Our Strongest Counter to the American Demands

It has rightly been said many times: nobody can win a trade war. And it goes without saying that a trade-dependent country like Canada certainly can't win a trade war with the much larger and less trade-dependent U.S. Both countries stand to lose; Canada much more.

The U.S. is counting on this imbalance (as well as a misguided or cynical disregard for its own economic interests) to press for manifestly unfair trade arrangements with Canada. They want to restrict sales of Canadian goods into the U.S. market, limit any countervailing restrictions on the sale of U.S. goods into the Canadian market, and secure priority access to Canadian energy, critical minerals and other valuable resources that presumably goes beyond what paying competitive prices would provide.

The U.S. leverage is clear -- they can hurt us more than we can hurt them. The question is: how can Canada fight back.

The Carney government appears to be doing all the right things. The more we can diversify our trading relationships, the less dependent will we be on the U.S. -- the less can they hurt us. The more we can stimulate domestic demand with interprovincial trade and more infrastructure and other investments, the less devastating will the U.S. trade restrictions be. 

Nevertheless, significant loss of U.S. markets and disruption of well-established supply chains will significantly impact Canadian businesses, workers and communities.  Restructuring our trade relationships and internal economy will take time. In the interim, business will be lost, workers laid off and families dislocated in the search for new opportunities and employment.

Knowing this, the Carney government must do more than map out a less U.S. trade-dependent future. It needs to articulate and commit to the wide range of worker, family and community support policies that will enable a major restructuring of the Canadian economy in an equitable way. It is easy for Canadians whose jobs and livelihood are not at risk to demand that we stand up to the Americans and that we refuse to accept the unfair trade relationship the U.S. wants. What we need are policies that support those at risk so they too can demand we stand up to the Americans . We need to ensure that it isn't just steel or auto or forestry workers and communities that pay the price.

The U.S. thinks it can make unreasonable demands and secure an imbalanced, unfair deal because of the pain it can inflict. Our strongest counter is to make clear that the pain they can inflict will be short-lived-- Canada will restructure and move on. In the meantime we can take the pain and we can do that because it will be shared.

Elbows up, but hearts in place.

Open Season on BC Ferries (Again)

It is open season on BC Ferries again. Pundits and politicians from all sides are skewering the company for its decision to go to a Chinese shipyard for its next major purchase of new ferries. They should have, it is widely argued, had the ferries built in Canada instead.

Of course, the political vitriol aimed at BC Ferries makes no practical sense. There are no Canadian shipyards with the capacity and interest in building these vessels. One could argue we should have that capacity in Canada, but we currently don't. To say BC Ferries should have had their ferries built in Canada is really to say BC Ferries should have deferred its purchase of the new vessels that it needs today until some indefinite and uncertain future time when efficient, cost-effective Canadian capacity exists. 

There is a tragic irony in all this. It wasn't all that long ago when pundits and politicians were skewering BC Ferries for the exact opposite reason. Then Premier Clark wanted BC Ferries to be a catalyst for the development of a new fast ferry shipbuilding industry in BC. It did not go well. Costs skyrocketed as new skills and capacity were being developed, and there was little sympathy for paying a premium price for the 'Made in BC'  policy. Whatever one's view on the merits of fast versus conventional ferries, it would have been far less costly to purchase them offshore.

It would be good if before venting our frustrations at BC Ferries (which sadly is a perennial sport in coastal BC), we should be clear on two very important things: 1) what do we want; and 2) what trade-offs are we willing to make.

As for what we want: ferry users want frequent, reliable and low cost ferry service; taxpayers want minimal subsidies; and politicians and pundits seem to really want BC Ferry-driven industrial development. 

What everyone doesn't seem to want is to recognize the trade-offs.

As a long-time observer and at times participant in BC Ferry battles left and right I would suggest everyone step back from the vitriol and think about the objectives and trade-offs BC Ferries had to consider in this latest purchase decision.

Does it need new vessels at this time? Almost certainly yes. Old vessels need to be replaced with more efficient and most importantly more reliable ones. 

Should it purchase the new vessels from the most cost-effective source? Again, unless the government explicitly directs otherwise the answer is yes. And if, for whatever reason, the government wants to rule out the lowest cost supplier it should be clear with ferry users and taxpayers that they will have to make up the difference. I am no fan of Milton Friedman, but he was quite right 'there is no free lunch' and by the same token 'there is no free buy from higher cost supply'.

Whether we should develop ferry-building capacity in BC for future vessel requirements is a separate matter, and clearly not one BC Ferries should have to decide. That is for government policy to sort out. And despite the political appeal it requires careful consideration.  Just because we need new ferries from time to time doesn't mean they should be built locally. We don't want to follow the same nonsensical economic policies that we are currently witnessing in the United States. If we have or can develop a sustainable comparative advantage in ship-building and have or can attract the skilled labour it requires, then for sure it is something to pursue. But if there will always be lower cost sources of supply we are far better off to purchase the vessels we need and concentrate our economic development on what we can most efficiently produce.

The lesson from the US abandonment of trade agreements and their betrayal of mutual interest is not that we shouldn't trade-- it is that we shouldn't trade almost exclusively with what has proven to be an unreliable partner. It is diversity of trading partners, not abandonment of the basic principles of trade we should be pursuing.

 

Inside the Tent or Fair Access Through the Door

Trump and his team have said that his so-called reciprocal tariffs are non-negotiable. But like much of what Trump says, the truth is the exact opposite. There is no question that all of these tariffs will be subject to negotiation. The tariff rates are too illogical, having no basis in reciprocity, and too destructive for the U.S. as much as everyone else to last. 

There have been the post hoc arguments of Trump and his coterie of manifestly incompetent economic advisers that the self-inflicted chaos following the release of the country-by-country 'reciprocal tariffs' was expected and will be short-lived.  It was all designed to bring down US interest rates and restore US manufacturing. The immediate economic downturn, they argue, will lead to lower US interest rates and the higher prices and reduced competition from foreign suppliers will lead to unprecedented investments in US manufacturing. But the downturn will only be as short-lived as the bat-shit crazy tariffs, the reduction in US interest rates will only take place when the threat of tariff-induced inflation is removed and the investment in US manufacturing will only take place when the uncertainty and unpredictability of US trade policy is eliminated. 

The 'reciprocal' tariffs won't last. Call it what you will ---the 'art of the deal' or completely immoral extortion by the rich of the poor; there will be negotiations and a new, hopefully less universally destructive US tariff regime will be put in place.

In Canada's case there is an explicit understanding there will be negotiations following the Canadian elections. All political parties are making their case that they will stand up to the Americans in these negotiations- they will get the best possible deal. That much is clear. What isn't clear is what they hope to achieve.

We know what Premier Smith of Alberta would want -- a carve out for Canadian oil and gas exports. She wants Alberta's main industry inside the US protectionist tent and what happens elsewhere doesn't much matter. I suspect the Pollievre conservatives would want pretty much the same, but from a national perspective --getting Canadian industry inside the tent. One can imagine the fundamental bargain that would be made: unimpeded US access to our energy, critical mineral, raw log and other resources, some accommodation of US concerns about what they consider to be unfair or unacceptable Canadian tax, cultural and other policies, and some restrictions on trade-relationships with other parties all in exchange for continued, mostly tariff-free Canadian manufacturing and other industry access to US markets. 

What is less clear and arguably more interesting given their front runner status in the election polls is what the Carney Liberals want to achieve. Are they looking to get Canada inside the US protectionist tent despite some loss of control over resources and over tax, third-party trade and other policy, or will they hold out for a more balanced truly reciprocal bi-lateral relationship even at some cost to our access to the US market?

