Herb Grubel

[Social Policy, February 17th, 1995]

Mr. Speaker, my questions are for the Minister of Finance.

Everyone knows that social spending, broadly defined, takes up about 70 per cent of all program spending. Therefore, budget balancing requires social spending cuts, not as a matter of Ideology but of simple arithmetic, to use the words of the Minister of Finance.

Does the Minister of Finance agree that yesterday's announcement by Moody's was caused by the absence of a clear commitment to substantial social spending cuts?

[Firearms Act, February 16th, 1995]

It was a handgun.

[Supply, February 14th, 1995]

Mr. Speaker, I appreciate the hon. member's speech. It was full of compassion. She also argued that she had a monopoly on compassion, that the Reform Party had no compassion whatever.

I have been in this business of arguing over social and economic policies for over 30 years. We agreed a long time ago that discussions over who is more compassionate will lead nowhere. I assert herewith that I am more compassionate than that member and every member of the Liberal Party.

The issue ought to be not who is more compassionate, but what is a rational solution to the problem so that we can give real expression to our compassion. That is the issue. This is rhetoric which leads nowhere. This country is going down the drain and we have to have practical solutions to the problems we face.

I also would like to make a brief comment on the member's description of the consultation process. I sat through more hours of this than I ever want to think about and travelled more miles than I would like to.

Most of the time I found that the witnesses said: "I do not know anything about the budget making process. That is your business, but let me take the next 20 minutes and tell you why the money I have been getting from the government is the best way the money could be spent and why you must never touch my program". Others had been coached by the intellectual and political left and had patent solutions that were obvious demagoguery from lowering the interest rate, to taxing the rich, taxing capital.

The Globe and Mail had an editorial saying that this process was dividing the country into hostile camps. I have not got the same impression, that this was a fruitful exercise in the way in which the opposite member was talking about.

[Supply, February 14th, 1995]

Mr. Speaker, I have had several opportunities on the finance committee and elsewhere to tell witnesses the truth about the welfare program budget cuts that our party is recommending. There is no truth whatsoever to the allegation that we would not protect the truly needy in our society.

The OECD is a highly respected international organization of which Canada is a full standing member and has to approve its reports. It has said that Canada is an outstanding example of excessive generosity in welfare programs.

We are not talking about hitting the poor in this world and it is an untruth being told and repeated again and again here. We are talking about retargeting all the excessive spending that is going on. That is the truth. The rest is slandering.

[Supply, February 14th, 1995]

Mr. Speaker, I can understand that the hon. parliamentary secretary cannot reveal anything about the forthcoming budget and that he had to stay with generalities.

The basic principles he laid out, I believe 80 per cent of Reformers agree with. The system must be fair, the cuts must be discussed widely. All the principles he set out are so universally accepted that they are almost empty rhetoric.

I was talking about four issues which were raised before the finance committee where the member opposite sat and listened. An overwhelming proportion of witnesses said we must not do these kinds of things. The report that the finance committee came up with did not reflect these recommendations.

As I said in my speech, those recommendations are absolutely crucial to the way in which the investors of the world are likely to react to the forthcoming budget. I hope that the government

will not goof in the budget, that it will take the advice of the overwhelming number of witnesses on those four issues. The four issues are that a $25 billion deficit target in two years is insufficient given the length of the business cycle. It is absolutely dangerous during a period of boom when the economy is growing at 3 or 4 percentage points a year to do as little as necessary to get to $25 billion in two years. It will send the wrong signal.

Everyone who studies the budget realizes that the social programs are absorbing such a large proportion of the total that unless we take very tough steps on those, as has been recommended widely by the OECD and the Auditor General, the budget will not be credible.

I raise this matter because early in this session I asked the Minister of Human Resources Development when he presented his plan for social policy reform whether there would be any savings from the reform. He went into a rhetorical flourish and said they will not eliminate the deficit on the backs of poor people.

