Herb Grubel

[Canada Labour Code, March 11th, 1997]

Mr. Speaker, I would like to speak to the changes to the labour code proposed by the government under Bill C-66 which will affect about 700,000 workers in federally regulated industries.

I oppose the legislation because it attacks the wrong problem. The problem as government members see it is labour disputes that must be dealt with in a specific way. It will be much better in the long run to deal with the real problem, the existence of federally regulated industries.

Let me summarize my argument. Unions exist to get higher wages for their members. They might often say they just want job security and all kinds of other goodies like work regulation and safety. All that can be translated into higher income. Basically unions exist to benefit workers.

It is true by definition that if enterprises are suddenly required as a result of unionization to pay higher wages to their workers the extra money must come from somewhere. There are only four logical possibilities.

First, the money that has to be paid to workers could come from the profits. An old ideological position is that it is a struggle between capitalists and the working class. Many people will know this position will not likely have a very strong effect. If the profits of companies are squeezed too much it may seem as if they are stuck where they are at the moment, but the fact is that they can always leave. More important, in a region in which unions are very strong factories simply will not be established. There will be no investment. The extent to which higher wages going to the worker come from profits is extremely limited. In some types of industries it is more possible than others. I will explain that in a moment.

The second possibility is that the employer simply raises the prices of the product and services produced by the unionized firm that suddenly faces higher labour wages. Under those circumstances the benefits to workers come directly from the consumer. It would tend to be consumers of only a very small proportion of the product. Therefore it does not totally come out of their pockets.

If everyone in society were unionized and insisted on higher wages it is quite clear there would be higher prices and the gains made by workers with the higher nominal wages would be wiped out by what they had to buy. This kind of situation existed in countries like Sweden where unionization was almost universal, at which point there had to be tripartite agreements between government, industries and workers to ask how they could prevent this cycle of inflation from taking place.

The third way in which workers can be compensated when they insist on higher wages is at the expense of other workers. In a sense the higher costs of production due to the higher unionized wages are passed on in higher prices. It is the consumers who pay in the end for the workers whose union action brought higher wages.

The other possibility is that workers induce a substitution of capital for labour so that the company will make the same profits and will not have to pass on higher costs through higher prices for their output. They would save labour. As a result the workers in the industry before the wages were raised are now thrown into the non-unionized sector where, if they are to be absorbed, they get lower wages. This is what economists have found. Everything else remains the same between industries. The workers who are unionized have 10 per cent to 15 per cent higher wage rates than those who are not unionized.

When a union is squeezing a higher wage out of an employer through unionized action, where does the money come from? It comes in some industries from government.

There is no sense for any reasonable government in the industrial world to attack the activities of unions, as self-serving as they are. The right to organize and the right to try to get more money for their members are such ideological issues that any government which tried to confront the ability of unions to do so directly would suffer greatly. It is a cause that makes workers go to the barricades. People have been prepared to die for the cause. It is not worth any government taking on the unions directly, but society has an option to strictly limit the power of the unions by certain policies. The policy which I would recommend is to remove situations where there is an unlimited pot of money or a very large pot of money. That large pot of money has been created by government policy itself.

I would like to elaborate on that basic idea by considering that unionization can take place in four analytical classes of industries.

The first business that I would like to discuss involves small privately owned firms, where entry is easy. A lot of capital is not required. They typically have no more than ten employees. It is a mom and pop shop, a tailor or even a small manufacturer of drapes or whatever is locally produced.

In that kind of business everyone is just scraping by. Often the employers are just making enough money to stay in business. They do it because they feel that someday they might hit it big or they like to have their freedom. They are their own bosses. If these people rationally calculated how many hours they work and what their income is, they would realize that they work for very little money. They could probably earn more on the outside.

When I return to the university and to the Fraser Institute after the next election, a study of small business will be one of the projects which I hope to undertake. I want to know what makes them such good employers and what they give to society.

