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The necessity of government – The second in a 3-part series: Social Enterprise Revisited

Consistent with CityU Canada’s launch of a Management program http://www.cityuniversity.ca/programs/bachelor-of-management/ we are happy to publish this second in the series of three articles from economist and industrial consultant Ken McFarlane.

Ken McFarlane’s academic and professional background is in economics and law. He is a Rhodes Scholar and has been an associate of several major think-tanks, including the Brookings Institution. After a diverse early career in the public, legal, non-profit and university sectors (including senior positions with the federal government and roles with a number of royal commissions of inquiry) he founded The Katalysis Group Inc. Over the course of twenty years, this company was involved in the development and implementation of nine successful industrial technology ventures in Europe and North America. He is now the Principal of Regeneration, LLP an international consultancy that, among other activities, focusses on a diverse variety of econoAprilmic and social development ventures.

The Necessity of Government

Written by Kenneth J. McFarlane  

Federal, provincial and municipal elections are opportunities for voters to re-consider what they expect from government. Except for a small cohort of activists pushing for one policy or another, most people in Canada have only a general idea of what they want and usually take their cues from the statements, promises and inducements of the various political parties.

These parties develop policies that typically play to the perceived needs and preferences of citizens. More often than not, what it missing is a solid strategy to ensure that the necessary capabilities, competence and funds exist within government to actually accomplish what is advocated, particularly when substantive and proactive programs are involved. When these shortcomings inevitably become apparent, the result is an increasingly jaded and disengaged electorate.

This unsatisfactory situation will persist until the necessary resources are applied at all levels of government such that they can be restored to their proper place within the social and economic fabric of Canada, after decades of planned deterioration. Nothing will do short of a full-fledged return of the public sector to a primary rather than subsidiary role in the affairs of the country, as was arguably the case in the four decades after World War II. While the necessary policies in 2017 and beyond are different, much can be learned from that 40 year period about the form and substance of the apparatus required to take a dynamic approach to government. What follows is a summary of what needs to be done to attain this and why.

SOME BACKGROUND

All this may sound a little abstract to those whose daily lives unfold at a distance from the inner workings of government. (All too often, this includes aspiring political candidates who have not felt it necessary to do their homework prior to seeking public office). And at present it is hard to imagine a Canadian political party with the nerve to directly promote the concept of a sweeping revitalization of government. Nonetheless, such boldness is exactly what is required at this point in Canadian history.

For several decades now, the candidates and parties that have prevailed in most elections are the ones that advocate, to a lesser or greater extent, the maxim that “the best government is the one that governs least”. We have been told that the free market will handle everything if only we trust the invisible hand. As a result, this has become so engrained in the collective sensibility of the country that even so-called progressive parties have felt the need to toe the line.

But the facts clearly show that 30 years of letting the fee market reign, while promoting an alarmingly smaller role for government than at any other time in our history, has undermined the best interests of millions of Canadians. Free market activities, particularly those that follow a socially responsible path, will always have a crucial role to play in any national, provincial or local economy. But good government is also essential as a necessary countervailing and regulating force that, after consultation, sets key priorities for all sectors and then develops the concomitant policies and programs.

This must all be worked out at the political level. Of course, the majority of citizens are confused and cynical about politics while frightfully busy in their own lives. They cannot see the utility in taking the time to sort this all out in their minds. As a result, they remain blind to its importance with regard to their own situations and that of the communities they live in. Not surprisingly, many do not even bother to vote in elections.

Fortunately, it is well established that citizens respond favourably to clear, crisp, no-nonsense messages from politicians. Obfuscation and superficiality must not continue to replace grown-up conversation regarding issues that truly matter. The substance and justification for a new narrative is not difficult to discern as discussed below.

THE STAKES ARE HIGH

Serious cracks in the foundations of our nation are becoming increasingly visible due to long term neglect of the fundamentals of good governance. All levels of government in Canada have been slowly but deliberately emasculated during the past three decades. The capacity to effectively accomplish just about anything desirable, let alone essential, has been seriously compromised.

Despite the bellicose claims of the Thatcher-Reagan era, neither the private nor the non-profit sectors, albeit for different reasons, have been willing or able to pick up the slack created by the deliberate undermining of public programs. This could have been easily anticipated and, in fact, has been lamented for some years now by commentators of all political stripes.

Nonetheless, Canadians continue to express the need for more and better public programs and services. The state of schools, medical services, housing, law enforcement services, disaster response capabilities, environmental policies, public works, economic development efforts, infrastructure, enforcement of key regulations, transportation systems, research and development and so forth are not at all what they should be. Innovation and upgrading is essential across the board.

Meanwhile, necessary new programs such as a comprehensive child care system are given lip-service and when actual proposals for this are floated the analysis around costing and funding such a service is superficial at best. Therefore they are easily side-lined, despite the inherent social and moral imperatives involved.

