The Evolution of a Zombie Economy

Commentary, Public Sector, Peter Holle

By conventional standards, the recent provincial budget was regarded as prudent, a careful piece of work, with small tax cuts, minor debt retirement, and several hundred million dollars squirreled into the piggy bank, the so-called “rainy day” fund. But the new spending poured into low-performing public institutions, paid substantially by the economically more vibrant provinces, indicates a not-so-prudent direction. Manitoba has evolved a zombie economy, hollowed out by past errors of the same sort.

These are mellow times in Canada, perhaps too mellow. A federal budget in balance gives us the luxury of available surpluses to repeat past policy mistakes. Paul Martin’s weak government caved in to provincial demands for substantial increases in federal transfer payments. But Manitoba’s comparative windfall from equalization just wraps another layer of cloth around the zombie’s head. The easy money is not the way to bring things back to life.

Relative national prosperity offers a great opportunity to unbind our suppressed energies. Instead, hard-won federal surpluses are being frittered away with comfortable, but dated thinking. Torquing the public sector with more money is not a way to improve public services. Manitoba has the biggest government sector in western Canada, yet it is never enough. Recent statistics show that all three levels of government consumed 47.4 percent of our provincial GDP in 2003/04. Add in such romantic relics as Crown corporations and government spending likely swells past half our economy. This compares very unfavorably to a Canadian average of 38 percent.

Suffocating federal transfers help pay for some of this massive expenditure, but we also support it with high taxes. That explains the decades-long exodus of talent, corporate headquarters and businesses. It also explains the damage from Manitoba’s chronically low level of private capital investment, which is the mainspring of economic growth. Manitoba averages $15,000 per person, while low-tax Alberta attracts triple that amount.

Why, despite all this spending, does the performance of the health and education sectors, for example, continue to be so spotty? Why does pouring more inputs into public services tend to balloon up their costs instead of producing more outputs, be they shorter waiting lists for hospitals, higher test scores or whatever? Why, in other words, is throwing more money at monopolies not a great idea?

I once asked Gordon Tullock, one of the world’s most famous economists: “Why is it that we don’t organize grocery stores like the government does health care and education, with one large single supplier?” Tullock answered: “Because most people like to eat. What would happen is not that you would starve, but you’d have a rather poor selection of poor-quality food at high cost.”

He was summarizing our biggest error in policy design. Adding funds into a monopoly simply increases operating costs with little or no increase in services. Unwittingly Premier Gary Doer confirmed Tullock’s analysis by stressing that new federal money sloshed Manitoba’s way would be used to increase the salaries of healthcare professionals – when we are already spending way more on healthcare than the Canadian average.

Creative, innovative public policy is crowded out by easy money and no-strings-attached transfers. Imagine if my surly government food monopoly really existed. Its aging proponents earnestly believe it will be more efficient since it is “non-profit” and has “economies of scale”. Amply funded with years of above-inflation funding increases, it has many dowdy stores with half-empty shelves. Only primitive cost-accounting systems exist, but people are assured that things are efficiently managed.

The staff are paid very well, more than other people, and have great benefits. Through lots of complex work rules, politicians and the lobbyists who support them get to decide what kinds of foods are available. Last month, trans fat-free salami pizzas were big. This month, there are no desserts because some professor doesn’t think this is good and she has the ear of the Minister. You get the drift.

Our political class’s solution to such mediocrity? Force-feed cash into this mess even faster than before. But a simple structural reform would give consumers choice. If we broke the monopoly and invited in Safeway, Superstore and Costco, customers would flee the ramshackle offerings of the Department of Supermarkets and head for suppliers with low prices, tasty, interesting food and the latest technology. The government could still fund the system by giving us the money to shop, but we would spend it according to our own needs. Of course, despite its crucial importance, we never made the mistake of making the food supply a government monopoly. Even when we transfer money to the poor and elderly, we don’t dictate how they spend it.

Had federal spending been held to inflation plus population growth since the year 2000, Canada could have cut the personal income tax by 30% while keeping surpluses intact. Yet the money is flipped over to provincial governments who hang on to the hopelessly flawed “Department of Supermarkets” policy model for health, education and other services.

As you grouse about this tediously long winter, put it all in practical perspective. For most of us, such a tax cut would pay for a nice holiday in the sun for a week or two. Every year. That is the real cost to you of sticking with a system that is using your hard-earned money to hyper-oxygenate an economic model of the living dead.