well-being of Canadians - the prospect that gays would have the same legal rights to form unions as normal folk, and that these unions could go by the name 'marriage'.

Note: Members of 'multicultural' groups who support polygamy, please skip the following paragraph - thanks.

If we let the 'traditional' definition of marriage be changed in this way, then at any moment, the dreaded specter of polygamy could be next.

We invite you to join us in defending the traditional definition of Canada in its darkest hour.

This message has been brought to you by the Conservative Party of Canada - the party that shares your values

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Thursday, January 27, 2005

STV: more bits, more pieces

First, the Citizens Assembly website has put together some good flash animations on STV and First Past the Post here.

(If you've watched the Australian animation I linked to a few posts back, you may notice some distinct similarities.)

Second, this is late notice, but if you're interested, there's a public meeting for anyone interested in the 'Yes' campaign this Saturday.

GVRD "Yes" Campaign meeting 1-3 pm, January 29th, 2005. Kerrisdale Community Center. 5851 West Boulevard, Vancouver.

More info, of course can be found on the Yes website.

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Wednesday, January 26, 2005

Hypothetical Question for the Day

What happens if the democratically elected Iraqi government decides it wants to evict the U.S. army and close off the country to American bases / troop movement?

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Dividing the Herd

I remember, way back, reading a story in the book Taran Wanderer (by Lloyd Alexander), in which the protagonist, Taran, is forced to divide a herd of cattle between two untrustworthy locals (their herds have been mixed together). Since neither of the two locals would trust him to divide the herd fairly, he comes up with a clever solution - one local will divide the herd into two halves and the other one will choose which half he wants.

I've been thinking about various potential government policies with economic implications (such as Kyoto, or environmental protection in general) and I've decided that we need a somewhat similar solution for our Federal politics (the ones that influence the economy anyway):

I propose that the NDP decide what our priorities should be and set targets, and the Conservatives are put in charge of getting as close as possible to these targets.1 The Liberals would of course still retain all the official reins of power including titles and the ability to make patronage appointments.

The way I figure, everybody wins. The NDP gets what they really want, which is improvements to our overall quality of life, the Liberals get what they want, which is the trappings of power, and the Conservatives get what they want, the ability to prevent all those crazy socialists (in their view) from building up a big welfare state and bankrupting the country.

OK, that's bit cynical and unfair (especially to the Liberals), but I still think it could be an effective model.

1 Actually this isn't all that far from the Green Party platform in the last election.

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Tuesday, January 25, 2005

Time for Another Great Leap Forward

"And now I tell you openly
You have my heart so don't hurt me"
- 'Dreams' - The Cranberries.

Those of you who work (or used to work) for a large organization will be familiar with the annual meeting where the higher-ups hold a little ceremony to talk to the employees about how the last year went and what's planned for the next year. In my experience with different organizations the coffee and muffins beforehand, brief video with inspiring music, sound bites from the CEO/Chairman and pictures of smiling workers, the powerpoint presentation and the closing q&a session are pretty standard.

The only difference is that this year, for the first time, I tried to keep myself awake1 by making mental notes for my blog.

1. The only thing worse than the bland/banal music typically chosen for the inspirational video is when they choose a song that you actually like and have [had] some respect for.

2. Given 5 minutes to try to inspire the whole organization via sound bites (and allowing that the inspirational music will take up a couple of these minutes) the inspirational video rarely gets beyond platitudes such as 'we need to continue to grow', 'we have to focus on profitability', 'our customers are our number one priority', 'the industry is more competitive than ever' and (if the company is doing well) 'there's no room for complacency'. However, this time, in amongst the vague sound bites, one of the execs found time to come out and specifically state that the (rather specialized) job I do is not important. It's a good thing I don't take these videos seriously!

3. I know it's not an exact parallel, but there's still something a bit disconcerting hearing an authoritarian organization the size of a small country talk about how successful their 5 year plan has been and their plans for the next one.

1 Actually, as these things go, this latest one was better than most.
In amongst the motherhood statements and empty rhetoric there was actually the odd bit of relevant information, humour and insight here and there.

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A Few Good Posts

Just a quick note to mention a few worthwhile posts I've seen in the past few days:

Jonathan, over at No More Shall I Roam, has a great post on Copyright.

Timmy over at Voice in the Wilderness has an on the money take on Bush's comments on Missile Defence when he visited Canada a little while back.

Andrew over at Bound By Gravity recounts his experience at the Conservative party regional policy conference the other day.

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Monday, January 24, 2005

A Little Fishy

Strand #1: I first heard about the concept of 'Intelligent Design' from Darren Barefoot's post referring to this interesting article about it in Wired.

More recently, Pogge has posted on the topic and the New York Times had an article on it today (reg. req'd).

Personally, I find it hard to take the whole Intelligent Design concept seriously. In a nutshell, the argument is that the world is so complex that somebody (intelligent) must have designed it. e.g. If you were walking on a beach and found a watch, the purposeful nature of it's design would leave you to believe that it must have had an intelligent creator and not just occurred by chance. And like a watch has a watchmaker a body must have a bodymaker.

Now I'm not saying that the universe wasn't created by some intelligent being. I'm guessing that anyone with the power to create a universe would have the power to lead us to believe whatever they wanted, leaving the question moot.

But the fact that the universe is complicated (by our standards) doesn't prove anything one way or the other. Arguing that human's are so special that we had to have been made specially, just sounds way too much like arguments that the sun goes round the earth, that the earth is the centre of the universe, that humans have a soul or a 'free will' that other animals don't and all the other human-centred nonsense we like to make up to make ourselves feel special.

Especially when simple observation shows us how similar we are to the next most intelligent animals on the planet and when evolution clearly lays out how beings of greater complexity can arise out of simpler ones without the need for intelligent external intervention.

Strand #2: As long-time readers will know, after making the ill-advised decision to fly with Jetsgo, my flight home for Christmas was delayed by 28 hours. On the plus side, all my time waiting around at the airport allowed me to catch up on my reading. Specifically, I was able to read two books I had been meaning to get to for a long time: Wizard's First Rule by Terry Goodkind (readable but not great - The Amazon editorial review is pretty accurate in my opinion) and The Hitchhiker's Guide to the Galaxy by Douglas Adams which was great fun, although I think it was wise to leave it as a fairly short book.

The Rope1: Since I had read the Wired article on Intelligent Design, I was amused to come across the following passage in Hitchhiker's Guide to the Galaxy (written in the 70's), which is written in reference to the Babel fish, a small fish you can put in your ear which will translate any language for you,

"Now it is such a bizarrely improbable coincidence that anything so mind-bogglingly useful could have evolved purely by chance that some thinkers have chosen to see it as a final and clinching proof of the non-existence of God.

The argument goes something like this: "I refuse to prove that I exist," says God, "for proof denies faith, and without faith I am nothing."

"But," says Man, "the Babel fish is a dead giveaway isn't it? It could not have evolved by chance. It proves you exist, and so therefore, by your own arguments, you don't. QED."

"Oh dear," says God, "I hadn't thought of that," and promptly vanishes in a puff of logic.

"Oh, that was easy," says Man, and for an encore goes on to prove that black is white and gets himself killed at the next zebra crossing."

That pretty much sums it up.

1 Technically, according to Wikipedia, a rope is made from three strands, whereas my story only has two. But does this really bother me? I'm afraid not.

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Thursday, January 20, 2005

The Bad, the Ugly and the Whatever Comes Next After Ugly

The National Post had a big headline the other day which read, 15 years of stagnation: TD blames debt and taxes as take-home pay flatlines and was based on a study done by TD Economics.

Personally, I recommend that, any time you see a newspaper article which makes reference to some study, you either go read the study1 and then read the article, or just skip the article because, from what I've seen so far, you're likely to get a pretty distorted view if you rely on one of the media's 'study interpretation' pieces for information.2

So let's look at the study first and then the Post interpretation afterwards.

The TD study, titled, "IN SEARCH OF WELL-BEING
Are Canadians slipping down the economic ladder?" tries to address the question of whether Canadian standards of living are improving or not.

I wasn't two paragraphs in before it became clear that in the author's minds, well-being = standard of living = after-tax income, but we'll save the whole issue of whether you can measure your well-being by the size of your pay cheque for another day.

The heart of the report is that while GDP per capita has gone up 25.5% since 1989, after-tax income per capita has only gone up 9.3% over that stretch. Furthermore, since a greater percentage of the population is working now than in 1989, the gain in after-tax income per worker is only 3.6%.

First off, the choice of dates is a little suspect since 1989 was right at the end of a long boom and right before the start of a recession. When calculating % changes over time, the choice of starting and ending points can make a huge difference so it's important to choose your dates impartially (i.e. for economic analysis the start and end points should be at the same point in the economic cycle).

Secondly, I'm not sure it makes sense to use the 3.6% figure. Obviously the people who have a job now but didn't in 1989 have made a huge gain in their after tax income so why should we ignore them when determining if Canadians have made progress in their after-tax income over the last 15 years?

The study argues that more jobs isn't progress because it means less leisure time, but obviously nobody forced any of these extra people to take a job - they had a choice between leisure time and working and they chose to work.