The world hears this message but the world also knows that we cannot get away without making such cuts. We will be judged very harshly, especially in light of the fact that we probably have the most generous social security net in the world and in the light of the fact that it is now increasingly recognized that it was a noble experiment. When we are generous we also create dependence and increase unemployment as unwanted side effects.

The world will look for a message on what the government thinks about the cause of our persistently high unemployment rate. For years, for decades, American and Canadian unemployment rates moved in unison. They diverged by very little until the middle seventies when Canada increased the generosity of her social programs. Since then the Americans, who are at the same level of economic prosperity as we are in the business cycle, have had unemployment rates below 6 per cent. We are at around 10 per cent. In Canada 4 per cent of the labour force is unemployed, yet there is no explanation for it. If the deficit could eliminate it, if large exports could eliminate it, if low interest rates could have eliminated it a few years ago, it would have happened. It is not just me who is saying this. The cause is somewhere else.

Unless the government addresses these issues investors will be very unhappy. The probability is that the need for reform and for tough measures on all these issues will not come after deliberate consideration in the House or in committee. It will be imposed by governments and international organizations we have to go to in order to get money to stabilize our exchange rate and interest rate.

It is not a happy picture. We do not enjoy talking about these things. I appreciate the hon. member cannot say more about it, but the generalities that we heard again today are not the way to go. I appreciate the opportunity to share these thoughts with the House and the people of Canada.

[Supply, February 14th, 1995]

Mr. Speaker, could you tell me how much time is allocated please?

[Supply, February 14th, 1995]

moved:

That this House urge the government to respond to the demands of Canadians for decisive spending cuts and no net tax-increases to eliminate the deficit and to produce a smaller federal government.

Mr. Speaker, as one of Reform's co-critics for finance, I have the honour to lead today's debate of this resolution. I will discuss its importance by drawing on my background as an economist and a long time teacher of international finance courses.

A number of my colleagues later in the day will expand on the theme in the light of their roles as Reform critics of different ministries. All of our remarks reflect consultations with constit-

uents through personal and town hall meetings, electronic media consultations and the return of questionnaires.

As a preliminary, let me note that Reformers do not enjoy our role as advocates for spending cuts and a smaller government. The government's involvement in the affairs of Canadians is so pervasive that few of us, our families or friends will escape the effects of such cuts.

As a professor, I am personally concerned about their effects on higher education, my own future and that of my friends and colleagues. We all dislike it when changes in government policies force us to alter our habits and way of life. Reformers therefore appreciate very much the personal difficulties which these cuts will bring. We know these difficulties will seem puny in relation to those that will be forced upon Canadians if we do not get our fiscal house in order on our own terms.

Consider what may happen to the exchange rate, interest rates and Canada's foreign position if the forthcoming Liberal budget does not satisfy both Canadian and foreign investors. Investors sell Canadian government bonds and move their money into some other governments' bonds, be they American, German or Japanese. Such sales depress bond prices and increase interest rates, sending the Canadian dollar on a downward slide.

How far will these adverse developments go? No one knows. There is no doubt that at some interest rate high enough and exchange rate low enough, investors will once more purchase Canadian bonds and dollars and the slide will be halted.

It is often said that rationality or real economic values take a back seat to investors' mass hysteria during such speculative bubbles. Falling values create expectations of further falls. Investors rush to liquidate their holdings before they are worth even less. Some hope to buy them back once the bottom has been hit, expecting quick profits. Others are made to move their money into foreign assets which increase in value at the same time that Canadian asset values fall.

At some point a new class of speculators enters the fray. They hold no Canadian assets but sell Canadian dollars short at today's price in the expectation that they can deliver it a few days later at an even lower price.

Some domestic investors will borrow Canadian dollars and buy foreign currencies. The hot money ready to enter such speculation is so large that no country in the world, certainly not Canada, can stop the slide once it has gathered enough momentum.

Many can understand what goes on during such speculative bubbles. They are likely to have been caught in the fever of buying real estate, gold or similar investments in the past. They will remember how profitable it can be to participate in the exciting events and how difficult it is to resist the herd instinct.