Tax-payers lament this state of affairs, even if they don’t fully understand the reasons for it, and what it will take to remedy the situation. Upcoming generations of Canadians who have never benefited from proactive and effective government find it difficult to fully understand the damage that has been done by not having this in place for decades.

Rather than taking the bull by the horns and clearly explaining what is happening, politicians — whether of the governing party or otherwise – attempt to manipulate these circumstances to their advantage. Narrowly focused if not ideological pronouncements replace the communication of relevant facts and development of truly feasible policies and programs that look to the future. Meanwhile, public servants who understand the details of the issues are often muzzled and citizens remain pessimistic.

GAMING THE SYSTEM

Pundits, policy wonks and political parties dance around the overarching issue of restoring government to its proper role within Canadian society by promoting this program or that without careful analysis and then hoping the capacity, competence and necessary resources will miraculously appear. In the zero-sum game that now pervades the public sector, more often than not what actually happens in such situations is that other vital services are dropped to make way for the new ones, without the costs and benefits being appropriately weighed. Insiders report that programs, sometimes far removed from each other in terms of their content and goals, are not-so-subtly pitted against each other.

The concept of public choice has been rendered illusory because the ways and means to initiate and maintain a wide spectrum of important services to deal with significant public needs has been considerably diminished. The fact that very few current or aspiring political leaders appear ready to fully commit and openly push for a return to broad-based government only exacerbates the situation. It allows anti-government ideologues to continue to effectively game the system for the benefit of their particular constituency rather than the community at large. Conservatives celebrate while progressives equivocate.

FINANCIAL REALITIES

It bears repeating that to move beyond the current, inadequate status quo, what is required are more financial and human resources to be made available to those crafting policy and programs within government. Fresh money is needed to re-build public sector departments and agencies agencies after decades of downsizing and de-funding. Traditionally such resources come from personal and corporate income taxes although there are other sources. At the same time, the word “taxes” is currently one of the most reviled in the North American voters’ lexicon.

But a significant amount of anecdotal evidence and readily available results from public opinion polls conducted in various countries, tell us that citizens would be willing to pay more taxes if high quality and sorely needed programs are provided. The pre-condition, as would be expected, is that their incomes be sufficient to manage it. This has not been the case for many years as unemployment remains high, in historical terms, and real wages continue to fall or flat-line for most people other than those at the upper end of the income scale.

Still worse, a significant number of Canadians often maintain an adequate lifestyle by incurring large debt loads which exacerbates the state of anxiety about taxes and their reluctance to pay their fair share. Equally important, it further undermines their actual ability to pay a reasonable amount through taxes to help finance programs that service the needs of the communities where they live. The consumption that personal debt allows may well help to stimulate demand in parts of the private economy, but has very little to do with directly facilitating essential public services and ensuring a sustainable future.

In their efforts to continually trim down the public sector, neo-liberal governments now and in the past actively exploit the economic realities faced by Canadians even as they have been, to a large extent, responsible for their creation through short-sighted and self-serving economic initiatives that benefit only a chosen few. The promotion of personal self-responsibility and self-reliance by these governments is commendable but meaningless unless the necessary conditions are created and maintained to make this widely feasible.

Only judicious structural policies that raise wages and create good jobs will allow citizens to continue to demand more from government while giving them the means to adequately contribute to the cost of enhancing old programs and launching essential new ones. None of these labour market policies are pie-in-the-sky or harmful to the economy, despite conservative assertions to the contrary. The truth lies in the opposite direction.

WAYS AND MEANS

The set of structural policies necessary to significantly increase the availability of good jobs are now fairly well identified, as reflected in diverse and easily accessible analytical studies conducted in North America and Europe. Fiddling with standard monetary and fiscal policy is inadequate and often perverse in terms of who benefits and who gets left out in the cold. Moreover, the list of now standard incentives given to businesses by government during the past 25 years to encourage them to create more and better jobs has, by and large, amounted to little more than a corporate cash-grab with very little new investment being undertaken as intended.

What is needed is a decidedly more hands-on approach by the public sector and this can manifest in a number of ways. A variety of macro-structural, micro-fiscal, regulatory, tax credit, education and social development policies, along with carefully crafted labour market, financial sector, productivity and targeted industrial strategies will, taken in combination, create broad-based advantages for individuals, businesses and government.

The literature on this, reflecting practical experience in various parts of the world and particularly that in Europe, is readily available to those who care to look into the details. The key point is that government sets the pace and defines the details of an economic revival that leads to good job growth rather than continuing to leave this to the free market which has proven its inability and unwillingness to deliver wide-spread prosperity.

At the same time, a special place must be reserved for ensuring tax systems are fully progressive and robust with regard to those individuals who are among the richest ten to fifteen per cent in Canada. The same should generally apply to our larger corporations and the system of flat taxes needs to be reconsidered.

