The Canadian Independent

Ignatieff: Wrong on deficit reduction, wrong on economic policy

Posted in Politics, Role of Government, The Economy by dave on April 2, 2010

I was watching Ignatieff give a 20 minute interview with Strombo on The Hour [Relevant portion starts at 15:20], and when it came to economic policy Iggy said a few peculiar things that I don’t think make a lot of sense.

First George asks if Ignatieff would raise the GST back to 7% to try to reduce the deficit. Ignatieff says no. Good, new taxes aren’t necessary. When asked how he would tackle the deficit, Ignatieff said that he would prevent the further scheduled cuts to the corporate tax rate, freezing it at the level it is now. He claims that this would recoup 5 billion that would have not been collected had the taxes been lowered next year.

However, the deficit is 54 billion. So after he cancels the tax cut, next year it will be 49 billion if spending remains the same. Not much of a deficit reduction plan, its kind of like Harper’s: make minor policy changes, and wait.

A real deficit reduction plan would cap spending in services which the government believes are “essential,” and to bring in across the board cuts to departments over a 2-3 year time period. 5% per year for 3 years would take care of the deficit, and tighten the belt. Of course, much more of that could go, but things need to be taken one step at a time.

Oh, but now we learn that Ignatieff isn’t going to use the total 5 billion for deficit reduction. He is going to use a portion of it towards learning, training and education. Why?

Well, according to Ignatieff a major economic crisis is coming. He explains how many people will be retiring from the work force, over a million, which is true. He also tells us that in the future there is going to be not only a labor shortage due to all of these people retiring but an unemployment problem because there won’t be enough trained people to take over the jobs of the people retiring.

On the surface this should seem like a serious problem, but its not. Why? Simple, because prices coordinate the pattern of production in a society over time. What the hell does that mean? Think about it like this: Boomers are retiring from trades professions, like contractors, farmers, roofers, and the like. This means there will be fewer trades people working. If just as many people demand the services of trades people, this means there will be more bids per tradesperson. This increased competition for his services, will increase the price he can charge and the profits he will reap from hsi service.

Other individuals in society, seeing that these are now lucrative and profitable professions will move, by their own motivation, towards trades schools and getting into those industries to earn money. Think about the IT and computer repair industry in the 90s. Suddenly home desktop PCs were everywhere, and people were having problems with them. There were few skilled professionals who could deal with the demand, and in the beginning these people were very well compensated. Many colleges and universities, within a few years time, created specialized programs to teach people how to do these jobs. The DeVry institute comes to mind. Then, people drawn by the promise of a good income, moved into this area. So what happened? Demand was eventually filled, and the prices (profitability) of those professions dropped in proportion to more people working in it. Society had its computers fixed, because of individuals seeing an opportunity and moving to fill it for their own self-gain.

Ignatieff’s problem is the exact same. To commit government spending to try to solve a problem which isn’t a problem in the first place, is just waste.

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This morning I was awoken by my alarm clock built by the ingenuity of millions of individuals…

Posted in Fuzzy Philosophical or Moral Issues, The Economy by dave on March 27, 2010

Commerce, the business of individuals exchanging goods and services for profit, is fundamentally healthy for human civilization.

“…all working for their own gain, but whose efforts were coordinated by the prices for labor and materials and finished goods provided by the free market. I then took a shower in the clean water provided by the shower head, pipes, and sanitation facilities whose construction also involved the efforts of thousands of people acting in their independent interest. After that, I turned on the TV to The Weather Channel, whose owners include one of the largest multi-national corporations and private equity companies, to see the week’s forecast presented in a clear, informative (and even entertaining) manner. I watched this while eating breakfast of General Mills’ inspected food and taking drugs whose strong brand name gives me confidence in its safety.