We need only to look at the recent experience of Mexico during the last few months to appreciate what can happen to Canada. The Mexican peso depreciated by over 50 per cent against the U.S. and Canadian dollars before stability was restored and a slow recovery started. Interest rates went sky high.

Canadians had a foretaste of possible developments in the middle of January when a small speculative bubble hit the Canadian dollar. The interest and exchange rates moved by extraordinary amounts in a very short time.

In the case of both countries the dramatic interest and exchange rate changes were halted by the interventions of governments. They bought bonds and currency that were being dumped by investors. They used at first the dollar and gold reserves in the accounts of their own central banks. They then drew on credit with private banks, foreign central banks and international organizations that have been negotiated before. They then went, hat in hand, to arrange new lines of credit, asking other central banks to help them by buying their national currencies.

The Government of Mexico went down very far on this road of using ever more costly sources of intervention. It ended up arranging for huge direct loans and standby credits from foreign governments and international organizations.

The cost of such borrowing is now quite transparent and not just monetary. The U.S. Congress debated loan conditions and came very close to requiring Mexico to adopt very stringent policies.

The important thing is that such loan conditions would have represented an almost unprecedented interference in the domestic economic, social and foreign aid policies of an independent nation state. In the end, President Clinton avoided the imposition of such extreme conditions by the use of administrative devices which bypassed Congress.

It is not clear that Congress will let presidents use these devices in the future. The American people and their elected representatives are in a foul mood when it comes to bailing out foreign governments which have what they consider to be inappropriate social and economic policies.

Reformers are not willing to gamble on any of these eventualities. Our first objective as a country must be to never be placed in a predicament like that experienced by Mexico. We want to retain Canada's sovereignty over its economic and social policies.

In the middle of January Canada came very close to the point where we too had to go hat in hand to foreign lenders. As some put it, we came very close to hitting the wall. An economist who watched the tickers flashing interest rates and exchange rates

dropping by the minute suggested to me that the situation was saved this time by massive intervention of the G-7 central banks. He is worried that we may not be so lucky the next time or that we can escape really burdensome loan conditions.

The next time may well be in the wake of the upcoming budget, not immediately but when some other event upsets investors. That may be a few days, weeks or even months later.

Investors will look for four major policies in the budget. The finance minister had better not goof.

First, investors will look for tax increases. Individual Canadians oppose tax increases because they feel overtaxed and want a smaller government for understandable personal reasons. Investors would interpret tax increases as a signal that the government does not have the courage to make the spending cuts needed to eliminate the deficit.

Higher taxes mean eventually a bigger government, one which during the last 30 years has grown but has not solved and instead has increased the problems of slow economic growth, increased poverty and unemployment, the breakup of families and which to boot, has created frighteningly large and persistent deficits. It is big government which has created among Canadians the pervasive sense that their and their children's lives are getting worse, not better.

Second, investors will look for cuts to social spending. Social spending programs broadly defined use about $70 billion or 60 per cent of the federal program spending of $120 billion. The current deficit of $38 billion cannot possibly be eliminated through cuts in non-social spending even in the face of rapid growth in revenue during the current boom without a threat to essential efficiency increasing government services.

Past governments have lacked the courage to tackle social spending. That is why the fiscal situation has deteriorated to the present cliffhanger. I predict very confidently that if the upcoming budget does not contain hard-nosed cuts to social spending, investors will be very unhappy. They will point with some justification to a lost opportunity since most Canadians are ready for such cuts.

In addition, it is now official. The OECD noted in a recent report that Canada's social programs are an outstanding example of excessive generosity.

Third, investors will look for a plan for the complete elimination of the deficit during the current economic boom. The Liberal red book target of $25 billion two years from now has been criticized roundly by many experts. It implies an increase in the federal debt by $100 billion or 20 per cent of the $500 billion during the first years of Liberal rule.

Like the Conservatives during the 1980s, the Liberals will find that the debt will cease to grow as a percentage of national income during the upswing if they achieve their deficit target. But this is a hollow victory because the cause of the debt will resume the moment the economy slows down again as inevitably it will.