Unions in the small business sector are non-existent. Why? Everyone knows that if they unionize those small shops to get a higher wage the employer might just throw in the towel and leave. He is not making enough anyway. Alternatively, the company could be driven out of business because it cannot pass on higher wages through higher prices. Try to sell ice-cream, shoes or drapes at a higher price than the neighbour charges. They would be driven out of business.

The second category of business that I would like to discuss is where they have a small element of monopoly power. For example, the steel industry used to have a certain amount of monopoly power. I say used to have. So did the automobile industry. That was before transportation costs fell dramatically and before technology spread throughout the world at the push of a button.

In the past those kinds of industries had what we call an oligopoly position. They were protected by natural processes in the economy. The cost of transportation was high. There was limited entry because of the scale that was required to build an automobile factory or a steel factory. Under those circumstances workers were somewhat successful in organizing because they were able to drive up the price and the price could be passed on. The price of steel in an automobile is still relatively low and automobile prices are not affected if unions in the steel industry raise the price a bit.

In the sixties, seventies and into the eighties we had huge, very disturbing strikes in the steel and automobile industries. They are gone. The reason is there are no oligopoly profits and there are no opportunities to pass on increases in the cost of production through higher product prices. That is because of free trade. It is because of the low cost of transportation.

We have now a very strict limit on the power of unions. Even international unionization has been shrinking where it was once almost universal. Even in Canadian industries where this is the

case, they have strong limits on their ability to push through the benefits that they think their union members deserve.

The third category in which unions have been very powerful in the past were industries in which there exists what we call economic rent. Economic rent is a surplus in the value of a product above the cost of production. This typically is found in natural resource industries.

Let us take gold. A gold mine may have a cost of production of $100 an ounce but the price that the gold fetches is $450. The question is what to do with the $350. It is in industries like these that unions were strong because they wanted a bigger share. It can be applied to copper, to tin, to whatever can be mined.

It was also true in the B.C. forest industry. We inherited from nature, undisturbed for millennia, for hundreds of thousands of years, mature forests where it might cost $3,000 to cut down a tree but the price would be $10,000. The government did not at that point try to get that $7,000 but took only the residual of whatever the cost of production was.

It can be imagined that under those circumstances, unions were happy to go on strike and the employers were happy to give in to get a bigger share of that $7,000 difference between what it costs to cut down the tree and get it to market and the $10,000 it sold for. That is how British Columbia in the post war years got itself the highest wages in the forestry industry anywhere in the world.

The honeymoon of natural resource industries has ended. There are very few resources left right now where it is possible for unions to tap into this economic rent. The power of unions in British Columbia has decreased and is decreasing continuously with the disappearance of this economic rent.

I now would like to turn, as my time is winding down, to the fourth category of industries where unions are powerful. The most powerful unions are typically found in industries that have a deep pocket. Who has the deepest pocket? The government.

Therefore government owned industries typically have the strongest unions. When they raise the wages of their members, who pays for them? Not at the cost of capital. It is sometimes through higher prices but it is typically, simply at the cost of subsidies.

The world has realized that this is the case and that is why everywhere in the industrial world we have privatized those industries that previously had been owned and run by government. Subsidies have ended but there is a very subtle additional area that we are now talking about, industries that are regulated by the state.

In Canada we still have 700,000 workers employed in this sector. Here the action is subtly different. Regulation means that the firms are allowed to operate a monopoly. They have the protection from the state that there will be no competition. For example, the airlines used to be that way. Courier services are that way. There are 700,000 workers still working in this kind of field.

We now know from studies that as a result of the monopoly guaranteed by the government and the regulation, costs in the airline industries around the world rose dramatically.

I will never forget started it all, the deregulation movement in the United States which spread to Canada. There were airlines that flew between states and therefore were subject to federal communications agency regulations. However, there were some that were not regulated because they were intra-state flights.

What we had as a result of this was that a flight between Boston and Washington D.C. cost exactly twice as much as a flight between San Francisco and Los Angeles. The former was regulated and the latter was unregulated.

