Antidote

After the unpleasantness of the last post, here is a little sanity, courtesy of commenter, 'A Canadian Reader' on the Globe and Mail the other day,

"I'm very tired of this obsession with lower taxes. My neighbourhood is full of people with the latest great cars, wonderful homes, children in private schools.

It isn't clear at all why we need our taxes to be even lower than they are. I don't need a new car. Mine is nice enough.

What I do need is schools that prepare our young people for a future they will have to shape themselves, health care that really takes care of the elderly and the sick, a civilized environment that values people and shows it every day.

I'm proud to support these goals with my taxes, and ashamed that my government is so focused on saving rich people and big business's money, at the expense of the weak and vulnerable.

It's a stupid priority and leads to what the US has now--California in tatters, Utah trying to cancel grade 12.

Time for the strong in society to grow up and quit trying to get all the cake all the time."

Now we just need a few (thousand) people to cut and paste that comment on to every news story in any medium that mentions how all we need for happiness is lower taxes (with never a word about what will be cut or who will benefit most) and we might start getting somewhere.

You Are Here

From a recent interview with Stephen Harper,

"Reguly: Do you regret cutting the GST now?

Harper: No, not at all.

Reguly: No?

Harper: No, it's ... First of all, I believe cutting all taxes is good policy, okay? I... I'm of the school that... You know, there's two schools in economics on this, one is that there are some good taxes and the other is that no taxes are good taxes. I'm in the latter category. I don't believe any taxes are good taxes. It's important to remember when we cut the full two points of the GST, the budget was still in surplus. Anyone who says we put the budget in deficit by cutting the GST is wrong. I also think cutting the GST had some important effects. I think it's important to say why it was a good policy, besides fulfilling an electoral commitment to cut the GST, um... besides being a tax cut which as I say is good in and of itself.

...

Reguly: Good."

Apparently, there are two schools of economic thought. One believes that we are better off with some sort of government. The other is explicitly anarchist. Our PM has declared himself an anarchist. The charitable interpretation is that he was simply trying to say that all taxes are the same in their appropriateness but of course this a) doesn't really match what he said very well and b) is almost equally as stupid.

I'm not really posting too much on the politics these days, but I wanted to note this one down just as a marker of where we are now in our discourse on the role of government and the need to pay for it, just how far gone into childish ideology and delusion we really are when our Prime Minister says such things seriously and the only response from our media is 'good'.

Canadian Stimulus

Let's accept, for a moment, that what would benefit the economy in Canada most at the present juncture, would be a stimulus plan where the federal government runs up a big deficit.

What would be the ideal form of such a stimulus?

1) You'd want to make sure that the stimulus was temporary because otherwise you'd be setting yourself up for recurring deficits when (if) the economy recovers.

2) You'd want to make sure the stimulus money was spent, because otherwise it wouldn't do much stimulating

3) You'd want to make sure the stimulus money was spent *in Canada* because we're not so altruistic that we want to run up our debts to stimulate other countries economies

4) You'd want the money to be spent during period in which the economy (GDP growth, employment) is in a downward trend. Otherwise you won't mitigate the magnitude of the downturn.

5) You'd want the money to be spent productively so that once the stimulus is done, there is something to show for the money spent, ideally something that can support future productivity gains to help pay back the money borrowed.

So let's consider some two of the main options being considered for a stimulus, tax cuts and infrastructure spending, starting with tax cuts.

Tax Cuts

1) Temporary? Fail. More than any other government policy, tax cuts are likely to be the hardest to undo when times change because of the powerful opposition to raising taxes.

2) Will be spent? Fail. Will vary depending on who gets the tax cut, but there's no way to ensure that the money given in tax cuts is spent, and the experience with the U.S. stimulus package suggested that much of it wasn't.

3) Will be spent in Canada? Fail. Money given in tax cuts will presumably be spent in Canada at the same proportion as income is currently spent in Canada, no more. And if you've ever been to a store, you'll notice that a lot of what we buy is manufactured abroad (although shipped, wholesaled and retailed in Canada).

