Policy Folly: Dividing the Cake Before It’s Baked

Despite having the fastest growing population in the developed world, thanks to a massive acceleration of immigration, Canada is facing a forecasted economic growth of only 1% in 2023 (according […]

Despite having the fastest growing population in the developed world, thanks to a massive acceleration of immigration, Canada is facing a forecasted economic growth of only 1% in 2023 (according to the OECD). This is surprising given the rise in demand for things that we are very good at producing, such as food, forestry, energy, and minerals.  The global demand for these goods is at record highs, and so are their prices. Yet, despite rapid population growth, huge reserves, and potential increases in production, Canada is facing a future of tepid economic growth.

There is a simple economic theory developed in China, called the Cake Theory, which helps explains this situation.  The traditional communists believe the focus should first be on determining how the cake should be divided before it is made. The free market reformers in China believe that the goal should be to bake the largest cake possible and then determine how it is to be divided. Both groups believe in having clear policies on the how to divide up economic growth, but only the reformers want to pursue economic growth first before the wealth is divided up.

Generally, in the west, we believe that a rising tide lifts all ships, and that despite the inherent inequality that growth brings, it is better to focus on baking a larger cake first, rather than on dividing the cake before it is baked. In reality things are more complicated, with market forces, union contracts, labour shortages, and labour laws establishing minimum income participation by workers. But the general idea is important: Do you focus on growth first or focus on equality first?

Our current federal  government, headed by our Prime Minister and Finance Minister are advocates of dividing the cake up  before it is made. Their view is that our natural advantages in primary industries are large enough, and the focus should be on a redistribution of wealth, rather than growing the economy.  As we all know, Trudeau has praised the Chinese Communist Party in the past, and it comes as no surprise that he favours their approach when it comes to the economic development.

This is a long-standing position that our Finance Minister, Ms. Freeland, is dedicated to, as clearly articulated in her book, “Plutocrats.”  She recognizes that while free markets and capitalism brings far greater growth than communism, and it increases wealth for everyone, it does not do so with enough equality.  She refers to the halcyon days after WWII, when the US Central Government had a marginal income tax rate of 77percent. This was a period when income inequality shrank, and due to a number of factors, including a baby boom and the end of the war, the US economy grew at about 3.5 percent per year.  It appears that she has been able to persuade both Trudeau, who jettisoned his previous Finance Minister, Bill Morneau; an advocate for a bigger cake first.  Now our PM has a Finance Minister  who believes in dividing the cake up before baking it.

Ms. Freeland and Mr. Trudeau are not the least embarrassed of their positions. They passionately believe on focusing on reducing income equality ahead of economic growth. In order to advance their policies, there are two  actions they need to undertake. First, they need to increase taxes, and second they need to increase government spending. They believe that by government making “strategic investments” (a process that is difficult to measure with any certainty), and by raising taxes, Canada will achieve the miracle of increased economic growth and, at the same time, reduced income and wealth disparity. The fact that their policies are also designed to limit and restrict primary resource development is seen as a good thing, in their eyes. They believe that there will emerge new green jobs replacing primary industry jobs, and that these new jobs will be well paid and sustainable. There are plenty of platitudes about how higher taxes on fossil fuel will naturally lead to green jobs.  Rather than try to help out Europe with natural gas sales, they believe it is better to develop a new industry based on solar power to make hydrogen and sell this fuel to Europe.

There are three years left in this government’s mandate, which means three more years of a government devoted to sharing the cake before it is baked. Three more years of slow growth,  increasing government spending, increased government regulations, and higher taxes. With each new session of parliament, more legislation is enacted to limit the growth of our natural resources advantages, and to even scale them back. There are ever more restrictions and cancellations of pipelines, increased environmental regulations, and increasing First Nations consultations.

Regardless of what is thought about these policies, the results will be reduced economic growth, for the country, in the provinces and territories, and for individual Canadians.

 

Randy Boldt is a senior fellow at the Frontier Centre for Public Policy

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