If we want maximum relief in the short term, getting inside the US protectionist tent is the best bet. If we want to reduce our dependence on the US market and on the good faith of future US policy, it is a more balanced reciprocal bi-lateral relationship we should seek. That means maintaining control over our resources and our sovereignty over tax, third-party trade and other policy despite the short term costs that may entail. 

It is time for political leaders to be clear. We know they want to stand up to the Americans, but to what end. Do they want to get inside the US protectionist tent or do they truly want to develop a new relationship with balanced, truly reciprocal access through the door?

Forget About Winning the Trade War; Focus on the Bigger Win

I'm all for 'elbows up'. Like most Canadians I applaud the retaliatory tariffs and threats of other measures our government has made in response to the unjustified, Treaty-breaking tariffs that the US is imposing on Canadian goods.  

But let's be clear.  Retaliatory tariffs and other measures won't win the trade war. If the US president doesn't care about the severe costs that his own measures are having on the American economy and its place in the world, it is difficult to see how the added costs of our retaliatory measures will move him. In many ways our retaliation is more important for what it means for us. The immediate push-back lifts our spirits and signals our resolve not to let the US assault on Canada go unanswered. 

If the first principles of economic theory and the actual historical record teach us anything, it is that no one wins a trade war. The best one can hope for is to minimize the damage. Our retaliation may help if they serve to galvanize internal US opposition to the president's apparent fixation on destroying long-standing, mutually-beneficial trading relationships. But they won't bring about a 'win'. They won't improve on the trading arrangements we had with the US, and they certainly won't restore confidence in a relationship that can so easily be shattered without justification or reason.

It is important to keep all that in mind when, as the president is reportedly determined to do, the US escalates the trade war with further unjustified tariffs and we have to consider how best to respond. 

To my mind, once one accepts that trade wars can't be won and the old order never fully and confidently restored, the best response is to pull back. The US is like a bully, completely out of control, throwing punches in all directions including on his own face. Of course we have to get the elbows up and hit back in response. But we aren't going to 'win' the fight. The only real way to win is to pull away, Maybe the bully will realize he took our friendship for granted. And maybe he will behave better down the road. But the big win is when that doesn't matter or at least doesn't matter nearly as much as it does today. And it is on that big win that Canada should be focussed.

In trade, what is more important than the retaliatory tariffs we impose are the new trading relationships we develop, both within the country and abroad. And underlying that will not simply be the interprovincial and international agreements and understandings we reach, but the hard investments we make in the transportation, port, electrical grid and other infrastructure that is needed for that trade to cost-effectively take place.

We need to consider where and how Canada can further develop its comparative advantage in industry, science, education, health care  and other fields to move away from our over-reliance on the resource and supply chain role we have had in what was an integrated North American economy. 

With respect to defence, what is most important are the new partnerships and military equipment procurement strategies we must pursue to lessen our dependence and vulnerability to the US. We will get far more respect and attention from the US when we stop supporting their military industry than when we impose a tariff on US-produced discretionary consumer goods.

As for global health, the environment, human development and resolution of international disputes and dysfunction, we must expand our efforts to work with like-minded countries so that abandonment of these critical issues by the US does not mean abandonment by the rest of the world.

This upcoming election in Canada is so important in so many ways. The contenders will no doubt spend a lot of time telling us how they will stand up to the US to 'win' the trade war the Americans have foisted on us.  Better they should tell us how they will pull away from the US and this war no one can win -- how they will stand up for a Canada very independent from the US.

It is Not Just a War on Canada

 It is not surprising and not altogether wrong for us to focus solely on what Trump's America is doing to Canada. With his unjustified and treaty-breaking, open-ended threats to impose 25% or higher tariffs on Canadian goods, Trump has in effect declared economic war. He apparently would gladly take us over, but is quite prepared to destroy our economy if he can't. 

Some of the more extreme among us would say we are the Ukraine of North America. Just as Putin sees only an obedient, Russified Ukraine or a physically destroyed country, Trump would seem to see only an obedient, Americanized Canada or an economically crushed territory.

However, as tempting as it is to go down that quite reasonable, albeit self-pitying road, I believe that would be a major mistake. Of course we must prepare for the economic warfare Trump has brought on us, both with our short term lobbying to delay and ideally eliminate the threat of tariffs (the threat itself seriously damaging to the economy) and with our longer term efforts to reduce our dependence on the US market. But we must also prepare for what could be the greater calamity -- the end of the United States as a stable, reasonable country and  leader in western and world affairs.

Trump isn't just declaring war on Canada and Mexico. He is declaring war on reason and fact-based policy; on human rights; on the environment; on justice and impartial application of the law; on critical international institutions, agreements and respect for territorial integrity. Fundamentally more important for Canada and the world than the war Trump has declared on us; Trump has declared war on the United States itself and the many positive contributions the US has made in leading the western world. The United States has never been perfect -- far from it. But it has been an important model and leader in many respects, arguably moreso than any other country over the last one hundred years.

The question for Canada is not just how do we protect ourselves but what do we do to develop new alliances and new leaders to champion the values, institutions and international understandings that are essential for the world to cooperate on the fundamental problems we collectively face -- climate change and protection of the environment; control of weapons of mass destruction; eradication of extreme poverty; identification and protection from virulent disease; respect for territorial integrity and peaceful resolution of disputes. It may be that Trump and his supporters recoil at 'globalist' concerns and actions, but the fact is we are one world; we have shared challenges and opportunities and they are growing in importance every day.

Canada is a small country but we are not alone. There are many countries in this world that share our basic values and concerns. We need to reach out to them -- not so much to help us with our 'war' with the US, but rather to address and respond to the war Trump has unleashed on the values his own country once stood for,

 

How to Respond to Trump's Tariff Threats

At face value there is little sense in President-elect Trump's threat to impose a 25% tariff on all imports from Canada until he is satisfied we have stopped illegal immigration and drug shipments across the border. It may be a negotiating ploy to extract concessions on other issues and it may suit Trump's inimitable need to blame other countries for the serious immigration and drug addiction issues facing the US. But the threat of tariffs won't solve those problems. Major improvements in border control and reductions in illegal immigration and drug supply require serious cooperative efforts by partnering nations committed to the same goals-- not bombast and threats driving people and countries apart.

Even from a parochial American perspective the tariff threat makes little sense because it is a threat to American investors, businesses and people as well as Canadian. It is, as University of Calgary economist Trevor Tombe recently pointed out in some detail, a classic lose-lose proposition. 

A tariff on oil and gas, electricity and other energy products -- by far the biggest component of Canadian exports to the US -- will hurt Canadian industry by putting downward pressure on the wellhead or netback prices producers receive. But it will also hurt US businesses and consumers (not to mention US investors in Canadian oil and gas companies) as the US is forced to replace the reduction in Canadian supply that the tariffs cause, particularly over the longer term as Canadian output falls or is diverted to other markets.

A tariff on motor vehicle parts and production -- the next most important component of Canadian exports to the US -- will hurt the Canadian auto industry, but will hurt the American industry as well because of the highly integrated manufacturing operations. Well-established, efficient supply chains will be disrupted and costs of motor vehicle production in North America will rise for everyone. The only possible winners will be European and Asian producers who will face higher cost North American production in global markets.

Trump's threat of 25% across-the-board tariffs is in short a transparently irrational proposal from the US as well as Canadian perspective. But lack of facts or reason does not necessarily deter Trump, who is attracted as much -- probably much more -- by the political buzz than the real consequences of what he proposes. 

And so the question is: how should Canada respond?

In the short term there is little more we can do than make the case to any and all who will listen -- the imposition of tariffs will hurt Americans and won't help the border control issues Trump says he wants to solve. There are far better ways to work together on those important matters. The same lobbying strategy Canada used to confront Trump's first term foray into lose-lose tariff policy will have to be used here.