Anyway, the next question is what about the difference between 25.5% growth in GDP/capita and 9.3% growth in after-tax income. Since GDP is a measure of total income for the country, any growth that didn't go to people would have to either go to corporations or to the government3. While the study notes this, it doesn't say anything further about the change in corporate income over this period - which seems pretty odd. Maybe corporations caused some of this gap and maybe they didn't, but if figuring out the source of the gap is the point of your study, wouldn't you want to look into it?

Disregarding the (potential) corporate factor, the study says that the difference is due to increased taxes. Of course, as the study notes, increased taxes won't reduce your standard of living, it just means that some of your income is being spent by the government you elected instead of by you. The tax money spent on the military increases my standard of living by keeping me safe, taxes given to education increase my standard of living by allowing me to get an education, tax money given to health care - well, you get the picture.

As the study points out, most of the tax increases were due to bracket creep (tax brackets not keeping up with inflation) and increased CPP premiums. For some reason, while the study says,
"Up until the mid-1980s, the federal government fully indexed tax brackets, but then opted for a looser interpretation from 1986 to 2000 applying indexation only to the portion of inflation that was above 3 percent,"

they don't explicitly point out that the brackets were fully indexed again in 2000 so this is no longer really an issue.

Also, while the study points out that, "CPP premiums were hiked from 3.6 per cent in 1986 to 9.9 per cent by 2003", they fail to mention that 9.9 was designed to be a long term steady-state rate, with automatic stabilizers built in to keep it from going higher4 - so CPP increases should no longer be a problem going forward either.

Then the study pulls out their least convincing line:
"Normally a rise in the tax burden would not automatically be associated with reduced economic well being if it were used to finance more current services or to invest in the future. But this is not the case here. The rise in the tax burden is the price society is now paying for past government deficits and policy shortcomings. Between 1975 and 1996, the consolidated government (federal, provincial and municipal) consistently ran deficits, swelling to as much as 8 per cent of GDP in 1992 and 1993. In that two-decade span, Canadians enjoyed $0.90 to $0.97 in program spending (total spending minus interest on public debt) for every dollar of revenue that was put into government coffers. Not so anymore. Only $0.76 to $0.84 of every dollar goes to program spending, with the rest of the money going towards interest costs and relatively modest payments against the accumulated debt."

[emphasis added on the dates to point out that this problem has been fixed too]

How they decided that paying off your debts and paying the interest on them so as not to declare bankruptcy doesn't contribute to your economic well being I don't know. Personally, I spent the latter half of last year saving money to pay off a debt I owed from my school days. I paid it off over Christmas and I definitely feel that my economic well-being has improved by not owing that money any more. And if there's one thing that I would take as a sign of economic non well-being, it would be declaring bankruptcy cause I didn't make my interest payments.

Still, their point that past (pre-current Liberal) governments screwed us over (albeit they were forced to deal with a severe economic dislocation due to the oil crisis) and that debt repayment should remain a priority is well taken.

After this, the study, assuming it has proved its point switches gears to ask what we can do about this problem. Here's their proposed solution: In order to make more money, Canadians need to earn more money (this is known in economic circles as increasing productivity).

In order to help us earn more money the government should:

1) Spend more money on things like education and infrastructure, which help us earn more.
2) Cut taxes to create more incentives for us to earn more
3) Keep reducing the debt.

Ah yes, spend more5, tax less and pay down the debt - why didn't I think of that? - and no, this study was not written by Dalton McGuinty.

By carefully choosing what to emphasize or downplay, the study presents a narrative that high taxes are preventing Canadians from improving our standard of living.

But what it actually tells you if you read between the lines, is that previous governments put us in a hole by creating deficits, underfunding the pension plan and allowing bracket creep. Luckily, the federal Liberal party has solved all of these problems since it took office. Unfortunately, solving these problems involves paying for our past mistakes so we don't feel like we're doing as well as we are because some of our increased income is going towards reducing our debt and refinancing our pension plan.

In conclusion, the study figures that, given that we are now on the right track, it makes sense to continue the balanced Liberal approach of paying down the debt and using the money freed up for a mixture of tax cuts and spending targetted towards productivity improvements.

It's kind of sad that, rather than trying to show Canadians how their financial situation really is improving even if it doesn't seem like it, the article reinforces the inaccurate perception among people that high taxes are keeping them from making any progress.

As a final comment, note that the study never answers the question in their title, "Are Canadians slipping down the Economic Ladder?" - maybe because the authors realize (deep down) that the answer is no (with one exception which I'll mention further down).

OK, enough about the study itself, what about the Post article.

They start off by saying that, "The report urges the federal government to cut taxes and redirect spending toward policies that would boost productivity and incomes."

Of course, you've read the study so you know it is really recommending more spending towards policies that would boost productivity, lower taxes and debt reduction.

Next, the Post ignores the 9.3% average gain/capita and only mentions the 3.6% gain/worker.

With their eye for idiocy, they catch the study's weakest point,
"Canadians have been getting less bang for their taxpayer buck as more of their taxes have been directed toward paying off the national debt rather than funding programs."
I'm not really sure what their point is here - that we shouldn't pay down the debt? That building it up in the first place was a bad idea? That having to pay the interest is annoying?

A little further down, they bring in some new information, namely that,
"A survey of 1,283 Canadians between Dec. 6 and 8 last year found their optimism about the economy was at a 12-year high, but only 23% said their own financial situation was improving.
The survey, by Pollara Inc., showed 34% felt they have been falling behind financially, while 42% felt they have only been holding their own, and their incomes treading water. Coincidentally, the numbers had not changed much over the past 15 years, according to Pollara."

Of course, a relevant thing to mention here would be that, for most Canadians, their income isn't rising as fast as the average income. This is because a disproportionate share of income gains are going to the top 10% of income earners6. So a lot of the people surveyed are right that their situation hasn't improved, but it's not because of high taxes, it's because most of the gains from economic growth are being captured by a small segment of the population. Cuts to progressive income taxes would actually make this problem worse - not better. The Post doesn't mention this.

And of course, people are unlikely to factor their improved position with regard to the debt or the CPP into their assessment of their own financial situation (even though it will benefit them down the road).

One surprising thing a little later in the article is when the Post mentions that Don Drummond, one of the study's co-authors, was actually, "assistant and associate deputy minister of finance under Paul Martin", which makes his downplaying (in the study) of what must have been some of his own accomplishments kind of puzzling.

Anyway, the Post then goes on to quote in full just about every word the study has to say relating to how taxes have gone up over the years. Then they quote Drummond as saying,
"I thought there was an implicit contract from government that the tax burden was high because we had to pay for those excesses and they were going to quickly bring down that debt burden," he said. "But... since about 1997, they decided to use a lot of the proceeds from the high tax load to ramp up spending."

It's a nice story, but not a true one7. The truth is that the government both allowed taxes to continue rising and drastically reduced spending in order to balance the budget. Once the budget was balanced, there have been both tax cuts (minor tax cuts in 1998 and 1999, a significant tax cut in 2000 and numerous further, smaller tax cuts since then) and increased spending. And when you look into it, the only tax which was increased significantly in the last 10 years is the CPP contributions which have no impact on the deficit/debt at all.

The Post points out that, "Federal program spending has been rising at about 7% annually in recent years, way above the 2% inflation rate". But notice how they don't compare it to what it was in 1989 or the total change since the Liberals took power or give us any growth rates on that figure (I would but I don't know what they are) - pretty low though I'd expect). According to this chart from the federal budget (scroll about halfway down): total government program spending (all levels of government) is now somewhere around 35% of GDP, down from over 40% in 1992.

To give them credit, the Post really does save the best for last, ending their article with a quote from Jack Mintz, who "is professor of taxation at the University of Toronto's Joseph L. Rotman School of Management and president of the C.D. Howe Institute, an economics think-tank", but who isn't connected to the study in any way. According to the Post,
"Mr. Mintz suggested a cut in business investment taxes, the third-highest among the world's 20 major industrialized economies, behind only China and Germany."

Yes, that's the Post's solution to stagnating wages for average Canadians - cut taxes for business. Hard to believe. You have to like how they snuck that in, even in an article which was about a study which didn't mention business taxes once8.

So there you have it, some economists wrote a study which demonstrated the wisdom and intelligence of the economic management of the Liberal party in correcting some of the mistakes of the past and which showed how people's income gains were showing up more in the improved financial situation of the government and the CPP rather than in their after-tax income.

Then the study authors twisted their own work to downplay any policy changes undertaken by the current government, to exaggerate their suggestion that high taxes were restraining income growth and to promote the exact same policies being undertaken by the government right now as if they were a recommendation for a change in course.

The National Post skewed things even further by taking out what balance and context the study contained and by throwing in random quotes not connected to the study at all, leaving us with the impression that across the board tax cuts are the only solution to our economic 'stagnation'. Meanwhile, the best course clearly seems to be continuing the balanced approach of spending, debt repayment and tax cuts which the Liberals are already doing.

Times like this always make me wonder how much of this is incompetence / ideological blindness and how much is an ends-justifies-the-means deal where people know what they are saying is misleading and likely to make people support policies which aren't in their own interests, but they do it anyway because they feel it serves some higher ethical purpose (e.g. lower taxes). Either way it's a pretty irresponsible game to be playing, if you ask me.


1 For some reason the Post doesn't give the link to the study, even in the online version of the story. I can't imagine someone Blogging a post of that length about a study and not providing a link to it, especially given that the entire study is available online.