How does regulation affect the whole situation? What happens is that the pilot unions say: "My responsibility for flying a 747, which costs $100 million, is very large. I am responsible for the lives of 500 passengers. I shall not take on this job unless I am paid $300,000 a year". At that point the employer says: "No, you cannot have $300,000, $250,000 is enough. No, you have to take a strike". What did they do? After a song and dance, very occasionally taking a strike, the employer said: "Sorry, here is your $300,000". The civil aviation board now has to raise prices because its costs have gone up. That is how we got double the cost of tickets in the regulated and non-regulated sector.

It is quite clear that what we have in Canada with 700,000 workers being subject to such regulations is they are facing exactly the same incentives as do the regulated airline industries. Imagine if the Canadian regulations would allow the diversion of wheat board exports to any harbour on the west coast other than Vancouver and Prince Rupert. Does anyone think that the unions would have as strong a position as they have now? No way. They would know, almost like the guys in the small shops, that if he strikes his business will go away and there will be fewer jobs in the end.

My conclusion is that Bill C-66 is attacking a symptom when we have a much more serious malady which is regulation and government ownership in industries where as a result there is practically no competition. Let us restore competition and see what happens to the power of unions. That is the way to go.

[Underground Economy, March 5th, 1997]

Madam Speaker, I would like to congratulate the member for Guelph-Wellington and her colleagues for engaging in a serious effort to understand the nature and the size of the underground economy and come up with some suggestions on how we could reduce the size of this unfortunate development in our economy.

As an academic economist I have a long tradition of studying this subject. I have attended a number of international conferences. I was first attracted to it when I met a professor from the University of Wisconsin, Ed Feige, telling of his experience when he stayed with a relative who came home one evening with a brown paper bag. He asked him naively what was in the bag. He opened it up and inside was cash. That person had a small retail store and he had taken a lot of his profits that day home in cash. They did not go through the banks.

It also brought back my own memory from childhood in Germany where my father had a grocery store. In the evenings he would draw all the shades and make sure that nobody could see in when he punched on the cash register a new tape reflecting a much lower cash receipt of the day that went into the official books. I know, and everybody seems to know, that these kinds of practices are very widespread. However, I found out at these conferences there is a very wide range. There was a very wide range of estimates of the size of the underground economy. It all depended on the methodology that was used by the people who studied it. On the one hand there was Ed Feige who said we have so much more cash floating around in the economy than we did before for a given national income that it must be used for the financing of the underground economy. He was driven by this example of his relative bringing in a brown paper bag full of cash. He estimates that it may be as high 15 per cent of national income, if not higher.

However, to me the most impressive and persuasive argument was made by people from Statistics Canada and other national data keeping organizations. Let me have a quick taxonomy. There is the underground economy that exists of barter where a dentist in a small town might accept a supply of chicken for 10 weeks, one a week, in payment for dental services. That kind of a barter undoubtedly takes place. Every once in a while I run into people who say "you are so naive that you did not know we were doing this". But the estimate of the importance of this kind of activity, given the size of the economy, is trivially small.

The second source of underground economy activity arises in the context of smuggling. Here the most outstanding example relates to goldsmith jewellery which is burdened not only with GST and PST but also a very unfair 10 per cent luxury surtax which is totally inappropriate for this age. It has created a huge underground economy. In the finance committee we heard regularly pleas from the industry for the government to abandon this absurd tax. I hope the government, as soon as it has breathing room, will follow this advice. It might produce more revenue than is being lost because the return to smuggling is destroyed.

The persuasive argument as to size came to me from national income accountants who said they knew from episodal evidence that the biggest cheating takes place in the construction industry, car repair, tailoring, barbers and a few other such industries.

We have statistics on the size of those industries. They may be important to individuals but given the size of the economy, a refinery or an automobile manufacturing plant those industries are very small. They make up no more than 2 per cent of national income.