But this short term response is the least of what we can and should do. The lesson here is not just that Trump is quite prepared to hurt Canadians even at a cost to his own country.  And the problem is not just Trump. Protectionism is a growing force in the US and Canada cannot count on staying inside its ever-increasing protectionist walls. Nor should we want to. The price will be too high.

The US is by far our largest trading partner and no doubt because of the strong north-south ties, will continue to be. But we need to take seriously the need to lessen our dependence on the American market and assumptions of good faith American policy. We need to be able to respond to tariff threats like the one Trump just made with more than weak entreaties to be exempt.

We need to support the investment in oil and gas pipeline and port facilities that will reduce the cost and increase the capacity to export to offshore markets. Just the option to access those markets will lessen the cost of what the US may do. 

We need to invest in the electricity transmission infrastructure that will support an expansion of interprovincial planning and trade. 

More generally we need to identify and work to eliminate interprovincial barriers to trade. We cannot count on the US to be a reliable trade partner, but we should be able to count on each other.

Of course, even with these and other measures, we will always be dependent on our access to the US market. And so Canada has to develop its own leverage when dealing with the elephant next door. We need to control access to strategic minerals in limited global supply and restrict US government participation in their development. We need to develop a stronger but also much more independent defence policy, particularly in the north where we may have more in common with Nordic countries' objectives and strategies than the US. 

In crisis, they say, there is opportunity. The opportunity for Canada now is to start to address what needs to be done not next week but over the next years and decades. Trump's threats are worrying in the short term, but they will do a great service to Canada if they get us taking seriously what needs to be done over the long term. Let's hope our politicians and political debate start to address that.

'It's All About the Money Stupid'

Like the vast majority of my colleagues I support the use of carbon taxes to encourage households and industry to reduce their consumption of fossil fuels. We economists believe in the behavioural impacts of price signals, so of course we support making it more expensive to consume fossil fuels and emit manifestly harmful CO2  and other greenhouse gases into the atmosphere. 

I understand the scepticism that many people have (and cynical politicians exploit) about the need for and effectiveness of carbon taxes. People will materially reduce their consumption of fossil fuels when reliable alternatives are developed, affordable and widely available. It will be technological progress, not marginally stronger price incentives, that will make the real difference.

Still, whatever one's view regarding the importance of its incentive effects, there is a very compelling and urgent case for carbon taxes that I think many people understand and could accept. In the words of former President Clinton, albeit in a different way for a different reason: 'it's all about the money stupid'.

We know that as hard as we try, we will not achieve zero carbon emissions for many years, not in Canada and certainly not globally. And even then it may take years after that to extract carbon from the atmosphere in order to reduce concentration levels to a level that will meaningful reduce greenhouse gas effects. What that means is we can expect the increasing frequency and severity of storms, fires, floods and other climate change-related events to continue. And that in turn means we will need more financial resources -- more tax dollars -- to invest in the very wide range of measures that are urgently needed to reduce risks, minimize damages, compensate victims and rebuild and recover in timely and resilient ways. 

I've heard a number of understandably very distraught people demand that those responsible for human-caused climate change should be called upon to pay compensation for the material damages that climate change-related disasters have. They are thinking of course of the major oil companies and other suppliers of fossil fuels. But who are in fact responsible. It is convenient to target big oil and other fossil fuel companies as the fundamentally guilty parties. And there may be many good reasons to go after those companies for tax, environmental impact or other reasons.  But in reality it isn't the supply of oil, gas and other fossil fuel products that is the problem. It is the demand for oil and gas that drives their production and supply, and it is the use and combustion of fossil fuels that results in greenhouse gas emissions. 

If we want those responsible for greenhouse gas emissions to pay for the increasingly severe climate change-related damages those emissions are causing, it is household and industrial consumers of fossil fuels that we have to target. And that is precisely what carbon taxes do. 

But we need more than the tax. We need to dedicate the revenues that carbon taxes generate to desperately needed compensation funds -- more generally to finance measures that will help to prevent, mitigate, compensate and recover from the climate change-related disasters we are facing and will continue to face for many years..

These are unsettling times. But there is so much we can and should be doing to help communities minimize costs, respond more effectively, support impacted people, business and communities,  and recover in a fulsome and timely way. Commissions of inquiry, resource management agencies, municipal officials, fire protection personnel and others have all set out what needs to be done so the next climate events are not as bad as the last. But they all require major resources and investments, well beyond what normal budgets provide for.  

Government budget constraints should not be the reason we fail to act.  We don't have to revisit needs every time disaster avoidance and preparedness fall short -- we don't have to rediscover the horrors of fire every catastrophic fire. We need to commit the funds and make the investments we know are required and increasingly urgent to avoid, minimize and deal with catastrophic climate change-related events. And we need to do that without draining resources from all of the other priorities our society must address. Dedicating carbon tax revenues to the mitigation and compensation of climate change-related events may not be enough in itself, but it can greatly help. It can get us going much more rapidly and effectively with what has to be done. 

We Need a New Level of Commitment and Approach to the Housing Crisis

We know from countless studies that there are severe costs of inadequate, unaffordable housing. Inadequate, unaffordable housing in urban centres limits access for low and medium wage workers.  People cannot work where they cannot afford to live. It significantly adversely affects the local community and economy. And, homelessness, in the extreme, imposes huge social and economic costs on all sectors of society:

-poverty, illness and premature loss of life for those directly affected;

-reduced property values for business and residents in or near outdoor encampment areas;

-disproportionate demand for emergency and other health services;

-extraordinary policing and criminal justice system costs;

-safety concerns for all residents, homeless and sheltered alike.

There have been increased efforts to address the homelessness and more general housing crisis in Vancouver and other British Columbia communities, but these efforts are manifestly insufficient. The problem has been getting worse, not better. There still is not the commitment to what is warranted and required -- a much greater, long term and strategic investment program than is currently taking place.

A fundamentally new level of commitment and approach is required.

First and foremost, investments to improve access to clean, safe and affordable housing cannot be dependent on the success or failure of ad hoc trilateral government negotiations and agreements. Secure, adequate funds must be dedicated to investment in housing and related supports and services to enable large-scale, long term plans to be developed and implemented.

Instead of the city looking to the province, and the province looking to the federal government for more funds for the different specific projects they would like to undertake each year or political cycle, we need the provincial government to create an Urban Housing Authority with a guarantee of funds sufficient to develop and implement long term investment plans that will make demonstrable improvements in:

-reducing and ultimately eliminating widespread homelessness and associated outdoor encampments;

-providing affordable rental or other housing opportunities for low and medium income workers and families in urban centres, reasonably near their places of work or study, housing that the private sector simply is not developing.

The mandate of this Urban Housing Authority would go well beyond the existing BC Housing Corporation with its limited scope and budget, and its complicated relationship with government. The Authority would be a major new developer of housing in BC urban centres, with private sector management and expertise, but very clearly articulated housing policy objectives and goals.

Core funding for the Authority would come from a housing development agreement with the provincial government. Much like BC Ferries which receives annual payments from government in exchange for  contractually-specified service guarantees, the Housing Authority would receive annual payments in exchange for housing development commitments -- commitments that would transparently put the province on a path to reducing homelessness and affordability concerns. The province could negotiate with the federal government and cities to share the cost of these payments, but the timeliness and success of those negotiations would not affect the province's commitment and contractual obligations to the Authority.

Over time, the Authority would develop other sources of revenues. It would be empowered to undertake land assembly and redevelopment schemes in core urban areas with profits used to finance development of more affordable housing units and related services. The Authority would also have borrowing powers through the Municipal Finance Authority or with provincial government guarantees to gain access to low cost capital funds. In this way the Urban Housing Authority would mirror the rationale and mandate of BC Hydro and BC Ferries -- established and empowered to make the investments and provide the facilities and services the private sector would not or could not do. And in doing so it would fundamentally change for the better the urban landscape of BC.