2 This goes doubletriple for the National Post. In fact you're probably better off not reading the Post at all. So am I of course, but sometimes I feel compelled to either mock them or dispel some of their lies.

3At least I can't think of anywhere else it could go - if I missed something let me know.

4See my post on Social Security / CPP here or see this report.

5 The authors may argue that they proposed redirecting spending, not increasing it, but since the only thing they proposed in terms of cutting was reducing the growth in spending on health (which is already underfunded, and politically impossible to cut spending on at the moment), I didn't take their spending 'redirecting' rhetoric too seriously.

6 From Statscan's daily newsletter, for May 13, 2003,

"Incomes of families in the bottom half of the income distribution showed little or no improvement through the 1990s. However, the 10% of families with the highest incomes experienced substantial gains."

7 The Federal Annual Financial Report, while obviously choosing their graphs to suit their message, nonetheless is a pretty good read for figuring out how Federal finances have changed over the last 15 years.

8 Not to mention that the Federal government is still phasing in the corporate tax cuts (reduction in tax rate from 28% to 21%) they brought in for the 2000 budget or that they announced a plan in the last budget to phase out the Federal capital tax on business as well.

A good summary (from a pro-government point of view) of changes in taxation since 2000, can be found here.

About 2/3 of the way down they talk about the international context around corporate tax rates. Personally I wouldn't put too much stock in their talk about the U.S. rate of 40% since the U.S. tax code has so many holes, I doubt many American firms pay anywhere near that amount on average, but the rest is pretty good reading.

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Wednesday, January 19, 2005

STV bits and pieces

First off, thanks to Angela for the new STV button - a definite improvement over the ol' purple and grey square! In recognition Angela, you are being awarded the prestigious title of 'Crawl Across the Ocean Artist Laureate'. Don't be too alarmed that the only other person who currently holds a CAtO award/title (Captain Flynn, holder of the prestigious First Commenter award) mysteriously disappeared after a seemingly innocuous Happy Holidays posting and is now rumoured to be buried under some smelly sweatpants at the bottom of Davy Jones' Locker1. Anyway, thanks - I appreciate it.

In other news, I have been asked by the people running the Yes to STV campaign if I want to do some volunteer work for them. To tell the truth, I'm a pretty lazy guy and fairly busy, and even the Blog seems like a stretch some of the time so I'm not sure how much I can commit, but on the other hand I do want this to pass, so it's a tough one.

At any rate, it sure seems like there is a lot of work to be done - compiling FAQ's, postering, media monitoring, and so on.

If anyone reading is interested in volunteering or helping out, send an email to - or just click on the shiny new button to go to the 'Yes' website (after all, that's what it's there for).

1 Hopefully it's just Blogger's block, or busy work schedule or a long Christmas holiday and nothing more serious which is keeping Flynn away from his blog.

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Blog Milestone

It took a while, but Crawl Across the Ocean received its first spam comment (on the previous post). Alas, even for spam, it was pretty lame. If you judge a Blog by the quality of it's spam then we're off to a rough start here.

Of course, once I went to delete it, I found that Blogger's comment deleting feature didn't seem to be working (since it wouldn't recognize me as being logged in). Fortunately, google (and Richi Jennings) provided a workaround

The workaround worked like a charm, but after using it, I found I was now recognized as being logged in so the comment delete feature was working again. It's stuff like this that made me switch out of computer science (OK, well technically that's not why, but stuff like this didn't encourage me, either).

Since I'm already rambling about technical stuff and complaining about Blogger, I'm also going to mention their terrible spell-checker (The mighty Google can't afford a decent spell-checker? - one that recognizes the word 'Blog' and doesn't get confused by contractions like won't and can't???)

And finally, this is more to do with my template than Blogger but, '1 comments'? come on (I'm guessing I could probably fix this if I really wanted to, but maybe some other time).

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This and That

First, via Real Climate a more thorough and less alarmist piece on global dimming than the BBC had. Doesn't really change my basic point though.

Second, regular readers will know I like to refer to Wikipedia sites. From a comment by WhoMan on this post at Robert's Blahg, I found this concise and seemingly pretty accurate (although a little dated on some of the numbers) assessment of the difference between various economic measures in Canada and the U.S. A good reference to arm yourself with prior to reading anything about the Canadian economy vs. the U.S. one or vice-versa.

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Monday, January 17, 2005

More on Social Security

I hadn't planned to say anything more about social security for a while but, as an anonymous commenter in the last post beat me to the punch by pointing out, there was an article by Roger Lowenstein in the NY Times magazine yesterday which was too good not to mention.

If you have any interest in Social Security or even if you just want to see an example of top-notch journalism, I highly recommend it.

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Sunday, January 16, 2005

The Hazards of Tobogganing and Social Security 'Reform'

I've never written for a newspaper so I don't really know, but I'm thinking one of the biggest advantages of blogging vs. the world of print is being able to write your own headlines. Of course, there may be a reason those two jobs are often separated.

Anyway, a friend mentioned the other day that there was an article in the (Vancouver) North Shore News on the dangers of tobogganing (prompted by a local boy who got a concussion) and that the article was recommending laws to make helmets mandatory while sliding. There is no word yet on whether this was just a big left-wing plot to get Andrew Coyne so upset that he stops writing altogether.1

Meanwhile, I'm starting to think that this whole plan to mess up the U.S. economy, I mean reform Social Security, may be just a ploy to get Paul Krugman so upset that he pulls a Coyne2 - or at the very least stops writing about all the other Bush disasters in the making. If you want a great example of Krugman demolishing the plan for Social Security 'reform', see this link (courtesy of another friend) to an interview with him in Rolling Stone.

1 Andrew Coyne had an excellent Blog which came 4th in voting for best Conservative blog despite the fact that he hasn't posted to it for months - mysteriously disappearing from his blog right after a series of impassioned pleas to stop the madness of mandatory cycling helmet laws.

2 OK technically Coyne only stopped blogging, he kept writing his column, and since Krugman doesn't have a Blog, just a column, it's not a perfect analogy, but nobody likes a nitpicker.

UPDATE: Courtesy of my North Van friend, here is the link to the toboggan story in the North Shore news. As my friends says, whatever happened to bailing out before you hit something? (or went over an embankment with rocks below) - were we wimps in our generation?

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Well the Blog awards may be over and the list of sites nominated still makes a good list of places to look for a good Canadian blog to read, but if you're looking for the best Canadian blog which wasn't nominated, then I would say, look here

Of course it's possible that I'm biased because it seems like every second or third time I write a post, it turns out that Andrew wrote something very similar a long time ago.

For example, consider my post from the other day on collective action problems and compare it to this post, one of the first things Andrew wrote on his blog (way) back in 2002.

I spent a good part of a rainy afternoon today reading through various posts from his long archive (once I realized that sometimes you have to scroll down a bit to see the post) and it's fascinating stuff, especially if you have an interest in Toronto politics, urban planning, collective action problems, Jane Jacobs, or Ontario politics (especially as they relate to Toronto), not to mention climate change, and federal politics

I'm thinking that, since I seem to channel Andrew's archives so often, it's a good bet that if you like this Blog you'll probably like his too.

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Just a Reminder

That the 2004 Canadian Blog Award Winners have been announced (revealed) and can be seen here


Good News For People Who Like Bad News

"‘Well sure as planets come
I know that they end
And if I'm here when that happens
Will you promise me this, my friend,
Please - Bury me with it!
I just don't need none of that Mad Max bulls**t"1

Post Holiday book review #2: "Our Final Century"2 by Martin Rees

For the last few years, I've had this gradually growing sense that the laws of probability are working against mankind and the continued existence of our current civilization.

While the capacity of the system which sustains us (the earth + all our inventions and institutions) to withstand damage is relatively static, our capacity to inflict large scale damage is growing rapidly (exponentially, arguably).

Looking back 200 years, the only real threats to our entire civilization were things like (natural) viral outbreaks, an object from outer space hitting the earth, or an enormous volcanic eruption - that is, the same threats we have always faced.

Those threats are still with us, but we now face added risks like nuclear annihilation and deliberately engineered viruses. On top of that, our growing integration and ever greater sophistication leave us more and more vulnerable to severe computer viruses, economic crises and any number of other threats.

The odds of any one of these things occurring (severely enough to threaten our civilization) are all very small. But as you keep adding more and more things which could potentially go wrong, the probability steadily rises.

So, what about the book? Rees' contention is that, because of the argument I just outlined, we are unlikely to survive to the end of the century. At least not unless we find a way to send life to other planets or we give up much of our freedom to a totalitarian government. Rees devotes chapters to the various threats we face such as biological agents and nuclear threats as well as more esoteric stuff like universe threatening physics experiments while throwing out various depressing thoughts such as the idea that in any field of science the most pessimistic and negative people tend to be the ones who know the most - i.e. the true experts.

But when I got to the end, to tell the truth, I found it a bit disappointing. The writing is clear and concise and not alarmist in tone at all but I think if you just spend five minutes and close your eyes and imagine all the things which could go catastrophically wrong with our entire world that couldn't have gone wrong one or two centuries ago, then you probably don't need to bother reading it, but maybe it's just me. Still, if you find bad news interesting, or you think what I wrote above is just a bunch of bs, or if you want to see it spelled out thoroughly in book form by someone with actual credibility, it's worth a read.

