In response to my op-ed about the addition of new seats to the House of Commons in the Globe of 26/9/09, one reader wrote in with a familiar objection:
Brian Lee Crowley, in attributing Quebec’s loss of national political influence to its pursuit of a “big state strategy” , conveniently chooses to overlook a province that does not support his thesis. Saskatchewan , with its family of crown corporations and large public sector, is currently a national leader in economic growth, investment and in migration. Even the recently elected Conservative government has chosen not to interfere with this arrangement, recognizing that its low cost infrastructure and public services provides the province with an economic advantage.
Busted! My whole thesis has just been disproved and my career is in tatters because I forgot about Saskatchewan.
I don’t think so.
Back when Saskatchewan was a bastion of Canada’s founding values, a vigorous work ethic, small government and low taxes, it rapidly grew to become the third largest province in Canada by population. Alberta was its poor cousin. Both provinces have magnificent resource endowments. Both provinces faced the same commodity-based economies, boom and bust cycles, etc. Tommy Douglas used the provincial government to broaden access to health care and to build infrastructure, but made it very clear, as I show in the new book, Fearful Symmetry, that he had no interest in creating big social welfare programmes that might create dependence. He was a vigorous advocate of workfare. When equalization was first put in place in the late 1950s, Alberta was a recipient, as was Saskatchewan. Saskatchewan, not Alberta, was tipped in the early days to be the centre of the western oil and gas industry.
Then what happened?
Saskatchewan largely lost its way. Oh, it didn’t go badly wrong, as Quebec and much of the Atlantic provinces did. But it didn’t get things right either, as its very similarly situated neighbour, Alberta, largely did. Saskatchewan rubbed along for years, no economic out-performer, but no basket case either. Some years it was on equalization, some years it was off. The anti-business attitude of the government scared off the oil and gas industry, which set up shop in Alberta, which had a much more encouraging tax and regulatory regime. When the CCF became the NDP, policymaking soon became more heavily dominated by public-sector unions, who naturally favoured big government, high taxation and high levels of public sector employment. For an economic model that the Globe’s letter writer celebrates, it hardly created an economic powerhouse. Most years Saskatchewan’s population barely grew, the province lost population relative to the rest of the country and it attracted no immigration to speak of.
Over the last 35 years (1973–2007), the population of Saskatchewan has
grown from roughly 912,000 in 1973 to its current level of 997,000 in 2007
(9.3% growth). This stands in stark contrast to the population growth experienced
by Alberta (101.4%) and British Columbia (85.0%) over the same
period. Even neighboring Manitoba (17.8%) managed to post population
growth that exceeded that of Saskatchewan. Indeed, Saskatchewan’s population
growth of 9.3% (1973–2007) ranks ahead of only Newfoundland &
Labrador, which actually experienced a decline in its population of 7.2% over
the same period.
Private investment levels were poor:
In terms of net business investment per worker—the accumulated
investment by business (adjusted for the number of workers and inflation)—
Saskatchewan fairs [sic] poorly for the period between 1978 and 2007 when
compared to the western provinces and the national average. As of 2007,
Saskatchewan ranked 9th among all Canadian provinces in terms of net business
investment per worker. Indeed, Saskatchewan’s performance was only
49.4% of the national average as of 2007.
The results for the more narrow measure of business investment,
namely net business investment in machinery and equipment (adjusted
for the number of workers and inflation), are equally as poor. By 2007,
Saskatchewan had the lowest level of accumulated per-worker net business
investment in machinery and equipment among all Canadian provinces.
Indeed, Saskatchewan’s performance of $7,175 in accumulated net business
investment in machinery and equipment in 2007 was only 38.1% of the
national average, 73.0% of that achieved in Manitoba, and just 15.8% of that
achieved in Alberta.
Saskatchewan suffered from many of the dysfunctions of Quebec, with the happy exception that, being next door to BC and Alberta, it could export its unemployed and many of its retirees.
Our letter-writer now claims that Saskatchewan’s big government model explains its current economic success. But then that model was the one that was in place during the years of relative economic under-performance as well, and so he must accept that the model is responsible for that under-performance. He can’t have it both ways. The really interesting question, then, is why are things different now, because it is certainly true that Saskatchewan is enjoying a bit of a boom and may be the only province to grow in 2009.