Lessons from Monty Hall

I wasn't the first to get the Monty Hall problem unequivocally and humiliatingly wrong. But I was as incredulous and arrogant as anyone else.

Monty Hall, you may recall, hosted a game show where contestants had to guess the location of prizes  behind a number of closed doors. In the classic Monty Hall problem there were three doors, two with nothing behind them and one with a grand prize. After the contestant chose one of the doors Monty Hall advised which of the other two did not have the prize. There were now only two doors where the prize could be located -- the one that the contestant had chosen and the one of the other two that Monty Hall did not rule out. Monty Hall then gave the contestant the opportunity to change her choice.

The question is: was there any difference in the probability that the prize was behind either one of these two remaining doors.

I, like many others, insisted there was no difference. The facts were clear. After the information Monty Hall had provided, ruling out one door,  there were only two doors where the prize could be located. The chance that the prize was behind either one of them was the same -- one in two.

That still makes perfect sense to me, except it is wrong. It ignores the fact that from the outset when the contestant picked one of the three doors there was a two in three chance she was wrong. To say the same thing there was a two in three chance that the prize was located behind one of the two doors she did not choose. And that didn't change when Monty Hall ruled out one of the two non-chosen doors. The only change was that there was now only one non-chosen door with the two in three chance of having the prize behind it.

So if the contestant stayed with her original choice she would have a one in three chance of winning. But if she changed her choice to the other door she would have a two in three or double the chance of winning.

I know this is a bit confusing and counter-intuitive. My son, or as my wife would say, the brighter and nicer economist in the family, had to construct simple simulations of the game to convince me I was wrong. Pure logic wasn't enough. But after a while it sunk in. And it was a great learning experience -- not so much the mathematical probability part but rather the more fundamental and humbling recognition of how wrong we can be despite the certainty with which we hold to the correctness of our position.

It is, I think, one of the most important lessons that helped shape my economic consulting career.  No matter how carefully we do our analysis and how thoughtfully we develop our conclusions and recommendations we must never forget we may be wrong. We miss or ignore important facts. We fail to recognize  the nature and significance of our assumptions. We sometimes just make mistakes.

I've always been skeptical of those who profess they have the one and only correct answer to difficult public policy issues. That is why I have taught and applied a multiple account approach to the evaluation of policy and project alternatives. Different values and interests can bring different perspectives and often the best we can do is to assess the consequences of different actions -- how things would be different going forward -- in order to define as clearly and meaningfully as possible the nature of the trade-offs different alternatives present. Add to that a real appreciation that we may be wrong in our assessments despite all of our best efforts and it calls for some caution and humility in the work we do.

One of the most unfortunate trends I've witnessed over my consulting career is the exact opposite of caution and humility. Especially in contentious policy and project debates, and the hearings and media frenzy that often go along with them, there is far too much of what I like to call "analysis with attitude". People have a position and shape their assumptions, analysis and conclusions accordingly. There is no room for nuance, recognition and assessment of trade-offs, or simple acknowledgement of all the reasons including typically pervasive uncertainty let alone mistakes, as to why they may be wrong.

After over 45 years I am closing my consulting business. If I can offer anything from my experience it is a plea to those who continue in the very important world of public policy analysis, debate and advice -- stay away from analysis with attitude and the vitriol and intolerance it too often foments. Try to inform and elevate the debate with careful, objective analysis and a fulsome recognition of uncertainty, different perspectives and interests, and the simple fact that despite our experience, knowledge and best intentions there are lots of Monty Hall problems and paradoxes out there. We make mistakes.

Rethinking the Carbon Tax in the Wake of Recent Severe Climate Events

If there was ever a time to reconsider the logic and purpose of the carbon tax, it is in the wake of the severe weather events that have caused so much damage in British Columbia this past week and last summer. 

The proponents of a 'revenue neutral' carbon tax, where the revenues are dedicated to the reduction of income or other taxes, see the carbon tax solely as a means of providing incentives to reduce fossil fuel use and associated GHG emissions. Encouraging households and business to reduce emissions is clearly critically important. And imposing a carbon tax, as virtually all economists will tell you, is an economically efficient way to do that. 

But carbon taxes would have to be an order of magnitude greater than current levels to meet the emission reduction targets that are needed to limit climate change to so-called manageable levels. And a revenue neutral carbon tax won't address the immediate challenge governments face as a result of the climate change we are already experiencing and which is likely to get more severe. 

There are huge expenditures that must be made to deal with the widespread damages caused by severe climate events like the flooding in recent days. And there are huge investments in public infrastructure and services that are required to enhance the preparedness and resilience of utility, transportation, municipal and other government services in order to mitigate the damages of future events.

Right now those expenditures will either come at the expense of other needed and almost universally underfunded health, education and other public services or be funded by increased income, sales or other taxes. That of course raises the obvious question: why shouldn't the costs of mitigating and addressing damages be paid for by the activity most directly responsible -- fuel use and the GHG emissions it causes.

The most obvious logic for and purpose of the carbon tax is to generate the revenues government needs  to pay for the costs climate change is already and will increasingly cause. We shouldn't be asking hospitals and schools to forego needed funds or workers and business to pay higher income taxes to pay for that. We should be expecting those most directly responsible to pay.

We need a carbon tax that is at least as high as required to cover the costs GHG emissions are causing. You don't need economic theory and price elasticity estimates to justify the tax. You just need the common sense requirement that costs must be paid for and those responsible should pay. You might even find a lot more understanding and support for the markedly growing level of tax that is required.

In the Wake of the Horrors of the Residential School System

There is, quite understandably, the demand for accountability and retribution in the wake of the gruesome discovery of unmarked graves in the vicinity of aboriginal residential schools. Even if there were some well-meaning educational objectives, there was a complete failure to provide even the most basic levels of protection, care and respect, resulting in tragic and lasting consequences for residential school students, their families and communities.

But without meaning to diminish the need for the most thorough and transparent accountability building on a 1996 Royal Commission and more recent Truth and Reconciliation Commission, and no doubt to be continued with the discovery of more graves and the release of more institutional documents, it would only compound the tragedy of the residential schools if we go no further than recrimination and demonization of historical leaders for what transpired in the past, and fail to consider what all parties must do in the future.

It is not good enough to recognize that the residential school system was a horrible mistake, The question is what must be done now so that aboriginal children and youth can get the culturally rich and modern education they deserve and need. Because too many are not getting that now and we know from census data and countless studies that without high quality education, employment and income opportunities will be greatly limited and social and wellness outcomes disproportionately poor.

We can rename schools and remove statues of political leaders that bear responsibility for the residential school system, and for some the symbolism of such measures is important. But we can't undo the past and can't gain much by divisive litigation of the intentions and responsibilities of people long since dead. Symbolic gestures won't provide meaningful improvements and opportunities for aboriginal children and youth today. That requires resources, personnel, and well-designed and implemented programs that meet the challenges of what underlies the educational and social outcomes we see today.

It will be up to aboriginal youth, families, communities and governments to determine the best ways of providing the educational opportunities they need. There have been great aboriginal leaders who have led in the education of aboriginal youth, with positive social and economic results. And there have been leaders who have worked on the overhaul of reserve school systems and support for off-reserve children and youth needed for meaningful improvements in educational and social outcomes. That work must be built upon by current aboriginal leadership to determine what is needed for their nations and communities. And those educational plans and programs must be priorities for provincial and federal governments to fund and fully support.

None of this will be easy. But in the wake of the horrors of the residential school system it is essential to move forward -- not just look back -- if the intergenerational cycle of poverty and despair that plagues far too many is to be meaningfully broken.