For those of you who are skeptical that we only have one century left, here's a timely piece of news from the BBC, (brought to my attention by Doug and his dynamic drivel) which provides a great example of the kind of thing me and Rees are talking about.

According to the article, the amount of sunlight reaching the earth has dropped by 10 to 30% in the last few decades. The same amount is reaching the earth's outer atmosphere as ever, but it's not all finding it's way through to the ground.

The leading theory to explain why is that "tiny airborne particles of soot, ash, sulphur compounds and other pollutants" are both reflecting sunlight and 'thickening' clouds so that they reflect more sunlight as well.

Apparently, scientists have been surprised that the increase in greenhouse gases hasn't caused a greater rise in temperatures. But they figure that this loss of sunlight ('global dimming' as it is known) may be offsetting global warming to a large extent.

So it seems possible, perhaps even likely, that the only reason we haven't suffered either a painful cooling or warming so far is that our activities have caused two large impacts on our climate, and they just happened to cancel each other out to a fair extent. i.e. We were lucky.

Now we're not making too much progress on reducing our emission which cause global warming, but the pollutants which cause global dimming are more and more coming under control because they are the cause of the visible air pollution which prematurely kills off so many in our large cities (not to mention blocking out the sky).

But if the dimming effect recedes, we may end up facing a much more severe warming trend. From the article:
"We're going to be in a situation unless we act where the cooling pollutant is dropping off while the warming pollutant is going up.

"That means we'll get reducing cooling and increased heating at the same time and that's a problem for us," says Dr Cox.

Even the most pessimistic forecasts of global warming may now have to be drastically revised upwards.

That means a temperature rise of 10 degrees Celsius by 2100 could be on the cards, giving the UK a climate like that of North Africa, and rendering many parts of the world uninhabitable."

Final century? I wouldn't bet against it.

1Despite taking it's name from a song lyric, this site isn't really a good source for musical info (especially on anything current), but I have to take a moment to mention the album "Good News for People Who Like Bad News", by Modest Mouse which is probably the best thing I've heard in quite a while and (obviously) provided the title for this post as well as the quote at the top which is from track 6, 'Bury Me With It'.

2In North America, the book was given the title, The Sorcerers StoneOur Final Hour, but I don't see why you would replace the literal 'Final Century' which is what the book is about with a metaphorical 'Final Hour' which just sounds like the hyperbole that it is.

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Saturday, January 15, 2005

Today's collective action problem

Imagine a scenario with the following characteristics:

1) The entire world has a problem.
2) Every nation is contributing to the problem, some much more than others
3) It is agreed that action needs to be taken in order to solve the problem.
4) It is believed that this action would be costly for every nation that takes part
5) The benefits from any action to solve the problem will be distributed equally to every nation, regardless of whether they themselves contributed or not.
6) Due to 4) and 5) any nation which takes action will be at an economic disadvantage vs. any nation which doesn't take any action.

How would you go about solving this problem?

a) This problem has no solution. Just ignore the problem and hope it goes away.
b) Ask for volunteers and hope that some countries value the gain from helping solve the problem higher than the loss of economic competitiveness.
c) Try to get countries which are wealthier to take the lead in solving the problem, either by going first or by agreeing to take bigger measures
d) Try to get countries which are contributing more to the problem to take the lead in solving the problem
e) Try to get all countries in the world to agree to make contributions to solving the problem
f) Create a global level of government which has the power to force action on everybody in cases like this.


Think about your options in cases like this (remembering the pressures that will face any government which undertakes some costly action while its neighbours freeload) the next time you hear someone saying that the Kyoto protocol is flawed, or so-and-so hasn't signed it, so we should just ignore the problem of global warming.

It's also worth keeping in mind when people say there is no need for a global level of government.

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That wacky MRI gap

I have to give the National Post credit - about all I usually see of it is the front page (in the newspaper box), but they come up with such wacky headlines that I often end up wondering what the heck they are talking about.

Case in point was yesterday's edition where the biggest headline read:

"MRI gap defies cash fix:
Most other developed countries have more machines per capita

Imagine if you saw the following headline:

"Spoon shortage defies purchase of new spoons" and you can see why I was puzzled by this headline (I had 8 spoons and I needed 12, I went out and tried to buy more but I was defied by the spoon gap). If the problem, as the subtitle states, is that there aren't enough machines, then how did more cash not solve this problem?

The article suggests that there is a shortage of people to operate the machines, but really, couldn't money fix that too?

So what's my point? That when people say that 'throwing' (the verb they almost invariably use) more money 'at' the system won't fix anything, they're wrong. This is most clear when we are talking about a shortage of machines that we haven't bought more of because we don't have the money but really it's true about the whole system in general.

The truth is, the biggest problem with health care (in my opinion) is that people want to spend more on their health but they don't want to pay higher taxes and taxes are what is used to pay for their health. There's lots of other problems of course (which I'll save for another day), but that's the biggest one.

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Thursday, January 13, 2005

Train of Thought

So Randy Moss was fined $10,000 for pretending to moon the crowd in Green Bay over the weekend. I can't be the only one wondering how much he would have been fined if he had actually done it.

Which makes me wonder about the proper proportion between punishment for doing something and punishment for pretending to do it. What if someone decided to do the (now banned, I believe) throat-slash celebration - what would the fine for that be?

Does the fine for pretending to do something depend on how likely it is that you would actually do it? Or on how disturbing a mental image it creates? Or just the current political climate? Or on the reputation of the person who committed the act in question?

Questions like this always bring me back to the same place - how absurdly complex even the simplest, most trivial things become when they involve human behavior and decision making. It makes me think we may never understand very much about why we act the way we do and we may never develop anything beyond the crudest analytical (as opposed to experience based) ability to predict how people will act in a given situation.

Every person is so unique and every situation so different, that any kind of repeatable experiment, or sample size large enough to analyze seems pretty hard to come by (especially with Terrell Owens injured).

Isaac Asimov postulated, (in his Foundation series) the development of 'psychologists' who, in his meaning of the term, were scientists who had developed an analytical framework for predicting what people would do and how society would evolve (their rules could only predict the actions of a sufficiently large group of people- they couldn't predict individual behavior).

On the other hand, Neil Postman argued in his essay 'Social Science as Moral Theology' (contained within his 'Conscientious Objections') that we are making a serious mistake by confusing science (along with ideas such as the scientific method and mathematical rules) with sociology, or any kind of human behavior. As he says in the intro,
"there is a measure of cultural self-delusion in the prevalent belief that psychologists, sociologists, anthropologists, and other moral theologians and doing something different from storytelling".

Postman's conclusion that all we can really do to try and figure out human behavior is to tell stories (his definition of storytelling includes 'studies' such as Milgram's experiment on obedience) makes sense because stories are really just a recounting of our experience and - in the absence of a rule-based analytical framework - a carefully distilled look at our experience is our only option for trying to understand who we are.

At any rate, I think I lean more towards the Neil Postman view of the world than the Isaac Asimov one. So what's my point, what's the moral of this meandering post? Nothing, it was just a train of thought, that's all.

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Wednesday, January 12, 2005

Random Steven Wright-esque thought for the day

I walked into a store the other day, and the sign by the cash register said, "We will exceed your expectations" So I raised my expectations accordingly.
By the time I walked out of there, I owned the place.

All right, I'm no Steven Wright, but I can accept that, since he is truly one of a kind.

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Another reason to support STV... the truly weak arguments that No supporters make when they try to argue their case.

For today's lesson, let's take Norman Spector's column in the globe from Monday:

Here's how it starts:

"Single transferable nonsense
10 January 2005
The Globe and Mail

The proposal that British Columbia adopt the single transferable vote (STV) in provincial elections is such a dumb idea, one hardly knows where to begin."

He's already said it's dumb AND nonsense and he hasn't even begun yet - sounds like a balanced piece coming up. He continues...

"Have I mentioned that STV supporters are asking us to try on for size the voting system used by only one of the Commonwealth's 53 countries? Now, it's possible that 400,000 Maltese know something the other 1.8 billion inheritors of British political traditions haven't yet grasped, but I wonder."

It turns out that the place to begin was with misleading statistics, bordering on outright lies. Last time I checked, Northern Ireland was part of the commonwealth, as are Tasmania and the Australian Capital Territory (of course Norman might argue that sub-national jurisdictions don't count as a valid comparison because we are talking about B.C., which is a - oh, never mind.)

At the national level, Australia uses a form of STV for its Senate. Not to mention the fact that while Ireland (which has used STV since 1922) isn't part of the Commonwealth, to say that they haven't had a chance to be exposed to the great British system of government and all its wonders might be a bit misleading.

He then continues a bit further down (Note: I'm not going to quote every single line in his piece, every now and then I've skipped a few, you should probably start by reading his piece, in its entirety)...

"Proponents of this Rube Goldberg voting system say it's as simple as 1-2-3, but they're unable to explain how STV would work in practice."

Another random insult to raise the tone, and another misleading statement bordering on a lie. A visit to the Citizens Assembly will give anyone a pretty clear idea of how STV would work.

"STV advocates contend that only one country uses the system because it transfers power from politicians and parties to the people. I smell other interests at play."