Continuing to give the rich preferential treatment because they are viewed as “job creators” has been proven to be an irrefutably mistaken notion. Moreover, the experience in various jurisdictions tells us that the fear of firms leaving the country or further offshoring their profits as a result of tax reform can be managed through shrewd and balanced regulation.

In fact, the international research is voluminous concerning the economic benefits of tax reform and the feasibility of doing so without creating unintended consequences. The political challenges surrounding all this cannot be underestimated, but honest and straightforward communications directed at the struggling middle class will carry the day in Canada as it has elsewhere.

OTHER SOURCES OF DEVELOPMENT FUNDS

The utilization of crown corporations, and public enterprises of various kinds and sizes, as the key implementation tools within a well-crafted industrial strategy, represents a significant opportunity to develop revenues that can be directed to essential public services. Net profits of large private corporations more often than not go to owners, upper management or to re-purchase shares or pursue mergers and acquisitions. As a result, the creation of large numbers of good jobs by private sector reinvestment has only rarely materialized.

What’s more, corporate tax and royalty revenues have been seriously diminished through constant lobbying of suggestible politicians. And the history of so-called private-public-partnerships has been dismal in terms of returns to the public purse. In fact, the term “partnership” in this context generally means, with a few exceptions, that government takes all the risks and the private sector reaps the benefits. Similarly, while some “privatization” of public services have been effective and worth the effort, the literature tells us that the majority have demonstrated no advantages, fiscally or in terms of effectiveness, over publicly provided programs.

Such concerns are generally not relevant in the case of crown corporations. If appropriate pricing regimes are put in place that avoid the use of subsidization, excess revenue will be available to pursue public priorities and ensure job creation. (Meanwhile, a specific goal of such a strategy would be to ensure the spin-off of small and medium size private businesses that enhance local economies and employment opportunities). The effectiveness of such entities depends on the re-building of public sector management capacity from top to bottom. This human resource priority is part and parcel of the general need for the regeneration of “infrastructure”, across the board, within the public sector.

Finally, there needs to be a more widespread but judicious use of public debt to fund long-term initiatives, essential services and industry-focused infrastructure and strategies. Of course, the debt must be prudent and the financial books in order before embarking on such an approach. To say the least, stimulating fiscal policies are controversial, but the evidence about which countries were the most stable during and after the Great Recession is instructive.

Further, the historical record going back decades tells an important story about the various benefits of financially expansive policies involving public debt. These go far beyond simply financing mission-oriented government projects and essential programs for the good of citizens. The economic foundations of the country are buttressed because of the positive spin-offs and “churn” created when good job-creating industries are carefully targeted, nurtured and launched. The fear tactics utilized by conservatives concerning the bogey man of judicious public debt have no basis in fact.

MORAL OF THE STORY

Anyone objectively viewing the facts of the past three decades must come to the conclusion that government can no longer stand back and continue to let the free market prevail to an extent rarely seen before in Canada or elsewhere. This is simply not serving the needs of the majority of Canadians.

There is no credible evidence to show that the private sector is more effective at accomplishing essential undertakings than a properly resourced public sector. Moreover, it is now well established that the corporate sector is primarily interested in serving the financial interests of its business owners, senior corporate managers and the attendant professional classes. Much less regard is shown for the well-being of key stakeholders, such as employees, or building general community prosperity.

To be fair, it was not always thus. In the decades leading up to the 1970’s, corporate leaders both in Canada and abroad had a more socially responsible attitude toward their employees and the communities they operated in. But that was then, and this is now, although a form of this still exists in certain parts of Europe. It will be impossible to return to anything resembling such an enlightened era until the public sector resumes its essential leadership role within Canadian society.

A renaissance in government as an effective architect of sound policies and programs is only possible once necessary public resources, both financial and human, have been restored to appropriate levels and a refined understanding of the role and purpose of the public sector has been re-embraced. Progressive governments that pursue this approach will be closely scrutinized. There can be no return to the bloated form of government that peaked in the late 1980’s and invited conservative zealots to go overboard in the dismantling of the public sector.

Rather, the carefully measured and appropriately scaled form of government that Canada perfected, at all levels, in the post-WWII era is the basic model to aspire to. As might be expected, necessary modernizations to this institutional legacy, in both form and structure, will be essential to reflect the complexities and challenges faced by federal, provincial and municipal governments as they look forward to the decades ahead.

More specifically, this does not involve the emulation of policies and programs of 40 to 50 years ago (although some of these probably could be dusted off where appropriate to plot a path to the future) but rather the creation of the necessary machinery, systems and organizations to produce policy and deliver programs required to accomplish essential and broad-based goals now and in the future.

Restoring efficient and sound programs and services that are crucial to the well-being of all citizens will justify the investment made in the rebalancing process advocated here. Rather than buckling to the pressure of self-serving private interests, government leaders must be the ones to determine priorities and what effective government means.

Copyright – Kenneth J. McFarlane – March, 2018 – Vancouver, B.C., Canada