We know education can be delivered exceptionally poorly -- arguably criminally in the case of residential schools. The challenge is to focus as much as possible on how it can be delivered exceptionally well.

The Political Economy of John Maynard Keynes - Then and Now

John Maynard Keynes was the brilliant British economist who upended the laissez faire economic policy that prevailed in the early1930's -- the notion that the economy self-corrects and the best government can do is to get out of the way even during economic crises like the Great Depression. He developed the theoretical foundation for counter-cyclical economic policy --  the need for government spending and other measures to stimulate the demand for goods and services during downturns in order to restore business activity closer to full employment levels.  

But as Zachary Carter writes in his recent biography of Keynes and sweeping history of economic thought from pre-WWI to the financial crisis of 2008 (The Price of Peace: Money, Democracy and the Life of John Maynard Keynes), Keynes was much more than the 'fiscal therapist' he is set out to be in the sanitized version of Keynesianism taught in economic departments throughout North America and Europe. He was a  great philosopher of war and peace who challenged the very basis of limited government, free-market economies.

For Keynes, the crisis facing European and North American countries leading up to and during the Great Depression was not simply cyclical downturns and collapse of economic activity. That no doubt was a central concern, especially after the crash of 1929. But the larger issue for Keynes was the suffering in the general populations throughout Europe -- suffering exacerbated by wars, ill-conceived terms of the peace, the Depression of course -- but most fundamentally brought about because of a failure of free-market economies to foster the government support and investments needed to meet essential community and societal needs.  It wasn't just the economic instability and insecurity that concerned Keynes; it was the  political instability it gave rise to -- political instability manifested clearly in the rise of Bolshevik and Fascist extremism, leading directly to the unthinkable Second World War.

The irony of Keynes is that he developed what was then considered and some still think is a radical prescription -- aggressive government intervention to address the failure of free-market economies to provide the counter-cyclical and social investments a healthy society needs -- for quite conservative goals. He wanted to save liberal, western society from the oppression wrought by left and right wing populist extremism and the global chaos that inevitably follows.

Keynes' academic and political battles were fought in the period from World War I through to the end of World War II. The 'Keynesian' issues have mostly been resolved -- most economists and governments accept the need for government intervention to restore economic activity during recessions, albeit with conservatives and monetarists favouring tax cuts and low interest rates to stimulate demand and with liberals and progressives favouring government spending.  But the bigger issues raised by the political economy of Keynes are as relevant and contentious today as they were in Keyne's own time. 

The question remains -- can free-market economies, even with reasonable counter-cyclical fiscal and monetary policies, provide the support and investments needed to meet essential community and societal needs. And if that support and investment isn't there, can we expect a resurgence of left and right wing extremism with all the pain that can bring, as occurred in Europe between the two world wars.

John Kenneth Galbraith directly addressed this issue in his book, The Affluent Society. In his acerbic attack on the tax-cutting, limited government policies of  conservatives, Galbraith wrote: "what is the advantage in having a few more dollars to spend if the air is too dirty to breathe, the water too polluted to drink, the commuters are losing out in the struggle to get in and out of the cities, the streets are filthy, and the schools so bad that the young perhaps wisely stay away".  

The specific concerns Galbraith raised may not all be as relevant today, but the general issue certainly is. Do we or do we not need public sector investments to address the scandalous conditions of homelessness, poverty and substance abuse afflicting so many in our urban centres; to support workers and communities who bear the largest costs of the necessary transition away from fossil fuel industries; to make investments in high quality child care and education services for children of all backgrounds and family means; to support culture, art, public libraries and all of the social infrastructure that enrich our lives. The list could go on. 

One of the interesting themes in Carter's biography of Keynes is the notion that in modern times the central problem is not scarcity -- it is not the classic economic question of how we can utilize labour, capital and natural resources most efficiently to maximize what we produce. The question that Keynes raised and is still so important today is not 'how' but rather 'what' should we produce and 'for whom'. 

The Price of Peace: Money, Democracy and the Life of John Maynard Keynes is a long read, but well worth the trouble. It is great history both of Keynes and the leading economists who followed, and provides critically important background to understand the debates we are or at least should be having in the present, and the future we may be heading for if we repeat the mistakes of the past. 

Systemic Bias in Media Coverage of Covid

While there have been some very informative and balanced articles on Covid -- the exceptional pieces by Ed Yong, Zeynep Tufekci and James Hamblin in The Atlantic stand out in this regard -- for the most part coverage of the pandemic by the mainstream media has suffered from the same systemic biases that distort so much of MSM reporting. The business imperative of capturing readers' attention is better served by tweets and articles that inflame rather than inform the general public. 

In the case of Covid this systemic bias is particularly evident in the relentlessly negative daily coverage and commentary on cases and hospitalizations, public health measures, vaccine procurement and delivery, and life during and after Covid. It is a negativity that is not just inaccurate and unbalanced in many important respects, but is compounding the tragedy of the Covid pandemic with a mental health crisis of depression and despair, the costs of which may continue well after Covid is effectively gone.

There is, of course, valid reason for negativity in all things Covid. It has been a devastating disease taking and disrupting lives in so many ways. But context and balance is critical in understanding where we are and where we are going, something often lost in MSM reporting. 

Take, for example, the coverage of the third wave of Covid cases here in British Columbia. As the number of cases grew at alarming rates in the late winter and early spring, the media seized on the potential for unmitigated exponential growth especially with the variants taking hold in the province. On April 1, when new cases in B.C. had risen to almost 1000 per day, Global News featured modelling results suggesting that new cases could double every 10-12 days -- implying new cases could rise to well over 2000 per day by mid-month. Daily case rates didn't in fact double in the first half of April. By mid month, they were still in the vicinity of 1000 per day. Nevertheless, on April 16, Global News again reported the potential for  new cases doubling every two weeks, rising to over 2000 to 3000 per day by May -- which we now know hasn't happened and almost certainly won't.

The potential for exponential growth is clearly important to report. But so too is the fact that the exponential growth didn't take place. The circuit breaker measures implemented by public health, the public response and on-going vaccinations have clearly slowed and seemingly reversed the growth in cases. But the positive mitigation in the growth of cases didn't make the news. The media coverage stayed with the potential for exponential growth and failed to highlight and explore why that didn't occur.

The fundamentally different consequences of the third wave also escaped MSM attention. There has been an alarming increase in cases and hospitalizations in this third wave, exponential or not, putting pressure on hospital facilities and staff in major urban centres. But unlike the first two waves, there hasn't been anywhere near the same number of deaths. As shown in these graphs of Canada-wide cases and deaths, the pattern is dramatically different.

The number of cases in Canada now is as high or higher than it has been from the outset of the pandemic. The number of deaths, on the other hand, is less than one third what it was in the earlier waves . The consequences of the pandemic are still serious, but they are fundamentally different. With the vaccinations of the elderly and most vulnerable populations, the costs of Covid are arguably far less now than they were in the earlier waves. Pressure on hospitals can be addressed. Illness can be overcome. It was the high death rate in the early waves that was so catastrophic.

I'm not suggesting that the media shouldn't be reporting on the serious third wave of Covid infections. But at least in places like British Columbia that should be balanced by recognition of the success the targeted public health measures and vaccinations have had and hopefully will continue to have. And it should also recognize the near miracle of the vaccines that have been developed in such a short period of time and the  amount we have already been able to access despite the globally limited supply.

These are difficult times. But we are so fortunate in British Columbia for the careful and thoughtful way the crisis has been managed -- not perfectly for sure, but exceptionally well by comparison to our neighbours to the south, most countries in Europe, and virtually all of Latin America. Critics in the media and elsewhere can be negative for their business, political or other reasons, but to fight the depression and despair that negativity brings on we need to appreciate that things are not as bad as some would suggest and certainly not as bad as they could have been. Despite what we constantly hear and read, the outlook is unexpectedly good.