4) Spent during the downturn? Pass. Tax cuts / rebates can be timed to occur when you want them to pretty precisely with little lead times.

5) Will the money be spent productively to leave future assets in place for future growth? Fail. Obviously some of the tax cut money may be invested but a lot of it will simply be consumed. Some may argue that lower taxes will always lead to stronger economic growth, but unless they can provide a shred of empirical evidence for this claim, I'd be inclined to discount it entirely.

So, 1 for 5 for tax cuts.

Now, let's consider infrastructure spending.

1) Will be temporary? Yes. Once the projects funded are completed, the funding will naturally cease.

2) Will be spent? Yes. The government can ensure the money is spent.

3) Will be spent in Canada? Yes. Obviously some components of infrastructure projects will be imported, but a higher percentage of the spending seems likely to occur within Canada for infrastrucutre projects vs. tax cuts.

4) Spent during the downturn? Fail - at least that it was opponents of infrastructure spending will warn. Personally, I'm not so sure, but more on that later.

5) Spent productively? Pass. Infrastructure is what makes this country work. Better roads, rails, power generation, communications, etc. will all enable better economic growth when (if) the economy recovers.


So the only argument in favour of tax cuts is a timing argument. But is it really true that government can't ramp up infrastructure spending quickly (or that the downturn will be so short that we have a short window in which to act).

Take the Dokie Wind Project, for example. What could be better for preparing Canada for the future than a project which cuts our greenhouse gas emissions, diversifies our power sources, lessens our reliability on fuel sources with potentially volatile prices and a limited supply? Yet the construction of the project is on hold due to a lack of financing. How long would it take for the government to step in with enough financing support to ensure the project can continue? Not long.

Also, I hear that the city of Vancouver has an opening for an infrastructure stimulus, sure to be spent before 2010...

Aside from the availability of lots of short term infrastructure spending options, we might also want to consider that this recession is likely to be with us for a long time so there might not be as much need for haste as people seem to think.

To me, the case for infrastructure spending over tax cuts is pretty much a slam dunk for anyone who's not a marketthink zombie, and that's not even considering that government needs to build / repair infrastructure at some point, so doing it during a recession when labour and material is cheap just makes sense (see the NDP construction of the 407 in Toronto during the 90's recession for example, their investment was likely worth 4 times what they spent less than a decade later, even without counting all the spinoff benefits from reduced travel times around the area.)

Symmetry Watch

Will the people who argued that budget surpluses were equivalent to 'overtaxation' now argue that budget deficits are 'undertaxation' and push for tax increases?

---

The sad part is, you could make an argument that one's responses need not logically be symmetrical, but that argument would be pointing out that since we have an accumulated debt in the hundreds of billions, we should be running surplusses through good times and bad (larger surpluses during good times, naturally) in order to eliminate the debt.

Did Your Pay More Than Double Last Year?

If not, don't worry because your CEO's did.

The Globe's Report on Business figures that the 161 top executives in Canada received average total compensation of $5.5 million each last year, thanks mainly to cashing in some stock options.

So let's do some math. $5.5 million x 161 = $885.5 million. Over 5 years that adds up to a little over $4.4 billion dollars. Hmm, roughly $4.5 billion over 5 years, that rings some kind of bell...

Just to refresh your memory, here's some quotes from a Globe story last week:

"Business leaders roasted the minority Liberal government's decision to boost spending by $4.6-billion and cancel corporate tax cuts [worth $4.6 billion over 5 years] to buy NDP support for its beleaguered budget.

They warned it will cost Canada billions of dollars in lost investment, job gains and tax revenue, and erode the business-friendly reputations of Prime Minister Paul Martin and Finance Minister Ralph Goodale.

"I think it puts Mr. Martin's credibility in doubt and Mr. Goodale's credibility in doubt," said Nancy Hughes Anthony, president of the Canadian Chamber of Commerce."

and more,

"Thomas d'Aquino, president of the Canadian Council of Chief Executives, warned that rolling back corporate tax cuts will discourage the investment needed to generate the future tax revenue needed to "pay for the massive federal commitments to expanding social programs and equalization payments."