Actually, only Norman talks about only one country using the system, because as we have noted, he is the only one who has randomly decided to pretend that all the jurisdictions besides Malta which use STV don't exist.

Norman's going to go on to explain how he thinks that it is just fringe elements who want STV because it would help them get elected, but if you ask me, the reason STV isn't more widespread is because it is a more complicated electoral system than first-past-the-post. And that's pretty much how everything in the world works, things start simple, but over time you learn the limitations of the way you do things and you decide to make things better, which generally means making them more complex as well. It's like the history of organized sport (with the gradual addition of fouls, lines, referees, offside rules etc.), organized religion, politics, pretty much everything. Of course if nobody is willing to improve their system until everybody else already has, well, you can see how progress might be a little slow.

"Like all proportional voting systems, STV produces minority governments"

This is true - do you know why? Because one party almost never gets over half the votes. Shocking, isn't it. Unlike first past the post which skews the vote results to artificially create a majority, proportional systems simply reflect the actual vote, and people usually vote for a minority.

"The second largest group of voters are disenfranchised, while fringe groups are empowered. And they multiply. In British Columbia's fruitful climate, that's a recipe for disaster."

God forbid the second largest group of voters are disenfranchised. That's what ALWAYS happened under a majority government - the kind that first past the post almost always produces. And does he even remember the 1996 election, when under first past the post, it was the largest group of voters who were disenfranchised?

As for fringe groups, to get a seat under STV, a party likely needs to get at least 15% if not 20-25% of the total vote in any one riding. Just how fringe is a group that gets that level of support. And what disaster does Spector foresee if a fringe-group like the Green Party (which got 12% of the vote in the last election) gets a few seats? That they might end up in a coalition and have a chance to push for part of their agenda to be implemented? What a disaster.

The rest of the article is pretty much a personal attack on Nick Loenen which attempts to show that since he supports STV and he is opposed to Abortion, STV is an inferior system to First Past the Post (I'm not making this up, that takes up about half the article).

I like it when he says that,

"he [Loenen] and other proponents of STV are proposing to destroy the finest political system in the world, British parliamentary democracy."

Before arbitrarily deciding that British parliamentary democracy is the finest political system in the world, Spector might want to compare the results over the last 40 years of two neighbours, England and Ireland - a comparison in which we see that Ireland (under STV) has emerged from hundreds of years of British oppression to exceed England in just about any measure of societal progress (including economic growth) while England has continued to struggle despite possessing the system which Spector likes so much.

Ireland's success is no proof of anything of course, but it suggests to me that B.C. isn't headed for disaster by 'destroying the finest political system in the world'.

Anyway, here's the big finish:

"Of proposals like Mr. Loenen's, leftie activist Judy Rebick has said, “This may be the only issue where you can have a left-right alliance.” Need I say any more?"

Do you see how after demonizing Loenen for half the article, he now attributes the entire STV decision to him, as if the whole Citizen's Assembly thing had never happened? And of course, all that Judy Rebick's comment means is that electoral reform isn't really a left-right issue, which of course I agree with. For example, I, a centrist, am firmly in favour, as I suspect noted conservative Andrew Coyne would be, as are any number of left wing voices.

So does Spector need to say more? I would say yes. He needs to talk about what the purpose of an electoral system is, he needs to talk about the problems with strategic voting, he needs to address the ethical problems with designing an electoral system to achieve policy objectives (strong government, marginalization of non mainstream voices) instead of simply reflecting the votes cast, and most of all he needs to address the failings of the current system which have led us to this referendum.

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Sunday, January 09, 2005

Vote Yes to STV on May 17 (if you live in B.C., anyway)

You may have noticed that I added a (somewhat crude - anyone know a good drawing program?) button to the links on the right. This post explains why it's there (Note: there may be some repetition here for longtime readers, for which I apologize, but I wanted to try and get all the relevant information/arguments/resources together into one post)...

Since the current B.C. Liberal government honoured a campaign promise and brought in fixed election dates we already know, 4 months ahead of time, that on May 17th, B.C. will be going to the polls for a provincial election. At this point, I am somewhat indifferent about which party gets elected (they all have serious problems) although that may change as the date approaches and we actually (hopefully) see some platforms.

But what I will be campaigning for is a 'Yes' vote on the referendum to change the electoral system. The Liberals honoured another election promise by forming a 'Citizen's Assembly' to study whether the electoral system in B.C. should be changed (In the 1996 election the Liberals got more votes than the N.D.P. but the N.D.P. still formed a majority government - this soured the Liberals somewhat on the old (First Past the Post) system).

After months of study, the Assembly recommended that B.C. switch to the 'Single Transferrable Vote' (STV) system which has been used in Ireland since it gained independence in 1922. So along with voting for a party on May 17th, B.C. residents will also vote on whether to switch to STV or to stick to the old system. In order to pass, 60% of people must vote in favour, and there must be a favourable (50% or more, simple majority) vote in favour in at least 60% of the provincial ridings.

I've been reading various people's opinion on whether to vote 'Yes' or 'No' and there seems to be some confusion on what the vote is about:

So, to clarify:

It is not a referendum on how you feel about the Liberal government.
It is not a referendum on the process which was used to generate the choice between STV and the old system.
It is not a choice between STV and your ideal electoral system.
Similarly, it is not a choice between STV and the Mixed Member Proportional System
It is not, or shouldn't be, a choice of which system you think will be best for the party you support.

So, if it's not all that, what is it?

It's simple, it's a choice between whether you think the old (First-Past-the-Post) electoral system or the proposed (STV) system is a better electoral system for B.C.

In order to answer this question we need to ask: what is an electoral system supposed to do? i.e. what makes an electoral system good (or bad)?

In a representative democracy, the electoral system is the mechanism by which all the votes cast (roughly 1.5 million in B.C.) are translated into a list of individuals (79 MLA's in B.C.) who will 'represent' the voters in making laws.1

In order to do this well, the system needs to accomplish 3 things:

1) Proportionality: The distribution of representatives should be reflective of the distribution of votes. As an extreme example, if some party received 80% of the votes in an election and got 0 seats, we would say that the electoral system had failed. If they got 80% of the votes and 80% of the seats, we would say the system had succeeded.

2) Minimize Wasted Votes: As many people as possible should be represented by someone they voted for. For example, under the current system, if I vote for, say, Bill Derlago and he doesn't get a seat in parliament, there will be nobody in parliament representing my vote, and the system has failed to fully represent me.

3) Ensure Geographic Representation: In addition to each person having representation, each geographical region should have representation as well. For example, if after the B.C. election there were no MLA's from the Okanagan region, we would say the system had failed.2

In order to assess how well each of the two systems do on these 3 tests, we need to understand a bit more about how they work.

First Past the Post

The First-Past-the-Post system is quite simple (in fact simplicity is it's main selling point). The territory in question is divided into equally sized ridings and whoever gets the most votes in each riding is elected.

Proportionality: First Past the Post systems routinely fails to accurately reflect the popular vote in the selection of representatives. Generally speaking, the more parties there are, the worse it does. There are three factors which cause distortion under First Past the Post:

1) The rich get richer: In general, the more votes a party gets, the more it is overrepresented in the legislature. For example, in the last B.C. election, the Liberal party got 57% of the vote, but got 97% (all but 2) of the seats. In the previous election, the N.D.P. got 39% of the votes and got 52% of the seats (and formed a majority). The corollary to this of course, is that parties which get fewer votes are underrepresented. As an example, in the 2001 election in B.C. the Green Party got 12% of the votes (an almost identical percentage as the Bloc Quebecois got in the last federal election) and got 0 seats. Which leads nicely into factor 2)...

2) Regional is better: In general, a party whose voters are more regionally concentrated will be overrepresented in the legislature. We see this most clearly in the national parliament where in the last election the Bloc Quebecois (whose support is concentrated in the French speaking parts of one province) gained 18% of the seats (54 seats) despite only getting 12% of the total vote. The corollary to this is that parties with broad-based support from all regions are underrepresented. The most extreme recent case of this was in the 1993 federal election when the nationally supported Progressive Conservative party got 16% of the vote but only got 0.6% of the seats (2 seats).

3) Luck: Finally, there is an element of pure chance in that a party which happens to win a lot of ridings by close margins will be overrepresented while a party which happens to lose a lot of ridings by close margins will be underrepresented - as happened to some extent in the 1996 B.C. election.

So, the First-Past-the-Post system gives unearned seats to the big, the regionally concentrated and the lucky. And by the same token it cheats the small, the broadly supported and the unlucky.

However, there are further, less obvious problems of proportionality in the First Past the Post system. Because of the way it operates, the First Past the Post system may distort the actual vote itself, by forcing people to vote for someone who is not their first preference.

Consider the case of Ross Perot or Ralph Nader. How many people would have preferred to vote for one of them but didn't because by voting for Perot they actually helped elect Clinton and by voting for Nader (instead of Kerry) they would help elect Bush.

Under First Past the Post, having two parties with a similar message is counter-productive, which discourages the formation of new parties, discourages voting for new parties if they do form, and discourages the continued existence of the new parties even if people do vote for them. Consider the case of the Reform/Alliance party and the Progressive Conservative party. The two parties had different messages which appealed differently to different people. But because they appealed to similar, overlapping groups of people, the two parties were effectively forced to merge in order to have any chance of electoral success.

