The great Canadian bribe
Do equalization payments exist to keep poor in their place?
By Brian Kappler
Economists are a blunt-spoken lot, in their own jargon-ridden way. So when a Nobel Prize winner in the dismal science spoke of our beloved equalization payments as a “bribe” to keep people in the poorer provinces, all the other economists in the room just nodded.
This was Thursday, at the University Club downtown, where the Montreal Economic Institute and two other free-market-oriented think-tanks staged a seminar on equalization.
(The story so far: Started in 1957, and now entrenched in the constitution, equalization is money paid by Ottawa, from general tax revenue, to governments of the poorer provinces. The idea is that each province should have roughly the same amount to spend on services, per capita. This year, the total is about $10 billion; Quebec’s share is about $3 billion. Only Ontario, Alberta, and B.C. are left off the gift list.)
On hand for the meeting was the venerable James Buchanan, Tennessee-born winner of the 1986 Nobel Prize for economics, and a man sometimes called “the father of equalization.” In 1950 he published a seminal dissertation in support of the idea of helping poorer regions of a federation. His ideas helped sell the idea in Canada.
Also present were a dozen senior Canadian economists – was it break week at the University of Alberta? – some on the panels and some just listening. Despite the free-market credentials of many of the players, there was not-quite-unanimous consensus that equalization payments are a good idea, work pretty well, but “could use a tune-up,” in the words of one expert.
A basic value?
The idea of equalization has been sold and re-sold to Canadians by their politicians as a basic “Canadian value.” It is fairness, it is helping the regions which need help, and on and on. Even in the last decade, as Mike Harris thundered that welfare should be “a lifeboat not a houseboat,” and as the Liberal government tightened up for a while on abuses of Employment Insurance down east, equalization has never been challenged, not even by Harris.
But the economists didn’t get all misty-eyed about social justice; Buchanan and the others just called it a bribe. Without this extra money, the idea is, thousands more from Saskatchewan and Newfoundland and the rest would flood into Toronto and Calgary, and that would be a bad thing; better bribe them to stay home.
The great man imported to be the star of the day cautiously professed ignorance of the Canadian experience, but cited an Italian regional-subsidy program frankly designed, he suggested, to keep the southern-Italian riffraff out of northern Italy’s cities.
… or downright stupid?
That was when Herb Grubel got up and said, “Excuse me sir, but the emperor has no clothes!” Grubel, a respected free-market economist, was a Reform Party MP, and their finance critic, from 1993-97. Then he loudly went back to academia, in disgust over the way politicians and voters fail to follow economists’ sage advice.
Which brings us to public-choice theory, a large part of what Buchanan has been thinking about since the 1950s: It turns out that when governments take a few cents from each person, and give the money to a few people, the few will reward the politicians but the many won’t notice. So the politicians win by it, even if the transfer is otherwise inefficient, unjust or downright stupid.
A prime example is EI – the Liberals began the process of tightening it up, lost seats in the Maritimes in 1997, loosened the purse strings again, and won the seats back. We all pay.
Economists in general seem to accept this effect as an intractable reality. So when Grubel suggested that equalization is the same abuse writ large, he was challenging the other professors’ stated support for the payments.
And then he asked why exactly Canada bribes people to stay away from our centres of population and wealth.
Newfie jokes aside, people from the equalization-receiving provinces are not disdained by the rest of us. And Canada needs bigger cities, concentrating the money and skill needed for excellence, and world-class competitiveness. And with immigration fairly open, what’s the point of keeping Canadians out of our big cities, anyway?
So why exactly are we paying all this equalization? The one-day conference broke up before anybody could suggest a good reason. Anyone who has an answer is invited to share it.
– Brian Kappler’s E-mail address is email@example.com