The Increasingly Misplaced Fixation on the Number of Covid Cases

Good public policy requires a clear understanding of the objective.  There is no point claiming you have 'the answer' when there is little agreement or clarity of the question.  This is true for all public policy issues, but particularly so when what is called for -- the answers -- are extreme in their nature and consequences.  

I've been thinking about this as I hear some people call for more extreme lockdown measures to counter the risk of escalating cases of Covid due to the prevalence of more infectious variants.  A recent op-ed in the Globe and Mail, for example, called for a total lockdown and Covid suppression strategy much like New Zealand did early in the pandemic. 

Aside from the fact that Canada is not an island, and with agricultural and other essential products trucked across the border every day we could not totally suppress Covid outbreaks without comparable measures in the US, total suppression presumes the objective is to eliminate all cases of Covid.  That undoubtedly would be nice, but it is not something Canada on its own could ever achieve.  Nor should it be the primary goal of Covid-related public policy.

The realistic goal for Canada and other nations has always been to minimize the incidence of severe illness, hospitalizations and deaths from the spread of Covid.  And that is something we can and will achieve without extreme Covid suppression strategies.  The continuation of distancing and masking, contact tracing and containment, and priority vaccinations of the most vulnerable populations won't eliminate Covid.  And it won't stop mutations and spread of more infectious variants.  But it will over the next months reduce illness and death.  It will do what needs to be done.

It has become part of our 'days of Covid' routine to monitor the number of cases that are reported with great fanfare every day.  But cases are not what we most need to watch.  It is hospitalizations and deaths that should be of primary concern.

It is true that before vaccines were available cases were a leading indicator of the hospitalizations and deaths that would follow.  But with the priority vaccinations that we have already achieved despite shortages of vaccine supply, and will see at ever-increasing rates in the weeks and months ahead, that should change.

It is human nature to fixate on numbers and worst fears.  But we do a disservice to ourselves and our country if we fail to recognize how fortunate we are with the unprecedented development of Covid vaccines--vaccines that may not eliminate all cases but are widely held to greatly reduce the incidence of severe illness and death.

We don't need excessively restrictive measures aimed at eliminating Covid cases when it isn't necessary to do that to achieve our primary goal.  We should never forget that the costs to people's material and mental well-being of excessively restrictive measures are great, far in excess of the benefits they would provide as priority vaccination of vulnerable populations breaks the hard link between cases, hospitalizations and deaths.

Site C (Again)

Opponents of the Site C project are quite right that sunk costs, no matter how large, should not determine whether it is appropriate to complete the project. The decision to proceed at any point in time should be based on the costs and benefits of going forward. That was true when the current government decided to continue construction in 2017 and remains true today.

However, any such go-forward analysis requires a clear understanding of the challenges and opportunities that electric utilities face with growing penetration of wind, solar and other intermittent supply, and the strategic value a resource like Site C can provide. That is completely missing in the latest calls to halt the project. 

Based on a comparison of spot market electricity prices in the US Pacific Northwest with their estimate of the cost of completing Site C, project opponents calculated  that BC Hydro could  save some $100 million per year by halting construction at this time.  It is not clear that this calculation fully considered the contract termination, dismantling and rehabilitation costs that halting a project this far advanced would entail.  Nor did it appear to recognize any benefit to a capital-intensive project like Site C from the low interest rates BC Hydro has locked into.  Nor is there any reason to have confidence in their estimate of the cost of completing Site C, or of the cost of their alternative, US spot market supply, over the long life of a project like Site C.

But more important than all that, the project opponents' analysis completely ignores the strategic value that the dependable capacity and shaping capability of a hydro resource like Site C provides. 

Growing amounts of wind, solar and other intermittent developments are increasing the variability of electricity supply and corresponding volatility of electricity market prices. When the wind is blowing and the sun shining, there is ample supply of electricity and market prices fall -- sometimes to zero or even negative levels when supply far outstrips demand. However, when supply from those intermittent sources is limited by weather or sunlight conditions, electric systems are constrained in their ability to meet demand and market prices can spike to very high levels. 

The US Pacific Northwest or other spot markets can be very cost-effective sources of supply. Indeed, the restrictions that government has imposed on BC Hydro in their use of spot market supply to meet provincial demand should be eliminated. (Ironically it is one of the most vocal opponents of Site C -- the Green party -- that prevented the NDP government from relaxing those restrictions this past summer). However, the best use of the spot market is an opportunistic one.  It isn't a source of supply you want to be forced to rely on regardless of the market price, for example in peak demand periods when you are short of supply because of a lack of your own dependable generating capacity..  Rather you want to buy from the spot market when supply is plentiful and prices are low. 

The opportunistic use of the spot market is precisely what BC Hydro's hydroelectric system enables it to do -- generate power in BC when spot market prices are high, and buy power,  backing off its own generation, when spot market prices are low. The development of Site C will enable BC Hydro to do that even more. 

What the latest opponent analysis of Site C completely misses is that the spot market is not a substitute for Site C. Nor is the expansion of wind and solar projects in the province that others would have BC Hydro acquire in lieu of Site C. Those sources do not provide the dependable capacity and shaping capability to produce your own power when it is most valuable, and to buy from the spot market when it is most advantageous to do so. 

What needs to be recognized is that rather than substitutes for one another, Site C complements greater cost-effective use of the spot market and can serve to accommodate more wind and solar development in BC and neighbouring jurisdictions. It is a strategically important and valuable resource.

It is possible, though highly unlikely, that the geotechnical problems and cost escalation for Site C would justify terminating the project at this time. But the challenge then would not be simply to replace the energy that Site C would have produced. It would be to develop the alternative demand and supply side measures that could offer the dependability and flexibility that more hydro production in the province would provide. The project opponents have yet to recognize the issue, let alone provide practical, cost-effective solutions.

On Tax Cuts and Cash Giveaways

They were never meant to be well considered policies.  The Liberals' promise to reduce the provincial sales tax and the NDP cash giveaway of $1000 per household were both the standard stuff of populist-driven electoral politics.  Still, it would be nice if during the leaders' debate or other forums, there was some serious discussion about government taxation and spending in this province - where the parties want to go over the medium to long term.

While one can justify virtually any fiscal stimulus including tax cuts and cash giveaways in the wake of Covid, in the not-too-distant future government will have very hard choices to make.  The government won't be able to sustain the on-going deficits it is currently incurring and yet there will be demands for more government resources in a whole host of critically important areas.

The homelessness and despair in our parks and streets is both a tragedy and disgrace.  There are no simple answers but one thing is clear.  It will require a Covid-level commitment to address the underlying problems and the resources to match. 

Reducing greenhouse gas emissions is a universally shared objective, but it too will require serious commitment and resources to get beyond high-minded targets and achieve major reductions.  Infrastructure and other investments will be needed to make affordable, green energy alternatives available for households and industry.  Comprehensive programs and plans will be needed to support fossil fuel-dependent workers and communities in their transition to new employment and economic activity in the face of their industry's decline.  

The benefits of high quality early education and child care, both for long term child development and the more immediate needs of parents, are now widely recognized and accepted across the political spectrum.  But for that to be provided throughout the province on more than a piecemeal basis will require major investment in facilities and staff training, and on-going commitment to operating costs. 

And then there is the aging population and growing need for health care facilities and services.  There is backlog in transportation infrastructure; the on-going need to seismically upgrade, refurbish and expand school facilities; and other major demands as well.  The list could go on.