Predictions are that this may well happen before the end of the present election cycle. Few expect decisive spending cuts during the last two years before the next election. Therefore, one of the crucial aspects of the budget that investors will study is whether and by how much spending cuts go beyond the $25 billion deficit target in two years.

They will also look for further plans for deficit reduction beyond the last fiscal year covered in the budget. Will the Minister of Finance have the backing of cabinet and the Prime Minister to plan for further cuts in the future?

Fourth, I believe that investors will look to the budget for one other important subject. They will look for evidence that the government has accepted certain radically different ideas about the causes of unemployment which have moved out of conservative think tanks and are now discussed freely by the Auditor General, the OECD and many academics.

According to these ideas Canada's high and persistent unemployment rates are caused to a considerable degree by the generous social programs themselves. The unfortunate but unavoidable reality is that Canada once had the choice of having high unemployment rates and generous UIC and welfare benefits as a matter of deliberate public preference. That choice has disappeared with the debt, deficit and slow growth of the last decade.

These are harsh messages for a Liberal government to accept, which on these matters is caught in its own rhetoric. Investors are watching to see if the Liberals can live up to their reputation as the ultimate non-dogmatic pragmatists.

Let me close by suggesting that Reformers have listened to the public and to investors. Our own alternative budget will reflect what we have heard. It will outline steps we would be prepared to take in order to address the four issues crucial for investor confidence and most thoughtful Canadians.

My colleagues speaking after me will elaborate on some of these matters without revealing too much about our specific recommendations. We invite the Liberals to present a budget which will take the news out of the policies on these matters we will propose very soon.

After this gloom and doom, a few words of hope. Once Canadians have gone through three years and deal with the necessary deliberate and thoughtful spending cuts, there is a light at the end of the tunnel.

Such cuts will restore investor and consumer confidence. The economic boom will be fueled and expanded. Economic growth will return to the high levels we have not seen since the pervasive government intrusion of the last three decades.

In a few short years after the budget is balanced there is a prospect of tax reduction, a smaller debt, or both. Mild, short run pain will not only avoid catastrophic pain in the intermediate term, it will also bring large and important gains in what in retrospect will seem like a very short time of sacrifice.

We hope the Liberals will hear this message, not because we want to be right, but because it is right for Canada.

[Taxation, February 6th, 1995]

Mr. Speaker, I am responding to a principle enunciated by the minister in the House several times.

Sweden recently cut spending and raised taxes. The higher taxes were seen by investors as a lack of government will to attack the causes of chronic deficits. They punished the Swedish krona in the exchange markets.

I have a supplementary question. What has the minister learned from the experience of Sweden?

[Taxation, February 6th, 1995]

Mr. Speaker, the Minister of Finance keeps saying that he will not raise taxes, just close loopholes. Canadians see right through this public relations gimmick.

If a policy hurts like a tax increase, if a policy raises revenue like a tax increase, it is a tax increase. Canadians do not want higher taxes under any guise. Will the minister neutralize the effects of closing tax loopholes by lowering other taxes?

[Employment Equity Act, December 13th, 1994]

Mr. Speaker, my brief remarks are designed to repeat some of the basic arguments against pay and employment equity which underlie Reform's opposition to Bill C-64.

Reform believes that government should assure equality of opportunity in economic life, but it has no business using the labour market to assure equality of outcome. Doing so interferes with basic freedoms, makes false assumptions about the causes of inequality, creates large inefficiencies and is basically unjust.

Consider the problem with freedom. Canada has developed into a prosperous society by upholding basic personal freedoms. One of these consists of the ability of individuals to sell their labour services to the highest bidder and for employers to choose freely those whom they wish to hire as long as they do not interfere with the fundamental freedoms of others.

These freedoms are an end in themselves, but they also are the engines which drive economic activity in a market economy that has produced the riches our society enjoys today.

Throughout the world and history people have died for these freedoms. We all remember the American civil war. Slavery represents the extreme limitation on people's freedom to sell their labour services to the highest bidder. Employment and pay equity legislation imposes on free Canadians just a bit of such slavery. Our society is on a slippery slope.