No doubt many things could be mentioned, but here are two that I think are key: lower taxes in Saskatchewan and policy fumbles in next-door Alberta.
Since 2001, Saskatchewan has been converging on the low tax policies of its neighbours to the west after years of high taxation. In 2001 the province reduced personal income tax rates and raised the thresholds at which those rates kicked in. In 2006, the NDP government our letter-writer praises for their left-wing bent, took a leaf from the copy book of nasty neo-cons like Ralph Klein and Gordon Campbell and cut corporate taxes. And not by a little. The CIT rate went from 17% to 12% (i.e. dropped by about a third) and those particularly nasty corporate capital taxes were largely eliminated.
Next door in Alberta, the government launched a review of the royalty regime in the oil patch just at the moment of the collapse of prices. The certainty and good business climate the industry had enjoyed for years were badly damaged. Exploration and development activity has fallen sharply. Premier Wall of Saskatchewan went out and made it clear to the companies that his province was now open for business, and they have come in significant numbers to check out the new business climate. Ed Stelmach is celebrated in Saskatchewan as the province’s biggest supporter.
Other decisions are helping. The removal a few years ago of the restrictions on non-residents owning Saskatchewan farmland have increased investment in the province. A few minor changes to the interprovincial-trade deal throwing open cross border trade between BC and Alberta (the so-called TILMA), has made it possible for Saskatchewan to sign on in just the last few days.
As for the alleged superiority of the Crown corporation model in Saskatchewan, the evidence for this claim is poor as well. While the current government may have had to promise not to privatize on a large scale in order to minimize attacks by the province’s extremely well-organized, well-financed and vocal public sector trade unions, the evidence is poor that the Crown model has served Saskatchewan well. Just one example: the privatization of the Crown telephone service in next door Manitoba gave an excellent chance to compare the two models. The result:
Ten years after the Manitoba government devolved MTS, the results for company size and profitability are dramatic. Despite slight advantages to SaskTel early on, MTS today earns twice the revenue, has three times the assets and employs 20 per cent more people.
Since the telecommunications market is highly competitive and federally regulated, MTS could not have achieved such growth by gouging customers or providing a more inferior product. In fact, service levels in both provinces remain essentially similar according to a Frontier Centre analysis of prices, geographical coverage and numbers of customers served. Nonetheless, the differences between MTS and SaskTel are vast, and the only noticeable cause is their ownership model.
Saskatchewan has momentum, but it has absolutely nothing to do with the legacy of tired old policies of the past. Even the NDP was jettisoning those policies before they lost power, and the Saskatchewan Party is pushing in the same direction. Apparently the Globe’s letter-writer is one of the last Saskatchewan residents still yearning for policies abandoned even by the province’s social democrats.
quoting from Page 213..”if we hadn’t force-fed Govt’ the economy would have absorbed all these extra workers, as other industrial democracies, with smaller Govt’s such as the US”
5 questions
1. Why is the Cdn economy dong better than the US( quoting Harper)
2. Why is the Cdn banks doing better with more regulation than found in the US?
3. Why is the CPP better funded than Social Security..
4. Why is unemployment higher now in the US than in Canada?
5. Please give an example of Govt investment you would support?
I appreciate your focus on Saskatchewan’s past history provides a certain comfort, ie: some golden age when things were, should have or could have been better. That’s yesterday, cant change that. Basically, what you don’t deny is our nation leading current state on a number of measures and, it is simply beyond reason that all this has occurred in spite of our history, institutions and policies.
Lower taxes are not a neo con monopoly…..its just a way of spurring economic growth, a concept not lost on the Dippers. Even the Wall administration acknowledged that the steps taken by the previous administration have contributed to the current prosperity.
Your comment that Saskatchewan is poorly served by its “…family of Crown Corporations†is well off the mark. The Wall Government will not even utter the “P†word ( privatisation) because the Crowns are so popular with the public. I challenge you to compare auto insurance rates between Sask. and those in Ontario or Nova Scotia. We are significantly lower; I know…I’ve lived in both of the latter provinces. I indeed my insurance rates went down last year. As well. I pay the lowest utility rates in all of western Canada. Sask Tel is in local competition with Bell , Rogers, a local cable company etc., yet it has over 80% percent of the telco business in Sask., because it works. I teach at a business school. My graduating students want to work for Sask Tel because its innovative.