Of course, government must make choices -- not everything can be done to the extent we would like.  But if we are to take these challenges seriously, government must commit to doing more than they have in the past.  The question is whether and how the Liberas or NDP are willing to do so. 

The short term fixes the parties are offering are of no help in dealing with these critical needs.  Cutting taxes as the Liberals are offering, which will be difficult to reverse in future years no matter what their current intentions, will only make the problems worse.  Government will need more resources and unless the Liberals have some other tax in mind, their tax cut proposal will make it more difficult to address the fundamental fiscal challenges government will face. 

The NDP cash giveaway is not much better.  It will add to the deficit in the short term and increase the fiscal challenge government will face to allocate more resources to the pressing medium and long-term needs.

It is no doubt naive to think any party will want to talk about how much resources they will devote to the problems we know have to be addressed, and more to the point, how they think they will raise the required revenues.  But it still would be nice to hear whether the leaders appreciate the challenge, and in suitably election-tainted general terms, tell us how they plan to deal with it.

BC Ferries Needs More Than a Covid Bailout

It is the classic problem BC Ferries has always faced – first as a Crown Corporation and now as an unnecessarily complicated quasi-private company still dependent on government subsidy. Given the constraints on fares imposed both by the government and a regulator, the government subsidy is not sufficient to fully cover the losses on the service government requires BC Ferries to provide. The combination of fares, subsidy and service levels are not financially sustainable over the long term. 

The recently announced Covid-related bail-out will help address BC Ferries’ immediate financial woes due to the springtime and early summer collapse in traffic and revenues. But it won’t deal with the long-term unsustainable arrangements, particularly with the provincial government making clear it wants more service without any fare increases or any reversals of the seniors’ and other fare discounts forced on BC Ferries over the last few years.

 

You can be sure the current government, like every government before it, will not want to increase the contract subsidy to the levels needed to sustain the service levels and fares it wants to see. And ferry customers, particularly the vocal Island stakeholders who think BC Ferries should be seen as part of the highway system, will not support increases in fares or cuts in uneconomic service consistent with the level of subsidy government will provide.

 

However, if BC Ferries is going to be able to recruit and maintain the skilled labour force it needs, expand and modernize its terminal capacity, maintain and upgrade its fleet, something will have to change. And if more subsidy and/or higher fares are not on the table BC Ferries will need to be given the flexibility and encouragement to fundamentally change the way it does its business.

 

It will need to introduce changes to its rate structures, reservation policies and schedules in order to increase the utilization of ship capacity much like the airlines were forced to do. Higher capacity utilization in off-peak periods and seasons will reduce average costs and the need for higher fares or subsidy to sustain operations.

 

For the longer term, definitely post-Covid, BC Ferries will have to make much greater efforts to encourage passenger as opposed to vehicular travel, especially in peak periods and seasons when more ships are needed to accommodate more vehicular demand. Encouraging more passenger as opposed to vehicular traffic requires better integration of ferry service with convenient land transport options including island taxi, uber, car share, bike and e-bike share, and upgrades of safe island bike networks. It requires as well much lower passenger fares with the bulk of BC Ferries revenue requirements recovered from higher fares on vehicles.

 

BC Ferries must also look for and be able to act on opportunities to eliminate duplication of terminals and reconfigure costly routes. And it should work jointly with the government to identify opportunities to replace ferry service to some islands with lower cost bridge connections.

 

There are calls for BC Ferries to return to its former crown corporation status. There is some merit in that. The current quasi-private structure makes little sense and probably adds to the interest costs BC Ferries pays on its large and growing debt. But that in itself won’t solve the fundamental problem. Fundamental change is required for that.

 

What's with the Greens?

It is disheartening to see the Greens try to derail the NDP’s efforts to eliminate some of the worst aspects of the previous government’s Clean Energy plan – in particular the NDP’s proposal to eliminate the self-sufficiency requirement that the Clean Energy Plan imposed on BC Hydro.

The self-sufficiency requirement called on BC Hydro to develop or contract for firm electricity supply from BC sources sufficient to meet forecast BC demand. It sounds harmless enough but it is hard to overstate how misguided and costly that policy has been.

Self-sufficiency was never needed to ensure reliable supply. If security of supply was the concern, the requirement should have been directed to ensuring BC Hydro had sufficient dependable peak generating capacity to meet sustained peak loads. But it was silent on that critical issue, focussed instead on the supply of energy regardless of when it was produced. That suited BC’s private run-of-river power producers, who could provide energy (unfortunately for BC Hydro customers disproportionately in the springtime when least needed), but little dependable peak generating capacity mid-winter when most needed.

There was the telltale sign that this requirement had nothing to do with reliability when it precluded BC Hydro from relying, if ever needed, on the province’s entitlement to the downstream power benefits under the Columbia River Treaty, a source of supply guaranteed under international treaty agreement and easily as reliable as contracted supply from BC sources of supply.

Nor was the self-sufficiency requirement cost-effective for BC Hydro customers. It had the predictable (indeed intended) effect of forcing BC Hydro to buy high cost, low value electricity it did not need.  The financially losses BC Hydro incurred as a result have been staggering. The average cost of the power BC Hydro was forced to buy averaged over $125/ megawatt hour, more now with the inflation provisions in the contracts. That power is worth less than $25/ megawatt hour – the losses, that have to made up for in higher than necessary BC Hydro rates, are in the hundreds of millions of dollars per year.

It was, pure and simple, a scheme by government and their developer friends to create an artificial market for what the developers could provide – all at the expense of consumers. We used to call that Mercantalist protectionism. I suppose today it could be better described as Trumpian economics, with its veil of national, in this case provincial, security of supply.

Perhaps the Greens believe circumstances are different now. They are, but if anything current developments provide an even stronger argument to eliminate the misguided self-sufficiency requirement imposed on BC Hydro. The explosion of solar and wind development in Alberta and the western United States is at times producing large amounts of surplus that can be purchased at very low prices. During high wind events and periods of high solar production prices can fall to zero – even go negative. With its large reservoir capacity BC Hydro is uniquely capable of taking advantage of this low-cost supply whenever available. Self-sufficiency only impedes BC Hydro’s ability to do so.

One would think that the Greens, of all parties, would understand the need to acquire electricity at the lowest possible cost in order to maintain low electricity rates and encourage the electrification in transport and industry we need to meet our GHG reduction targets. For that we should be doing the exact opposite of self-sufficiency. We should be expanding our interconnection capacity and freeing up BC Hydro’s ability to acquire clean energy at the lowest possible cost from wherever it is available.

That’s doesn’t mean there won’t be private or community power developments in BC. There will – when and where they are economic. It is true BC Hydro could do much more in making available low cost transmission and back-up services in order that developers could undertake power projects on their own. But the government should end the craziness of forcing BC Hydro to buy power that it does not need for reliability, that is not economic, and that limits its ability to take advantage of the exceptionally low cost renewable energy increasingly available in neighbouring jurisdictions.

Sustainability of our government debt- sustainability is not the issue

Debate about the sustainability of government debt is seldom about the debt itself – the financial burden we are imposing on future generations. After all, the well-being of future generations will depend on the investments we currently make (or do not make) as much as or more than the way in which those investments are financed.

The fact that the same people who raise concerns about unsustainable debt commonly support tax cuts, regardless of their impact on government finances, tells you that for many the real issue is not the debt. Trumpista Republicans are particularly obvious in that regard. And the same hypocrisy is evident in Canada when it comes to glaringly contradictory positions on tax cuts, deficits and debt.

There are, of course, limits to the foreign borrowing a country can prudently undertake. Repayment obligations to foreign creditors can require draconian austerity measures, as countries like Argentina, Greece and others have recently experienced. For Canada, however, the repayment obligations on our total debt, foreign and domestic combined, is relatively small in relation to our national income.  