A large proportion of those activities is undertaken by a large firm and a large firm that engages in car repair cannot cheat. Furthermore, let us look at home repairs where they might give a deal if they do not have to pay GST on building an addition to a house. Let us remember the person has to buy windows, doors and all materials that go into it. The addition may cost $10,000 but the value added by the person who does the work is probably about $1,500 or $2,000. GST is paid on all the inputs because the person cannot claim back a rebate on the input.

I am persuaded that it is a relatively minor problem. I believe the hon. member for Guelph-Wellington was overstating the case when she said that Canada's future was in danger because we had an underground economy. That is a vast exaggeration of the problem.

In the moments remaining to me I will talk about some possible solutions. The first solution would be more education. How can anyone be against education? How far can we go when the message being sent goes against individual self-interest? We know that in the end self-interest pays and dominates.

We should also remember especially in those cases that it is a victimless crime. The victimless crime morality is very hard to argue. The hon. member might say that other people will have to pay more taxes and services are down. That is remote. The amount of money being cheated is so small that the average person can rationalize very well the effect on society as a whole of minute actions. Nevertheless, let us have more education by all means but let us not spend too much money.

The next thing is to have more enforcement by the Department of National Revenue: more audits, more rat lines and all those kinds of things. Surely they will produce some benefit. Not only am I worried about the cost. I am also worried about the other side of the coin, that we are increasing the power of the state. We are letting human beings who are imperfect, who could fail and who

could abuse power go out and chase down a few individuals. This involves a great deal of risk.

Let us build partnerships. It is like education but I doubt that it will go very far. The conclusion I reached having looked at the subject is that the only sure way to do it is to lower the returns from cheating. How do we do it? It is by lowering taxes. There is a risk of being caught and a risk of social disapproval. The higher the rate of return from engaging in illegitimate activities and carrying the risks, the more will be undertaken. The converse is the lower the rate of return, the less will take place.

That is just another argument in a long line of arguments in favour of lower taxes which can only be brought about by Canadians accepting somewhat smaller government and going back to self-reliance rather than on any occasion possible screaming "Ottawa help me". That is the way to deal with the problem the hon. member has addressed in her resolution.

[Vaclav Klaus, February 20th, 1997]

Mr. Speaker, the Reform Party and I welcome to Canada today Vaclav Klaus, Prime Minister of the Czech Republic.

Vaclav Klaus deserves the highest praise for three outstanding achievements in his life. First, when his native country was ruled with an iron fist by a communist regime, he had the courage to advocate a democratic free society and economy for his country. Second, he persuaded the people of his country of the merit of his ideological vision and to elect him prime minister. Third, against strong opposition from special interests he enacted free market reforms, set free the creative energies of the Czech people and made his country the most prosperous of the former Soviet Bloc.

Welcome to Canada and three cheers for Vaclav Klaus and the Czech people he represents.

[The Budget, February 20th, 1997]

Mr. Speaker, I think the division was quite clear during the election campaign and the people spoke clearly. One party said that it could not go on adding to the debt the way it had happened in the preceding 15 years. Two governments and two different parties had engaged in this spendthrift policy. In effect, the government has cut program spending, as Reform had proposed. We had proposed reducing interprovincial transfers. Instead it cut transfers for health, education and welfare which we had not proposed.

There are a large number of parallels but also some significant differences. The point I am trying to emphasize, which came out clearly in the numbers I gave, is that the deficit had to be brought under control. That was done. The government should be given credit for it. It did not do it right and I outlined why it was not done right and what the consequences of it were.

I believe my statement is basically correct. I am proud that because we had this agenda, we have helped prepare the way for the Liberal government to do what is right for Canada.

[The Budget, February 20th, 1997]

Mr. Speaker, the member is getting me into a lot of trouble with my party, which is not a very nice thing to do. However, you will have noticed that when I presented the summary of my experiences over the last four years I did come down very hard on the shortcomings of the policies. There is a clear difference in vision between the Liberal Party, the Reform Party and other parties on the right.

This should be emphasized and made clear in discussion and should be on the level of historic tax experience and not just hand waving.