I appreciate that efficient, market focused, government crown corporations do not work in theory. However, perhaps disturbingly for some, out here they work in practice.
In response to Michael Ensley:
Well:
1. Because we have been reverting to Canadian type since the high water mark of the bidding war, some time in the 80s. The GST, free trade and the Chretien Martin budget reforms all put us on a much more sustainable path, while the Americans have been going in the opposite direction ever since Clinton.
2. Not sure why this is relevant to anything, but because a) we have a better regulatory system than the US and b) because Canadian banking culture is more conservative. But then other more heavily regulated banking systems (e.g. in Europe) got into a worse mess than either US or Canadian banks, so it is clearly the right kind of regulation, rather than “heavy” regulation that is the answer.
3. See 1, above. We bit the bullet and fixed our system. The Americans didn’t. Our premiums are also high and our benefits lower than in the US.
4. See 1, above.
5. First, let’s separate genuine investment (i.e. investment made in the reasonable expectation of genuine increase in productive capacity in the future), and mere government “spending”, which is usually immediate consumption mis-labelled as “investment”. Examples I would support: genuine cost/benefit tested infrastructure where conditions make it difficult for the private sector to make these investments and realise a return; quality education at the primary and secondary levels, where generally the benefit to society exceeds that captured by the individual. This ceases to be the case once you reach post-secondary levels, which is why the case for massive public subsidy there is much weaker.
More generally remember that the argument I am making in the book and elsewhere is that Canada lost its way and for most of the past decades, the US enjoyed a markedly superior economic performance. The US is now losing its way and Canada is feeling its way back to its traditional approach, so our positions are slowly reversing. On current trends, America will be the big government jurisdiction and we will be the small, and we are already reaping the benefits…
In response to Dan Cameron:
Ahhhh. You seem to say a) well yes, there was bad stuff in the past, but let’s just forget about that. Then b) but surely everything that’s good today must be due to what we did in the past. Sorry. No dice. Your argument might be restated as follows: “It is simply beyond reason that Eastern Europe’s renaissance has occurred in spite of their history, institutions and policies that they inherited from decades of Soviet communism.” The argument is beyond belief, not reason.
As long as the bad policies I described were pursued, Saskatchewan languished. The policies were changed, things got better. And I made the point that the NDP made the tax changes, so I don’t know where you got the idea I suggested they were some kind of neo-con monopoly. The point to remember is that even the NDP realised their old approach was failing. They realised they had to change — they did and it paid off. To claim that these changes were somehow the old “left-wing” mentality at work and that’s why Premier Wall has continued with them is to miss the point. Everybody but you has abandoned the old model.
Crown corporations: I already offered the evidence as to why on a straight Crown corp to privatized company comparison, SaskTel is a loser. Sask gov’t car insurance, like gov’t car insurance everywhere, is rife with hidden subsidies. Even Bob Rae with a majority NDP government in Ontario got elected on a strong platform of nationalizing car insurance and had to change course once he realised what it meant. If the Sask Crown corp model is so obviously more efficient and effective, why did the province with so many of them, so entrenched and reaching into so many parts of the economy, not provide Saskatchewan with superior economic growth? In fact the record shows it got the opposite. And why don’t voters in other jurisdictions demand that more of their provincial economy be brought under government ownership and control? Saskatchewan residents are comfortable with what they know, and powerful public sector unions have whipped up fear among their members and sympathisers about what privatization might mean for them. Political parties respond. That doesn’t prove anything about the relative merits of private sector ownership. In fact the literature, both theoretical and empirical, about the superiority of competitive markets over government monopoly provision is so widespread that one wonders what they’re teaching in business school in Saskatchewan.
I was glad to see a wonderfully honest discussion regarding the role of government and SK as a case study. Let me offer a few thoughts to try to further the conversation.
One, if we examine data on provincial and local spending as a share of the economy, SK has one of the smaller governments in Canada; certainly less than QC and Atlantic Canada. This measure admittedly underestimates the cost and role of regulations, which SK might not fare well in. However, it’s probably the best current measure of the size and burden of government.