As Kevin Milligan, Trevor Tombe and other leading Canadian economists have pointed out, even with the huge amount of Covid-related health care, bridging and income support measures the Canadian government is currently undertaking, the interest payments on our total debt will still be significantly less than what we have readily managed in the past. As for the debt itself, it will gradually fall in relative size and significance as long as in normal times new debt accumulates at a lower rate than our rate of economic growth.

But if the debt itself isn’t a major problem, even in extraordinary times like this, what is the real issue that gives rise to the apocalyptical warnings of many politicians and commentators, particularly on the right? It isn’t the amount of borrowing per se; rather it is the extent of government involvement in the economy they are railing against.

When politicians raise alarms about the run-up of government debt what they are really decrying is the increased amount of public sector expenditures that the debt makes possible. They believe our economy should produce the goods and services that individual households and businesses want; in economic terms they believe resources should be allocated in accordance with private household and business decisions, not public sector priorities.

The problem with the misdirected debate about the sustainability of government debt –  focused on the debt itself instead of the expenditures the debt makes possible – is that it diverts attention from the far more important question we should be addressing: What is the role of government in modern society – what is the right balance between private versus public sector spending.

In the midst of the pandemic there has been widespread agreement about the need for massive government spending. But as the pandemic and with it the pandemic-related spending subsides, there will be the issue of what level of government spending is needed in more normal times. Do we return to pre-Covid levels of government responsibility and spending. Or do we recognize the need for major change.

There are legitimate, though often exaggerated concerns that government bureaucrats can be excessively political, risk-averse and inefficient in what they are mandated to do. And that does raise important cautions about exactly what government should be responsible for. Nevertheless, I think any fair-minded person can recognize that the well-being of present and future generations will depend far more on the investments we must make collectively than the spending we can make on our own.

The pandemic itself has made clear the need for more basic research and health care system preparedness to avoid the calamity of new viruses and other public health emergencies in the future.

Massive investments will be needed to address the ever-growing challenge and effects of climate change. It is not just the efforts to reduce emissions that need to be supported, but also to mitigate the social, economic and environmental damages that we are already experiencing and that will in all likelihood escalate in the future.

There is the challenge of poverty and homelessness, combined in many instances with mental and physical wellness issues. We’ve recognized the unacceptability of these conditions during the pandemic; they will be no less acceptable when the pandemic disappears.

There is the ongoing challenge of meeting increasingly complex educational needs in a world where knowledge and skills will be of paramount importance in order for our youth to find and retain meaningful employment and income.

There are the unacceptable third world conditions in some First Nation communities. And there are the growing needs of many oil and gas, coal mining and other resource-dependent workers and communities that will require support to transition to other activities and industries in order to survive.

There are as well our global responsibilities. We are a rich nation, but our well-being and those of our children will never be secure if we fail to support the basic needs of people in much more difficult circumstances.

And there are many other challenges, challenges that will require more public as opposed to higher levels of individual and private sector spending.

The Reagan and Thatcher revolutions brought a relentless effort to reduce public sector spending, leaving more resources and spending power in the hands of individuals. But that will have to be reversed if we are to meet all of these needs. The question is how much more public sector spending should we support. That is the debate we will need to have. Then we can sort out the best ways of financing that spending – with more debt, higher taxes or some combination of the two.

The question of the appropriate amount of debt will be a much easier issue to understand and resolve once we’ve developed a consensus on what we are trying to do.

Moving Away from Isolation

As governments begin to grapple with when and how to move away from the extraordinary isolation measures that, on the one hand, have been necessary to curtail the exponential growth of Coronavirus cases and deaths, yet on the other hand are hugely disruptive to the economy and our personal lives, it is important to bring some perspective to the consequences and costs that alternative strategies may entail.

The consequences and costs for the economy are relatively straightforward to assess. Different strategies (for example, earlier or later reversal of the isolation and industry shutdown measures) will significantly impact employment and business activity. The losses in employment and business income under the different strategies provide a measure of the economic cost they entail.

The consequences and costs for Coronavirus-related illness and death are much more difficult to measure. Nevertheless, one can build on estimates of the number and severity of coronavirus cases to bring some perspective to the costs of the illness and deaths the different strategies entail.

For example, in a March 25 article in the New York Times, Nicholas Kristoff and a team of epidemiologist modellers provide information on the Coronavirus consequences of different time frames for ending the isolation measures in the US. Their estimates of the number of Coronavirus cases and deaths that one could expect if the US were to lift the isolation measures after 3 to 6 weeks are shown in the table below. 

The estimates are no doubt rough and do not take into account the mitigation measures that could be implemented in place of isolation. Nevertheless, they do indicate how severe the consequences could be. An early end to the isolation (after the first 3-week period) could result in 104 million Coronavirus cases in the US (almost 30% of the population) and some 1 million deaths. Ending the isolation measures after 6 weeks could cut the total number of cases by over 50% and the number of deaths by almost two-thirds, but would still have staggering effects (with an estimated 45 million cases and 356,000 deaths).

Weeks of Isolation	3	4	5	6
Cases (millions)	104	81	61	45
Deaths	1000000	787000	553000	356000

To some people it is impossible or even immoral to try to estimate the costs of illness and death. But to decide how to manage economic-health trade-offs, one needs some sense of the cost that people place on the risk of serious illness and premature loss of life – the amount of resources they would want government to allocate or income they would be willing to forego in order to reduce the number of illnesses and deaths.

With respect to illness, a minimum measure of the cost is the estimated average health care cost that will be incurred to treat more and less severe Coronavirus cases. As for deaths, economists look at the decisions people make with respect to more and less risky occupations, and to more and less safe automobiles or other products to gauge the cost they assign to the risk of loss of life. How much higher wages do people need to offset increased occupational risks or how much higher prices will they pay for safer products.

Based on studies of those choices people make and also on direct surveys, economists have concluded that on average people in wealthy countries like the US or Canada assign a cost in the order of $5 million to $10 million to the risk of the loss of one life. Taking $7.5 million as a mid-range estimate, the cost of the one million lives that could be lost if the isolation measures in the US were lifted after three weeks would be some $7.5 trillion dollars

The Table below uses an average health care cost of $25,000 per illness and a loss of life cost of $7.5 million per premature death to develop estimates of the total US Coronavirus health care and premature death costs when the isolation measures are lifted after 3 to 6 weeks.

Weeks of Isolation	3	4	5	6
Health care ($billions)	2,600	2,025	1,525	1,125
Loss of life ($billions)	7,500	5,900	4,150	2,670
Total Costs ($billions)	10,100	7,925	5,675	3,795

It must be emphasized that these numbers are rough – they are useful not in their precision but rather as an indication of the order of magnitude of the costs involved. And in that regard they are very clear.

Firstly, it is clear that the costs of illness and death are huge. If the US were to lift the isolation measures after 3 weeks with no effective alternative mitigation measures to take their place, the total cost would be over $10 trillion – almost one half of the US GDP in 2019.

Secondly, the costs do fall considerably with each additional week of isolation – if the measures are kept in place for 6 weeks the total costs would be $3.8 trillion – 60% less than if isolation were lifted after 3 weeks. However, they would still be huge. Costs of $3.8 trillion are equivalent to almost 20% of US GDP.

If the goal of the isolation measures has been to flatten the curve in order that hospitals can cope, the goal of delaying the lifting of isolation measures must be to develop and put in place mitigation measures that could effectively replace isolation. Delay in lifting the isolation helps but still leaves unacceptably high costs of illness and death. And unlimited delay is not sustainable – the economic costs would be overwhelming.

To avoid massive costs of illness and death if the isolation measures are lifted too soon, or of massive loss of income if the isolation is excessively prolonged, planning and preparation for effective alternatives to isolation have to start today.