The end result is that people are never really given the option of voting for the party that they would choose in an unbiased system, so the vote count itself is not proportional with the preferences of the population.

Wasted Votes: With only 2 parties, the proportion of those votes which are wasted (i.e. the percent of the population not represented by anyone they voted for) varies from a maximum of 50%, down to about 25% in really lopsided elections. As the number of parties increases, the number of wasted votes increases. For example, in a four party race, one candidate could win election with only 30% of the votes (with the other 3 getting 25, 25% and 20% respectively). In this case, 70% of the voters will be left unrepresented.

Geographical Representation: First Past the Post does a good job of this, and ensures that each riding is represented by one person.

Single Transferrable Vote:

Before explaining what STV is, it's worth considering what the opposite of First Past the Post would be. First Past the Post breaks the territory down into a number of regions (ridings) such that there are as many ridings as representatives and then chooses one representative from each riding. The opposite would be to only have one riding (equal in size to the whole territory) and then choose all your representatives from that one riding.

This opposite system is known as [Pure] Proportional Representation or Party List Proportional Representation (since it is normally implemented in such a way that who gets elected from each party is based on a list that each party puts together - although there's theoretically no necessity to implement it that way).

Pure Proportional Representation achieves (surprise, surprise) perfect proportionality, but does it by sacrificing geographic representation (and in the case of party lists, people are only really assured that they are represented by the party they voted for, not the individual). It is generally used in geographically compact places where geography isn't a big issue.

So, given that First Past the Post and Pure PR represent two extremes (One person elected per riding & perfect geographic representation vs. one riding from which everyone is elected & perfect proportionality) how do we compromise between them?

There are two ways. The first is to elect half (or some percentage) of the members from First Past the Post and half (or some percentage) from Pure PR. This approach leads to what is typically known as the Mixed Member Proportional system (MMP), the system which was recommended by the Law Commission of Canada and the one which is going to referendum in P.E.I. in November. MMP is a pretty good system and, if you ask me, it's about equally as good as STV in general and probably better for large territories with many regional parties (like the federal government in Canada).

In B.C. however, the Citizen's Assembly rejected MMP and chose the second way to compromise: fewer ridings with more than one person elected from each one - STV.

Under STV you could have, for example, a riding from which 5 people would be elected (this riding would be 5 times the size of the old ridings if you wanted to keep the number of representatives the same). Voters would rank candidates starting with #1 and continuing up to #5. After that, anyone who gets enough first place votes (more than 1/6th of the total, since only 5 people can get more than 1/6 of the votes) is elected (if someone has more votes than they need, then their 'extra' votes are redistributed among the remaining candidates) and if nobody has enough votes to get elected than the person with the fewest first place votes is knocked out and the second place votes on their ballots are redistributed. This process repeats until 5 people are left standing.

It's a bit complicated although it becomes pretty clear if you watch the cute animation here (note: what the Aussie's call Proportional Representation in the animation is what we call STV).

So how does STV do on our three criteria for an effective electoral system?

Proportionality: While not as good as an MMP system or a Pure PR system, STV does much better than First Past the Post. The more people are elected from each riding, the more it resembles pure PR and the better the proportionality.

Minimize Wasted Votes: Because it allows you to express more than one preference, STV is probably the best system for making sure people have someone in parliament who they voted for, since even if their first choice was a fringe candidate with no hope of being elected, once that candidate is eliminated, their second preference will be counted.

Ensure Geographic Representation: Under STV every representative, represents a specific geographic area and every area has (more than one) representative. Some might say this is a disadvantage vs. First Past the Post since the one-to-one connection between citizen and geographical representative has been broken. Others may see it as an improvement since now voters have a choice of more than one representative from their area they can go to in case of trouble, giving them more choice. Personally, I'd say it's a draw, but that's a judgment call.

So on our 3 main criteria, STV is clearly superior on two and about even on the other. This is why the button I added to my site says, 'STV for True Democracy' - because true democracy means an assembly which accurately represents the votes cast and which doesn't waste the votes of half the population.

Other Issues:

Besides the 3 primary tests I identified, there are a variety of other issues which can be considered in comparing electoral systems:

Ease of entry for new parties:

First Past the Post: Very difficult. A new party typically needs to get at least 30% of the vote in a single riding in order to elect someone. What percent of the total vote they need in order to get someone elected depends on how regionally concentrated they are. That's why most new parties which form and are able to win seats under First Past the Post are regional protest parties.

Of course even these regional protest parties generally don't last all that long since they don't have the support to form a government and under First Past the Post, they just take votes from any other party with similar policies. So not only can they not gain any power, their presence tends to lead to the party they are protesting against taking power (Perot=Clinton victory, Nader=Bush victory, Reform=Liberal government) This is why there's even a 'law' which says that First Past the Post systems naturally lead to only having two political parties.

STV: Easier. Strategic voting is no longer a problem and a new party will start getting close to gaining seats as its support reaches double digits (roughly - it depends on how many members are elected per riding - the more, the better the chances for small parties).

Support for Extremist Parties: Mildly easier under STV but since you still need at least 10% of the vote (more in most cases) to get a seat, it's a question of how extreme a view something is if 1 in 10 people support it as their first preference.

Turnout: First Past the Post - probably the worst system, due to the high percentage of wasted votes, large numbers of safe seats where the outcome isn't in doubt, the problem of strategic voting and a lack of choice among candidates.

STV: Its complexity may discourage some people, and the percentage of spoiled ballots may be slightly higher, but the far greater choice, combined with no problem with strategic voting, no/fewer safe seats and fewer wasted votes would lead one to believe that turnout would increase under STV vs. First Past the Post.

Choice Among Candidates from the same Party: First Past the Post: none - if you want to vote conservative in Calgary West in the Federal Election you have to vote Rob Anders, the party tells you who to vote for.

STV: Yes - how many choices you have depends on how many people are elected from your riding. If 5, then you would have up to 5 choices of Conservative candidates to vote for.

Complexity: First Past the Post: Probably the simplest system you could come up with other than just flipping a coin.

STV: More complex. It is easy to vote (just put a 1 beside your first choice, a 2 beside your second choice, etc.) but the process for determining who gets elected in each riding is somewhat complicated (in order to make it as fair as possible).

Party Control of Electoral Process: First Past the Post: Limited to choosing who runs in each riding.

STV: Even more limited since voters can choose among the various candidates nominated by a party in a certain riding. If they don't like one of the people who wins nomination, the other candidates will be elected first. This makes it difficult for party leaders to parachute in' outsiders.

Likelihood of Majority Government: First Past the Post: High - because parties with more votes get disproportionately more seats under First Past the Post, majority governments are more likely. This is seen as a plus by those who believe that strong government is better government (up to a point - they generally don't support dictatorship) and who don't mind skewing the results to achieve it.

STV: Lower, because STV is generally proportional, in order to gain a majority the party would need to get close to 50% of the total vote. This doesn't happen very often (although it could, if that's what voters wanted).

Some people express concern that in a minority government situation, a small party could hold the balance of power (like the Bloc does in our current Federal government). Of course, this doesn't mean that a small party can get whatever it wants. Even if it does enter into a partnership with the ruling party, it is generally a junior partner and is lucky to get progress on a couple of it's key issues (those least objectionable to the ruling party, generally). Really, the only change is that the small party holding the balance of power (and the people who voted for them) won't be completely ignored like they would be under a majority situation.

Representation of Women (+ Ethnic Groups, etc.): Although women make up half the population, they have historically made up a much smaller percentage of assembly members under First Past the Post systems. Party list systems (including MMP) can increase the number of women in parliament, basically because the party leaders decide who gets elected, so if they want, they can decide that a certain percentage of those people should be women.

However, like First Past the Post, STV require candidates to both win a nomination for a riding and then win a seat in the riding itself so it isn't likely to increase the number of women elected. In fact, since STV is both more competitive and offers voters more choice than First Past the Post, it may lead to fewer women: if, that is, women are not being elected due to an unwillingness to compete or because voters don't want to vote for women.

Level of Change from Past: First Past the Post: None, First Past the Post is the past.
STV: STV would be a fairly significant change although, if you believe this book (a fairly famous work, which probably deserves a post or two itself), any impact on government effectiveness is likely to be limited - change would be limited to the composition of the assembly. Of course, if you don't like change for any reason, it makes sense to vote for the status quo.


Simple enough?

If not, let's just say that just about anyone who has studied electoral systems seriously (like the Citizen's Assembly) has concluded that STV is better than First Past the Post and the last few decades have seen a lot of countries switch away from First Past the Post and hasn't seen any (that I know of) switch to it. There are reasons for this, and those reasons are what I tried to capture in this post and they're why I'll be voting yes on May 17th.


1For those of you more comfortable in the symbolic world, the electoral system could be considered: F(v) = a, where v = the votes cast, a = the composition of the elected assembly and F is the function (electoral system) which takes v as input and produces a as output. And yes, I am a bit of a math geek.

2 Some may wonder why geography is so important but other possible criteria for representation (class, gender, occupational class etc.) are ignored. If so, you should go read Systems of Survival by Jane Jacobs. As she explains, the work of government (and what makes it ethically different from commerce and trade) is that it involves the control and management of physical territory. Hence the importance of territorial representation in the parliament.