[The Budget, February 20th, 1997]

Mr. Speaker, as you might know, I will not be seeking office in the upcoming election. Therefore today I am definitely giving my last speech as an MP in this House in reaction to a government budget.

Let me start my comments with a brief assessment of the budgetary policy of this government during the last three years.

The $42 billion deficit in 1993 required urgent and decisive action. This view was shared by most Canadians and it produced the historic electoral success of the Reform Party which ran on the platform of fiscal responsibility. There are a number of indications suggesting that in 1993 neither the Liberal Party nor the finance minister fully appreciated the severity of the country's fiscal crisis. For this reason the first budget in 1994 reflected the belief that Canada would grow out of the crisis if we just reined in the growth in spending.

The 1995 budget showed that reality had finally mugged the minister and his party. I take pride in my and my colleagues' contribution to driving home the fundamental truth about the effects of compounding interest and the risks associated with threats to the value of Canadian bonds caused by growing debt to GDP ratios.

Pressed in addition by high interest rates, warnings by Moody's about the downgrading of the debt and slow economic growth, the government bit the bullet and announced substantial cuts to program spending and some relatively small but still substantial tax increases.

The minister deserved the positive reaction to his historic budget given by the financial markets and the Canadian public. I praised the minister for having lowered program spending in absolute dollar values for the first time in post-war history.

I still believe that this praise was deserved. The 1996 budget contained no substantial further cuts or tax changes. All the politically difficult decisions had been made and embedded in the 1995 budget.

During the last two years, economic development largely outside the control of government favoured the Liberals and their budgetary goals. Economic growth remained moderately high simply because the country enjoyed a cyclical upturn.

The growth was driven largely by strong exports to the United States, which were fed in turn by a strong U.S. expansion and a low dollar. Most important, interest rates in the U.S. trended downward.

These fortunate exogenous developments produced better than expected increases in revenue, along with decreases in interest costs. As a result, the interest rate spread on short to medium term bonds between Canada and the United States moved in favour of Canada and resulted in even more moderate, positive effects on the fiscal balance.

In light of the much better than expected and very fortuitous improvements in the deficit, a large and vocal faction of the Liberal caucus began agitating for a resumption of the party's traditional policy of spending to buy votes for the next election, though of course they always describe these spending programs as providing compassionate aid to the unemployed and needy.

When the 1997 budget was revealed this week I, the financial community and in my view most Canadians were pleased to find out that the Minister of Finance increased spending and reduced taxes only by a relatively small $1 billion.

With most of the big increases coming a year or two in the future, he has stayed the course of fiscal restraint in this election year and stared down his spend thrift colleagues in the party.

Moreover, the spending increases he made were not of the traditional make work, pork barrel variety but, with some exception, involved projects that have a high probability of bringing good social and economic returns.

Ironically, the basic pattern of the Liberal budgetary policy is almost identical to what Reform had promised to do in its zero in three election platform in 1993. However, there are several major differences.

First, the cuts have not been fast and incisive enough. As a result, in the 1997-98 fiscal year the deficit will still be $16 billion or nearly $1.5 billion a month. This level of deficit may seem low by historic and some international standards but by any other standards it is still outrageously large. I repeat, we are adding to the debt $1.5 billion every month. Divide this by 30 and you get $50 million a day.

An important consequence of this continued deficit is that it exposes Canada to the risk of backslide should there be a turnaround in economic fortunes like a rise in interest rates and lower economic growth. Both these events are certain to take place in the future.

For the sake of Canadians, let us hope that the economic environment remains benign for several more years.

Also, because improvements in the fiscal balance have been so slow, the debt is well over $600 billion and there are no plans for paying it down. Very soon Canada's problem will not be the deficit but the debt, if it is not already so.

Interest payments on the debt of $46 billion nearly equal what the government spends on elderly benefits, OAS and others, employment insurance, formerly known as unemployment insurance, and social transfers to the provinces combined. Let me repeat this. The sins of the past decade, including the last three years, have resulted in an outcome whereby the cost of servicing the result of those sins takes up the same amount of money as our very generous and expensive program of old age security benefits, now called the elderly program, unemployment insurance and the social transfers for health, higher education and welfare. This is truly an astounding number.