Jack Mintz, president of the C.D. Howe Institute, predicted Canada will lose "billions of dollars in investment" as a result of Liberal missteps on corporate taxes."

and my favourite,

"Perrin Beatty, head of the Canadian Manufacturers & Exporters, said Liberals are turning their back on businesses. "The government put those tax cuts in the budget because they recognized that Canadian business faces unprecedented competition"

So forgoing a $4.6 billion future tax cut for Canadian business will cost us billions of dollars in investment, destroy the credibility of the government, make business unable to compete in a tough global environment and is enough to pay for massive federal commitments to social spending and equalization.

But the same amount (probably more if you consider the time value of money) paid to the CEO's of just 161 companies is no doubt a wise and necessary cost of doing business which will more than pay for itself by creating incentives for CEO's to try and do a good job - something which a salary of $700,000 (on average) apparently wouldn't be enough to encourage them to do thus requiring the incentive of cashing in stock options if the share price goes up.

Here are some quotes from the Globe article on executive compensation:

David Beatty, head of the influential Canadian Coalition for Good Governance (CCGG), agreed that some CEOs, such as Power Financial's Mr. Gratton, have created "tons of value" for their shareholders, but others "are just riding on the boat" that has been lifted by overall rising market levels. "They are giving away a lot of the company for nothing. There are other ways to reward people."

...

Bill Mackenzie, head of Institutional Shareholder Services Canada, formerly Fairvest, said it's hard to link huge option gains with individual performance. "It just means there were big grants. Whoever has options has beautiful leverage, and they are making a killing."

...

Claude Lamoureux, CEO of the Ontario Teachers Pension Plan, argues that options do not always reward performance. "It is very random. You could do wonderful work and not be rewarded, and you could do crappy work and make a lot of money with your options."

...

Mr. Hugessen [from Mercer] expects investor groups will pressure boards to be more selective about when they hand out share units, rather than just making grants a given every year for anyone "who fogs a mirror."

"It begins to feel a little like a money machine. People are hankering on to this."

...

Citing the work of Harvard law professor Lucian Bebchuk, he [David Beatty] said many compensation decisions are based not on performance but on a desire for collegiality, a sense of loyalty to the CEO and conflict avoidance. The result, he said, has been "outrageous costs."

Just something to think about next time you hear dire warnings of doom and gloom from our CEO's when the government fails to cut corporate taxes quickly enough for them or when they talk about how we need to keep costs down in order to be competitive.

CEO overpay cons

It's always interesting to see what searches bring people to this site. So far my favourite was a recent visitor who searched for "CEO overpay cons" - a search for which this site comes up a respectable 8th on google.

In honour of that search I direct your attention to this post by pogge in which he rightly takes Thomas d'Aquino (president of the Canadian Council of Chief Executives) to task for his hysterical, hyperbolic reaction to the deal between Paul Martin and Jack Layton to cancel corporate tax cuts in the federal budget.

Says Thomas,

"By reneging on the corporate tax cuts in the 2005 budget, the deal announced today will sacrifice Canada's ability to foster more high-paying jobs and to ensure that our economy grows fast enough to pay for the massive federal commitments to expanding social programs and equalization payments,"

As pogge notes, given that the federal corporate tax rate has already been reduced from 28% to 21% since 2000, it seems a bit absurd for supposedly serious people to be making statements that not cutting the rate further for a few years is going have some huge negative impact on our economy.

Personally, I think Paul Martin should have stuck to his guns on this one, and on principle I worry about deals which increase spending but don't increase revenue to pay for it (the spending occurs now while the corporate tax cuts didn't take effect for a few years - and Martin is now telling the Conservatives he's going to go ahead with the cuts anyway), but we're not talking about a huge amount of money on the scale of the federal government and it would be nice to discuss it like adults rather than having flacks like d'Aquino making ridiculous statements with no connection to reality.