Some Resources:

Tons of relevant information at the site for the Citizen's Assembly

Additional info on First Past the Post, and Single Transferrable Vote, at Wikipedia

Dave Pollard had an excellent post on STV over at How to Save the World

The Electoral Reform Society has been studying what electoral systems work the best longer than anyone.

The best illustration of how STV works that I've seen can be found in a flash animation
put together by South Australia's State Electoral Office

One thing to note is that what the Aussie's refer to as Proportional Representation in the animation, we call Single Transferrable Vote, and what they call 'Exclusion (Bottom's Up)' is often referred to as Instant Runoff voting here.

A report on electoral reform from the Law Commission of Canada.

Fair Vote Canada is a group that was been working on improving the electoral systems across Canada.

Here is the same Vote Yes to STV campaign website that the button links to.

Finally, if you think I'm long-winded on this topic, don't go here. Within that site, you can also find this concise summary of the experience with STV in Ireland

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Saturday, January 08, 2005

Real Science is Hard

If you're interested in the Canadian Blogosphere take on 'Global Warming' there's been lots of talk lately, starting at Stageleft,
continuing at Heart of the Matter, continuing at Bound by Gravity and also spilling over at Calgary Grit and Obsidian Tempest.

The upshot is that there are some right-wing folks who disagree that with the vast majority of climate change experts who believe that human activity is contributing to a general rise of earth's surface temperature (i.e. global warming) or who think that even if we are contributing to rising temperatures we should just roll with the punches (so to speak) instead of trying to prevent/minimize our impact.

What I find interesting is the contrast between the complexity of the scientific work on one hand and the simplicity of those who are arguing against the general consensus which arises from the scientific work. What it comes down to is that real science is hard, pseudo-science is easy.

Anyway, for those who are interested, here's a link to the Intergovernmental Panel on Climate Change, a UN body set up to co-ordinate/synthesize the work done/knowledge gained on this topic by scientists from around the globe.

And here's a link to a very clearly written Blog, RealClimate which is run by some climate scientists and is devoted to providing timely, accurate responses/clarifications to mainstream media discussions of climate change. It's worth a look (for future reference, I've added it to my links under miscellaneous) - thanks to Jonathan for pointing it out.

To me, the question we should be talking about is how should we go about reducing our impact on the climate. I don't think that Rick Mercer commercials are the answer, but I admit that I don't know what is. I'm thinking that the division of powers between Federal and Provincial is probably a complicating factor, but don't know that for sure. Suggestions are welcome.

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Friday, January 07, 2005

Random Thought For the Weekend

Maybe it's just me, but I think that when it's big news that your country's [proposed] Attorney General disavows torture, it may be time to take a step back and think about where your country is at and how it got there.

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Thursday, January 06, 2005

Overheard... the bus stop this morning:

Homeless Guy: "I'm sorry, I can't remember, have I already asked you for money?"
Woman Waiting for Bus (amused): "Not today"

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Wednesday, January 05, 2005

Social Security / CPP 101

So I've been thinking about social security & public pension reform over the last couple of weeks, doing some reading, trying to write a blog post explaining some of the concepts involved and to sort out my own thoughts, and a peculiar thing happened - I ended up accidentally writing an essay (It's a shame this never happened back in my student days).

I should mention that this is not exactly my area of expertise, so if any readers out there (especially my large actuarial following) sees any errors, misconceptions etc., please make your voice heard.

Anyway, here it is (cross-posted at the e-group which you should be voting for here as best Canadian blog - or at the very least, best Group blog)...

Social Security / CPP 101


Some time in the past (1937 in the U.S., 1966 in Canada) a decision was made that the state should provide funding to old (over 65) people so that they could stop working and have some rest before they died without being left destitute. In the U.S., this program is called Social Security, in Canada it is known as the Canada Pension Plan (CPP).

The Funding Decision

Governments faced a key decision in setting up these programs: how to fund them. Generally speaking, they had two choices:

a) Force people to save a certain percentage of their salary throughout their lives, save up that money over the years, and then use that same money to pay themselves benefits during their retirement (a 'fully-funded' system)


b) Force people to save a certain percentage of their salary throughout their lives and use that money immediately to pay benefits to people who are already retired (a 'pay as you go' system)

While there isn't really any significant predictable difference in efficiency (total money paid out vs. money paid in) between these two systems1, each comes with it's own unique drawbacks.

Pay As You Go Drawbacks (remember #1 and #3 for later)

Problem #1: No Free Lunch

Upon implementation, the pay as you go system starts paying out benefits immediately (or soon, anyway) to people who have never contributed anything (or much, anyway) to the system. While this fortunate generation does basically get a free lunch, society doesn't get off so easily.

The catch is that because the first 'golden' generation received benefits but never contributed any savings, the system is always one generation worth of payments short on cash (it's a bit like a stable pyramid scheme). As long as each generation is willing to see its own contributions paid to their parents generation, this isn't a problem. If however, at some point you want to switch to a fully funded system or just scrap the whole idea, then you have to come up with the extra generation worth of cash or else your current crop of retired folks (who contributed to their parents generation's retirement all their lives and are now relying on their children's generation to support them) will be out of luck.

Problem #2: Temptation

Because of it's receive now, pay later, structure, the pay as you go system has a tendency to lead to regular increases in the benefits provided, which in turn leads to higher contribution rates down the road to pay for them.

Problem #3: Matching

Unlike the fully funded model where each person basically supports their own retirement, under pay as you go you have one group (those currently working) supporting a separate group (those currently retired). This creates a potential problem if the relative size of these two groups changes.

Fully Funded System Drawbacks

Problem #1: Lack of Flexibility

A pay as you go system is better suited to achieving social policy goals such as redistributing income, providing disability benefits and so on, if these are desired.

Problem #2 What to Do With All That Money

A fully funded plan creates a huge pool of savings as compared to a pay as you go plan. If managed by the government there is a risk that it will be managed poorly or politically and that it may be used to disguise a budget deficit. If managed by individuals there is a loss of risk sharing as well as higher fees and expenses. More on this later.

While the huge pool of savings may increase the countries overall savings rate and this may lead to more investment (especially if markets are in need of capital) there is little agreement or evidence on this front.

Finally, there is the question of whether a country's capital markets (stock market, bond market, etc.) are big enough to be able to effectively make use of all this money.

Problem #3: Delayed Implementation

If people have to rely on money they themselves contributed to the system, then the system will only start to pay out significant benefits as people who have been contributing for years start to retire. Doing it this way doesn't win a lot of votes from the people who are already retired at the time of implementation, since they get no benefit from the program.

The Decision:

Faced with future problems under a pay as you go method and immediate problems under a fully funded approach, both the U.S. and Canadian governments unsurprisingly chose to implement pay as you go systems.2

Remember That Matching Problem?

A study done in the mid-1990's in Canada suggested that [thanks to longer lifespans and declining birth rates] the ratio of workers to retirees would decrease from 5:1 at the time, to 3:1 by 2030. This is exactly the matching problem (#3) that was a risk under the pay as you go plan. A similar trend has occurred in the United States.

With the ratio of people 'paying in' to people 'taking out' in steady decline, the system needs to be rebalanced to avoid ending up unable to pay the full benefits it has promised people. There are basically 3 ways to bridge the gap between the amount of money in the system and the amount of money to be paid out:

1) Reduce the money you pay out (cut benefits, raise the retirement age, etc.)
2) Increase contributions (raise taxes, force the current generation to save more to support their parents)
3) Increase the rate of return earned on the money in the system (i.e. money that has been saved but hasn't been paid out yet.)

Over the years, the Canadian and American governments have used a mixture of these approaches to deal with the matching problem.

U.S. Reaction - 1983

In 1983, the U.S., foreseeing trouble ahead, applied a combination of methods 1 and 2. Specifically,
"The National Commission on Social Security Reform was created in response to the actuarial unsoundness of the system. The commission called for 1) an increase in the self-employment tax; 2) partial taxation of benefits to upper income retirees; 3) expansion of coverage to include federal civilian and nonprofit organization employees; and 4) an increase in the retirement age from 65 to 67, to be enacted gradually starting in 2000. Again, Social Security was declared actuarially sound. Payroll taxes were 10.8%."3

In order to smooth out the rise in contribution rates, the U.S. decided to raise rates more than was necessary at the time, in order to build up a surplus of funds, and then draw down that surplus as necessary once the demographic crunch really started to arrive.

Canadian Reaction - 1999

Canada attempted to build up a similar reserve fund, but by the mid-90's actuaries were estimating that the fund would be fully drawn down by 2015, after which retirees would not be able to receive the full benefits they had been promised. In order to maintain full benefits, contribution rates would have to gradually rise from the current (at the time) 5.6% to 14.2%.

Canada followed the U.S. example of 1983, but applied all 3 possible remedies, reducing benefits, increasing premiums, and attempting to raise the rate of return on the reserve fund (by moving to a partially (20%) funded model, building up a reserve of 5 years worth of payments and switching from a policy of investing only in bonds to investing in stocks as well).