At the time which millions of people coordinate their activities to take advantage of each other’s knowledge and skills, I leave for work. I get into my Japanese-designed, Mexican-supplied, Michigan-assembled automobile and set out to work on the roads built by construction contracting companies and named after corrupt politicians, possibly stopping to purchase additional fuel that was shipped from the Middle East by an oil company at a per gallon cost many times lower than the price of having a letter delivered across the street by the government monopoly that loses millions of dollars each year. To make the purchase there is no need to leave the pump; I am able to slide a piece of plastic into a small slot and get credit extended to me by a bank who has never met me in person. On the way out the door, I put out the Fed-Ex envelope containing the documents I need to arrive across the country tomorrow morning and drop the kids off at the public school which is attended by only the best students, thanks to the high home prices in the area.”

Why the Obama health bill cannot work

Posted in America, The Economy by dave on March 22, 2010
The way insurance works is simple. Its a risk pool. Individuals pay premiums into a central pool, and claims are paid out from the central pool. Actuaries gauge the statistical risk of potential clients to either accept them, reject them, or accept them with various exclusions or a rated policy.
A rated policy is one where premiums are higher than they would be due to extra risk from a pre-existing condition or habit. An exclusion is where the policy won’t cover certain pre-existing conditions, for instance if you had problems with your back they may accept you but exclude claims based on your back.
The Democrats have suggested rhetorically that companies will no longer be able to reject people because they have pre-existing conditions. This means the average amount of risk per client will rise, as people with serious medical problems will be able to get insured and immediately add a considerable expense load on the risk pool.Insurance firms generally only make 3-4% profit margins at the end of the day.
The idea that you can force companies to have a considerably higher expense load on the risk pool, without significantly raising premiums is a fantasy. If you block them from raising premiums, the companies become insolvent.

The Deficit Fantasy

Posted in The Economy, The Public Sector by dave on March 21, 2010

The Canadian government has some difficult fiscal policy decisions to make, that the government simply isn’t interested in talking about. None of the opposition parties are interested in making these decisions, either. Politicians are too concerned about winning the battle of the day, be it about Rahim Jaffer’s coke habit or whether or not Canadian soldiers are complicit in maybe sometime sending Afghan detainees to be tortured by other Afghans.

Unfortunately there is a real fiscal problem coming in Canada – the aging crisis. The fundamental issue is this. In 2001 there was about 5 working Canadian taxpayers for every senior in Canada. As soon as 2020, that number will be down to 2 working taxpayers for every senior in Canada.

Seniors, use a disproportionate amount of healthcare, social assistance and collect from the Canada Pension old age retirement program and the Canada Pension disability program. What this effectively means is since we have socialized, made society responsible for the costs of individuals using these particular services, is that we’re going to have a glut of elderly people requiring more healthcare than they had needed before, requiring more long-term care service than they had needed before, requiring more in-home care services than they had needed before. Demand for healthcare in this country is going to rise simply because the amount of people, as a proportion of society, who require these services is going to rise dramatically. And that group expected to supply for the costs of healthcare in this country, the base of taxpayers, is going to reduce dramatically as a proportion of society.

The result of this trend is that healthcare, disability, long-term care and pension costs are going to continue to rise while the tax base to pay for these costs is going to continue to shrink. You don’t have to be a genius to see that such an arrangement is fiscally unsustainable.

Ontario Premier Dalton McGuinty has already said that in 12 years 70 per cent of the province’s operating budget will be needed just to sustain medicare. That’s not going to happen because otherwise education and other services would collapse, leaving us without the resources to sustain medicare.

The small changes that the Federal Tories are making in order to “reduce the deficit” is a fantasy in light of the changing demographic trends and the way we have set up healthcare and other services in this country.

Canada is facing a permanent structural deficit based on the services that it already has set up. The only way we can avoid this is by significant reform of the current system. The problem from a fiscal and ideological standpoint is that we’ve set up an upside down pyramid, where seniors and the elderly in our society are provided for by the young working taxpayer. Normally this arrangement shouldn’t have the fiscal problems that we are facing, because often times there are several taxpayers for every senior, and together they have the fiscal capacity to sustain the programs for the seniors.

However, in our current circumstance we are having an increasingly smaller population base to support a rapidly increasing base of seniors.

Without a change in the way we deliver healthcare and other seniors services, the deficit the government is facing can only be structural, and will be something that will be much more difficult to deal with 10-15 years down the road.