Two, we need to understand the broader economic effects of the Crowns in SK. There is increasing data that the SK Crowns, like most Government Business Enterprises (GBEs) under-invest and over-employ due to political requirements. This can be done at little cost to an economy only in the short-run. Over the longer-run, such purposeful under-investment coupled with misallocations in labour will cause economic performance to suffer. In addition, some of the Crowns will be facing large capital investment requirements over the next decade that they simply do not have the resources to finance. SK will then face a difficult situation.
Third, SK is interesting in that it was an NDP government that enacted sweeping personal and business tax cuts, which have led to an economic turnaround in the province. In other words, the tax reforms were not ideologically driven but rather pragmatic responses to the economic problems facing the province. As near as I can tell, the current Conservative government has done very little in the way of true market reform.
Jason says that Saskatchewan is now a relatively small government province, but that was not always the case. In a piece of research I co-authored a few years ago for the Atlantic Institute for Market Studies (AIMS), we looked at own-source provincial and local revenues (which excludes any federal transfers and any provincial transfers to local governments) over the decade 1994-95 to 2003-04 to arrive an estimate of the fiscal burden that provincial government imposes on each provincial economy. We did this by looking at provincial own-source and local revenues as a percentage of GDP.
Based on this measure there was a clear divide between the more developed and less developed provinces. The two richest provinces, Ontario and Alberta, both had a provincial government fiscal burden of under 20% of GDP. Most of the other provinces group together in the 21-23% of GDP range, with Saskatchewan the outlier among English-speaking provinces at 25.1%.
You can consult this research here. See p. 4.
Brian raises an interesting question – how best to measure the size or burden of government. Looking at revenues is certainly one valid way assuming that surpluses and deficits are controlled for and non-tax revenues are included. However, I believe that utlimately the burden of government is about how much of a jurisdiction’s resources are controlled by the state. To that end, I think a combination of direct and indirect spending plus, if possible, regulatory costs is the best measure of the burden of government. That’s why I believe measuring regulatory costs and getting a better handle on their total burden should be a paramount priority for economists. This doesn’t negate or lessen other alternative measures of government.
1. Any economy held back by bad policy will look like a star for a while once it makes some better policy. It’s a question of percentages.
2. In small provinces like Sask (1 million people), just stopping out-migration and getting a little bit of in-migration moves the dial.
3. The Crowns face an enormous access to capital issue vis-a-vis replacing and upgrading old plant. SaskPower in particular. This cannot be solved via government ownership, so the government is allowing private companies to generate power to sell into the grid while maintaining the retail face as SaskPower.
4. Saskatchewan people are very pragmatic and generally won’t let their government’s get too far out of control. This works because in Saskatchewan there are only two degrees of separation, and the Minister of whatever is probably one of your neighbours.
5. Saskatchewan is a commodity economy, and the commodities we have are in demand right now. Uranium, oil, potash, good football team. Commodities should do well for a number of years, and inflation tends to be good for Saskatchewan. Just look at how we did in the 1970’s during stagflation. We’re the ultimate uncorrelated economy.
6. Tell someone for 30 years that their house is worth $80,000 and they won’t do much. Revalue it at $250,000 (this has happened to almost everyone in Sask), and the wealth effect unlocks massive pent up consumer spending. That’s why there are Porsches and BMWs everywhere in Regina, and we don’t even have a Porsche dealership. And why every street in my neighbourhood has several massive home renovation projects going on.
7. Take away the uncool factor (Lorne Calvert) and replace with the young, cool factor (Brad Wall), and suddenly staying in Sask or returning to it doesn’t make a person feel like the dumb person in their crowd.
8. Living next to Alberta is a great way to keep the policy mind sharp. Get too uncompetitive, and all your people with money move away and your stats go negative. Get competitive enough and they come back and your stats go through the roof. (see #2).
For what it’s worth I wrote a column published in the Edmonton Journal, Star Phoenix, and Leader Post earlier this year which made precisely the point Brian makes in an earlier comment. It is Saskatchewan that is moving in the direction of a more open economy, and the rest of North America that is largely doing the opposite.
There is a permalink to the column here: http://www.fcpp.org/main/publication_detail.php?PubID=2810