Specifically, of the funds required to bridge the funding gap:

25% came from the switch to partial (20%) funding combined with equity investing
28% came from benefit reductions
13% came from an increase in the payroll tax (to 9.9%)
34% came from one specific benefit reduction: freezing the annual taxable earnings exemption (no longer indexing the basic amount of income which was exempt from CPP - frozen at $3,500)4

Similar to the U.S. plan of 1983, the 9.9% rate was designed to be high enough to be a 'steady state' figure - i.e. stable in the long term. Unlike the U.S., Canada built in an automatic stabilizer by which benefits would be automatically reduced (by no longer being indexed to inflation) in the event that the 9.9% rate no longer seemed high enough to ensure the long term health of the system. So far, the 9.9 rate has been sufficient (the steady state rate is now estimated at 9.8%).

Whereas in the years leading up to the 1999 changes there was a flurry of warnings about a crisis in the CPP and the need for privatization, the years since have been remarkable for their silence on the issue (Google: '"Canada Pension Plan" Crisis' or 'CPP Pyramid Scheme' and you'll see what I mean).

U.S. Reaction - 2005

Unfortunately for the U.S., the adjustments made in 1983 have not yet been quite sufficient to fully close the funding gap in Social Security. Of course, as Paul Krugman notes,
"The date at which the trust fund will run out, according to Social Security Administration projections, has receded steadily into the future: 10 years ago it was 2029, now it's 2042. As Kevin Drum, Brad DeLong, and others have pointed out, the SSA estimates are very conservative, and quite moderate projections of economic growth push the exhaustion date into the indefinite future."5

Unlike in previous solutions, the President has ruled out options #1 (benefit cuts) and #2 (contribution increases), leaving #3 - increasing the rate of return as the only possible solution. Based on the debate in the U.S. so far, the option of having the government invest the surplus money in stocks does not seem to be being considered. This leaves the only option as having individual investors invest the money in stocks themselves. But this can only happen in a fully funded system.

So the current (Bush administration) plan is to switch from the pay as you go system to the fully funded system. And this is why I said you should remember problem #1 with the pay as you go system - the enormous cost of switching away from it.

This leaves us with 3 questions:

Will increased returns from investing the money in stocks solve the funding gap?
Is it better to have individuals manage their accounts vs. the government?
What will be the cost of switching systems, and how will it be paid?

Will the increased returns from investing the money in stocks solve the funding gap?

On its face, this is a simple actuarial question. In the same way as it was estimated that switching to some stock investment for the CPP would cover 25% of the Canadian funding gap in 1999, it is possible to work out a similar figure for the current U.S. situation. Thanks to the 1983 reforms, the funding gap isn't that large (with solid economic growth in the next couple of decades it won't exist at all), so I wouldn't be surprised if reasonable stock returns wouldn't cover much of the gap.

However, there are other, murkier aspects to this question. What will happen with people who do better than average with their investments? Will they be allowed to keep them? If so, it will be harder to close the gap. What about people who do poorly? Will they be left to suffer? If so, doesn't that defeat the whole purpose the program was set up for in the first place? If not, and we have to supplement their returns, this will make it harder to close the gap as well. If we are going to hold people to an average return anyway, shouldn't we just make them invest in index funds and save the commissions?

And of course, just how much will people end up paying in commissions and fees? Experience in other countries suggest that from 1-2% of the return will be taken up by them6 - a significant dent.

Furthermore, a lot of people may not even want to be bothered with having to manage another account and to the extent that they do take the time to figure out what to do with it, the opportunity cost of everyone in the country putting in even just a few hours to manage their account could be enormous.

Finally, what if people throw all their money in stocks and the market has a long spell of poor performance (it's happened). Or what if the stock market performance over the last few decades has been unusually good (there's reasonable evidence to support this.7) Or what if people are conservative and don't put much money in stocks at all? Either way, the gap may not be closed much.

To boil it down, there's a reason stocks have a higher rate of return than bonds: they're more risky. And when combined with a plan whose motivation is to provide a consistent, basic return to everyone rather than just a good average return, significant losses to fees and commissions, and a likely end to a period of higher than usual stock returns, it's possible (perhaps even likely) that the gains from investing in stocks will be pretty small.

Is it better to have individuals manage their accounts vs. the government?

Just because a system is fully funded doesn't mean it has to have private accounts (Singapore, for one, has a fully funded, centrally run pension plan8).

On the one hand, people like to manage their own money and don't trust government enough to feel comfortable leaving a huge pile of money in its hands. On the other hand, government will end up paying far lower commissions, will take vastly fewer man hours to make the investment decisions and would be expected to earn a higher (or at least equal) rate of return as the average individual (it's possible that it is purely random and hand picked experts couldn't do better than average returns, but there's no reason to think they'd do worse than average).

It's also worth noting that both countries already have systems whereby those who want to manage their own retirement savings have a tax free vehicle (RRSP in Canada, 401K in the U.S.) which allows them to do this.

Plus, we have to consider all the potential problems with managing above and below average returns that we mentioned in the last section. These problems don't arise in a government run system (or in the optional RRSP / 401K systems). They are the reason (along with containing fees) that many countries which have set up private accounts have put tight restrictions on how they can be invested, which kind of defeats the purpose.

What will be the cost of switching systems, and how will it be paid?

As mentioned earlier, this is the cost of paying people their benefits when the people they were expecting to provide them (current workers) are now keeping the money for themselves (as happens under a fully funded system). It's the delayed cost of the free lunch you get at the start of the pay as you go plan.

Coming up with the total should be a fairly straightforward actuarial question - the estimates I've seen have been upwards of $2 trillion. In order to finance a similar transition, Chile ran many years of budget surplusses (and devoted the surplus funds to the transition costs), privatized a number of state enterprises, cut benefits, raised taxes and still was left with significant borrowing9. Argentina financed a similar transition with pure borrowing, but given the financial (debt/currency) crisis/meltdown they were hit with a few years into their experiment, we'll never know for sure how that would have worked out.

Given that the U.S. is already fairly significantly in debt, and somewhat resistant to raising taxes, the only way to finance the transition (without cutting benefits) would be through issuing yet more debt. This will have two costs:

1) Interest - even at U.S. government borrowing rates, the interest on $2 trillion+ is likely to be significant. Although in a sense you are just trading the liability of switching systems someday for the liability of repaying government bonds someday, there is a big difference in that you have to pay interest (now) on government bonds, while you don't on theoretical future obligations.

2) Higher interest rates /reduced market confidence - in financial markets you pay a penalty for risk and even the U.S. government starts to look a bit more risky when it adds $2+ trillion to an already large debt load. Also, by increasing demand for money, the government is likely to push up interest rates, which will have a negative impact on the economy.

In a nutshell, the cost is hard to estimate exactly, but it's going to be high.


There are good reasons to prefer a fully funded system to a pay as you go one (and vice versa). If I was starting a new system myself, I'd probably go with a fully funded one, mainly because I don't like the idea of constraining the choices of future generations. But that ship has already sailed and it's too late to start from scratch.

Given the heavily indebted state of the Canadian and (especially) the U.S. governments, taking on another huge financial burden just for the unproven potential benefits of changing funding systems or for the creation of private accounts which are likely to do as much harm as good seems deeply unwise.

Rather than take on huge costs and risks for an uncertain gain, the better path would be to make the minor but politically difficult changes necessary to keep the existing system functioning according to its intended purpose into and beyond the foreseeable future.

1 The growth in funds (rate of return) for a fully funded system depends on real interest rates (i.e. posted interest rates - inflation) if invested in bonds or growth in corporate profits if invested in stocks. If real interest rates/corporate profit growth rates are high it does better, if they are low, not so good.

In a pay as you go system the growth in funds (rate of return) depends on the growth in wages (from which contributions are made).

Whether the real interest rate, corporate profit growth rate or the wage growth rate will be higher is hard to predict. In the 50's and 60's, wage growth was higher but in more recent years real interest rates have typically been higher. Corporate profit growth rates have been high over the last few decades but many would argue that this performance is unsustainable.

2 Actuaries / government officials of the time may argue that they did it not for political expediency but because the economic variables at the time (as described in note 1) suggested a pay as you go system would be more efficient. I wasn't there so I can't say for sure, but I'm a bit cynical so I tend to think they went for expediency and immediacy rather than aiming (incorrectly as it turned out) for efficiency.

3 From this website pushing Social Security Reform. It's slanted and their understanding of pay as you go systems is a bit lacking, but if you ignore the subjective parts, it's a good, well organized source of facts on the Social Security system.

4 Figures from this report on the changes made to the CPP in 1999, prepared by employees of the Social Security System in the U.S. The focus is on the decision to invest some of the reserve in stocks and how this was handled, but it has a good background on the whole situation.

5 Frustrated with trying to get his point across in 700 word columns, Paul Krugman wrote this (slightly) longer piece in which he debunks three myths about Social Security with typical style.

6 Taken from a paper by the U.S. congressional budget office reviewing experience with Public Pension 'Privatizations' in other countries (Australia, Britain, Mexico, Chile and Argentina). Interesting subject but fairly dryly written, you have to read between the lines a bit to figure out what the authors really think.

7 Krugman has a good explanation of this in the same article.

8 I found out about the Singapore system from this paper written on the pros and cons of privatizing Mexico's pension plan. It does a good job of explaining some of the trickier concepts, such as why there's not much difference in efficiency between a fully funded or pay as you go system.

9 The original NY Times article is in the pay archive, so I'm linking to where I saw it quoted at Tech Central Station.

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