Monday, March 28, 2016


Winston Churchill said “attempting to spend your way out of debt is like standing in a bucket and attempting to pick yourself up”; the Liberal government is in effect attempting to do this very thing.

"With the exception of the Child Subsidy, this budget was FISCAL FAILURE".  

Counter Cyclical spending, the process of government spending to stimulate the economy in the face of a down business cycle needs to have a very sharp pencil. We need to be sure that the money spent generates a sufficient increase in tax revenue to recoup money spent AND cover the cost of money.  Perhaps the most important point in counter cyclical spending is that it has very little stimulative effect, the Canadian economy is approximately $2 trillion, the Federal Government Budget is about 10% of that give or take. So think about how much 1% ($20 Billion) of the total economy is going to do to simulate the economy just in nominal amounts – nothing. Policy that uses the mass of the economy to drive growth, is policy that works – government spending can be directed at facilitating the economy, it will never grow the economy on its own.

The budget the Liberals just brought down, is the kind of budget that brought us down in the 70s and 80s. Less than 20% of the total budget is going to “investment” in capital projects and many of those are nothing new, nothing that is going to do what capital spending is meant to do, help us satisfy Canada's overall mission – they never got to the $10 Billion they promised in “new infrastructure”. This burgeoning deficit is partly the product of reduced resource revenues, but it is also indicative of a bad attitude toward fiscal management – this is like déjà vu la 1970s, the only difference is then we had an expanding tax base to save us, now we are facing some tough demographic realities that will reduce government revenues and increase the cost of government.  We need to invest in our First Nations, the Liberal government has committed to that, yet they have failed to insist the money invested in First Nations is subjected to generally accept accounting principles, by avoiding mandatory reporting as precondition to funding.  

Capital spending when done in business means purchasing assets or developing assets that generate benefit to the company mission; government can do this as well.  Had this government trimmed government operational spending and upped capital spending, I would be praising them right now. The fact is they have done the opposite and in so doing are robbing the next generation to fund nothing of significance now. 

They – this government – will point to all manner of numbers to say what they are doing is okay, they will pull comparative data from Europe, showing Canada’s debt is better than most western economies – none of this has relevance. What is relevant is, are we doing the very best we can with what our country has to offer – we are falling short. With Canada’s wealth, we should be sporting a sovereign wealth fund big enough to choke a horse, instead we are broke. Had we managed our resource wealth properly, we would be funding counter cyclical spending from capital reserves, instead we are spending our children's future.  We need to get serious about fiscal management, this government’s first attempt falls short, very short – they seem to indicate by their actions that they believe there is no bottom line.

CLICK BELOW - More Thoughts On the Issue

Sunday, March 6, 2016

Carbon Tax V Cap & Trade

If you’re bent on pricing carbon, think about this.

In designing public policy the first objective should be “do no harm”, the second objective should be enhance human existence. In managing Carbon and the negative externalities that flow from fossil fuel use there is opportunity to; maintain a healthy economy, facilitate the transition to other fuels, develop the safe use of fossil fuels and to seed new or other industry.

We want to create a circumstance where people can readily respond to opportunities that flow from carbon credits. By way of example, an Oilsands company exceeds its carbon cap, posts a number of tons on a trading platform, then a business person elsewhere accesses the dollar value in that tonnage to plant an appropriate number of trees OR, a homeowner converts to solar or super insulates their home and accesses the value in that tonnage to offset the cost. The challenge in many of the conservation measures related to reducing fossil fuel use is that the economics fail to justify action - the time it takes to recoup capital costs associated with conversion to other energy sources results in the accumulated benefit of the “improvement” being unwarranted – when judged from an opportunity cost perspective and or on a partial budget perspective. So any policy that assists in enhancing the economic benefit in conversion is a wise choice. Cap & Trade provides opportunity for these sorts of “GDP neutral exchanges” to take place, that is to say, that Cap & Trade done properly can result in little or no net reduction in economic activity.

The assertion that Cap & Trade unduly burdens the industrial sector is errant, the system can be designed to cap consumer use of fossil fuels as well. There can be carbon caps on personal transportation associated with vehicle classification, certain vehicles would exceed the cap and incur carbon cost, that cost could be offset by some other conservation action by the vehicle owner or another actor OR by directing carbon credits to an electric car user for example.

In the age of the internet, trading platforms are readily accessible to all people and easy to use, so the process of posting excess use of carbon and people accessing the value associated with it is simple to do.    

The problem with Carbon Taxes is that they are implemented with a critical misconception – that, as in British Columbia’s case, a 2% Carbon Tax will deter fossil fuel use. When attempting to deter use of fossil fuel by increasing price, a large percentage - like 20% - will deter use, but only to a point because very soon demand for fossil fuel “hardens” or becomes “inelastic”; there is really a very small amount of discretionary fossil fuel consumption in society as a whole. We know this is true because, there is a hundred years of price sensitivity data that shows it to be true. British Petroleum has done extensive price sensitivity analysis in England, drawing on data from the energy crisis era. In a country that at the time had food costs at nearly 40% of disposable income, gas prices doubled and demand for gas degraded just slightly, but in the main held steady. Carbon Tax is a very weak deterrent to consumption and to be used as a deterrent to consumption would require economy slaying percentages to work.

$30 / tonne may translate to more or less than 2% at the point of consumption - the concept holds true.

If Carbon Tax is being implemented as a means to manage the negative externalities that flow from fossil fuel use, the Carbon Tax is a means to garner funds, in the same way that we tax liquor to manage negative externalities flowing to society from its use, THEN carbon tax may have some merit. If the Carbon Tax is a means to finance transition from a Fossil Fuel regime to another energy regime, then it may have some merit - BUT only if the funds are earmarked and directed to transition AND the tax is NOT revenue neutral. 

The important point here is that Carbon Tax is just another way to get money, linking the funds collected for carbon mitigation activities to the degree of fuel use really has no rational basis as a claim, given that the smaller increments in price have very little affect on consumption. There is no basis to assert for example, that the 2% Carbon Tax in British Columbia has decreased fossil fuel use, any declines in fossil fuel use can be attributed to the long-running trend starting in approximately 1980, where GNP and fossil fuel decoupled, with fossil fuel use relative to GDP falling. This is due to the expansion of non-industrial components in the economy. To support this point I have provided two graphs below, barrels per day oil consumption and the historical price of oil in current dollars - you'll see there is little or no correlation between oil price and oil consumption. 


More Thinking on the Subject

Oilsands Moratorium Wrong Wrong & Wrong