Consider the idea that existing inequalities between groups is due to discrimination. Reform believes that this proposition is based on false assumptions and empirical evidence. Studies by Tom Sowell at Stanford University have shown that Americans of Japanese origin as a group have much above average U.S. income.

My former colleague, Don DeVoretz at Simon Fraser University, has shown that immigrants on average have higher incomes than people born in Canada. The recorded extraordinary success of these two groups is indicative of the impossible task of establishing that group disadvantages are caused by discrimination based on race, gender or national or ethnic origin.

Economists led by Nobel laureate Gary Becker have long argued that free markets offer the best protection against discrimination. Consider a firm that gets paid $1 for the assembly of a computer component. The wage rate is $10 per hour and the average male is able to complete 10 units per hour. Consider that women have greater dexterity and are able to assemble 12 units per hour. Any firm which refuses to hire women for this task is at an obvious competitive disadvantage with a firm that does. It will ultimately go out of business.

Students of labour markets have been able to show that discrimination in the labour market has historically persisted only in instances where government regulation or government enforced monopolies like labour unions have prevented the adjustment from taking place.

Bill C-64 and similar legislation involves serious costs. Bureaucrats, lawyers and the police needed to enforce such legislation are not available to produce goods and services that determine our living standard. The private sector incurs large administrative costs. In addition there are the costs of lost efficiency. Goods and services will no longer be produced using the lowest cost.

In the United States affirmative action has been estimated to result in lost output equal to 4 per cent of national income. Since Canada may be assumed never to want to lag behind the U.S. in such social legislation for long, we may soon expect at least such cost.

The ultimate cost of governmental attempting to create perfect equality of incomes has become obvious through recent developments in socialist and communist governments around the world. Employment and pay equity in these systems had been perfected. Now communism and socialism around the world have failed or are in retreat.

What does the Liberal Government of Canada do? It pushes state efforts to achieve equality of income by applying it to the civil service. In addition, the recent Liberal recommendations to the finance minister in the report of the Standing Committee on Finance bragged about the fact that if adopted they will further equalize income. Have the Liberals learned nothing from history?

Let me now discuss briefly the sense in which the proposed legislation is basically unjust. Using the course of power of the state to help one group of disadvantaged individuals automatically discriminates against others and deprives them of their rights and freedoms without due process.

These groups are paying a discriminatory tax and are implicitly declared guilty of discrimination. Reform sees no justice in forcing young people belonging to one group to pay today for discrimination that may or may not have taken place in the past.

By the same token, where is the justice in giving members of minority groups alive today benefits in return for injustices real or imagined suffered by past members of this group?

Let me close by reminding members of the slippery slope on which we find ourselves. In one of his novels, Kurt Vonnegut describes a world in which state created equality of outcome was perfected.

It had moved from assuring pay equity to equity in looks and sports. In Vonnegut's brave new world, good looking people had to wear glasses and other devices to assure equality of looks with those disadvantaged by nature.

Gifted athletes were made to wear heavy weights to assure that they were able to jump no higher and run no faster than the rest. In the end, the hero of the story discards the starting post equalization devices and enjoyed his life to the fullest for a short time until he entered jail for the rest of his life.

Whenever it is impossible to make a strong intellectual case against the government policy like pay employment equity the question arises why governments persist with such policy. Public choice theory of government provides the answer.

Such legislation serves the interests of politicians and parties. Identifiable groups are given benefits and they are expected to reward the donors at the ballot box and with financial support. The cost of the legislation in terms of lost freedoms, discrimination against the innocent and reduced output are difficult to measure.

As a result the victims of the policy have little or no incentives and knowledge to punish the politicians who have imposed those costs on them. Such special interest group legislation slowly and exorbitantly lowers the income of Canadians and most tragically deprives them of their freedom.

Bill C-64 and similar legislated pay and employment equity reduce the welfare of Canadians. That is why Reform opposes it.