When interest rates go up again, the problem will be even worse. Only debt repayment can end this regretful state of affairs.

The media has finally picked up on one of my main themes in past comments on the budget. Two-thirds of the improvement in the fiscal balance was achieved by increased tax revenues mostly through bracket creep, partly through tax rate increases and some through the growth of population and wealth. Only one-third of the fiscal improvement has been due to cuts in program spending.

Unfortunately half of these cuts involved downloading of the adjustment burden on the provinces which in turn have cut funds for health care, higher education and welfare. Only a meagre 35 per cent of the reduction on program spending involved cuts to the size of the federal government, the departments which provide subsidies to business, regions and special interest groups which offer services which duplicate and overlap those delivered by the provinces.

Finally, I was very disappointed that the budget did not start the most fundamental debate that Canadians will have to face in the future. Assuming that economic conditions continue favourably and that the deficit will be eliminated in the year 2000 or so, the debate will be over the use of future dividends.

Canada faces three choices. The fiscal dividend can be used to lower taxes and gradually produce a smaller government. Alternatively, it can be used to pay down the debt and start a virtuous cycle of growing fiscal surpluses which in turn can be used for further debt and tax reductions. The third possible use of the fiscal surplus is increased spending and a larger and more intrusive government.

The next election should involve the discussion of these different paths for the development of Canada. Any government elected in 1997 or 1998 will face the need to decide on this matter. There are obviously no best choices. Each of the three alternatives has advantages and disadvantages. However, in the light of post-war experiences, in my view bigger government does not appear to promise many benefits for society at large.

Surely there are always beneficiaries from government largesse and they always tell good stories on why they deserve the goodies from the state. However, as we look back on the decades since the 1960s it is difficult to find evidence that the massive expansion of governments has produced a significant improvement in the lot of the average Canadian above that due to general and largely exogenously determined economic growth.

If we believe the government's statistics and read the public opinion surveys, poverty, educational attainment, health care, crime and unemployment are worse than they were before the massive growth in spending after the 1960s. In my view it defies logic to argue that because past spending has produced the deterioration of these standards we therefore should have spent more.

I know I am running out of time but I have just one last page. I assure the House that I know the arguments on the other side. Some are good but most involve rhetoric and wishful thinking.

I admit that I may be wrong about the merit of large government. It is for this reason that I think we need a national debate on this issue. What a shame that the 1997 budget did not set the framework for such a debate during the upcoming election.

[The Budget, February 19th, 1997]

Mr. Speaker, whenever I present the arguments the leader just developed, audiences tend to react by saying: "You will never be able to deliver on this". I wonder what kind of an answer the leader would give to people who make this argument.

[Petitions, February 19th, 1997]

Mr. Speaker, I would like to present a petition signed by a number of constituents from Capilano-Howe Sound.

The petitioners urge the federal government to join with provincial governments to make possible the upgrading of the national highway system.

[Petitions, December 11th, 1996]

Mr. Speaker, I would like to table two petitions signed by constituents of Capilano-Howe Sound, wherein they urge Parliament to amend existing legislation to define marriage as the voluntary union for life of one woman and one man to each other to the exclusion of all others.

[Whistler Mountain, December 9th, 1996]

Mr. Speaker, last summer Whistler Mountain in my riding invested several million dollars to improve the safety of North America's fastest downhill ski racing course.

Last week the world's best racers assembled for the opening event of the world cup season. Dozens of volunteers worked hard to perfect the course. And then the heavens opened up. Four days in a row it snowed and snowed and snowed, metres of it, dry and fluffy.

The village is a winter wonderland. The slopes are paradise, the powder snow knee deep. I know, because I made my share of fresh tracks. Even the racers revelled in it.

In the end, the race had to be cancelled. Too much snow. What a pity, what luck.

Come all ye skiers and enjoy it. Better luck next year, racers.