Fiscal Responsibility - Part 2: Markets and Innovation, Chapter I: short-term to long-term

So far we've talked about the people part of fiscal responsibility: wealth distribution. To me, this means to give from rich to poor, from unsustainable to sustainable, and from downsizing to conservation. This next part deals specifically with how we approach the market, and how we encourage companies to improve themselves continuously. Innovation is a greater resource than any other, and constant creation and capitalisation of new ideas enriches the economy, creates more density to the flow of goods and services, and makes an economy more resilient. An economy based on only a few products is fragile. An economy bursting with new ideas is always able to adapt. Even if some businesses don't survive, the economy will keep on chugging. Oddly enough, what makes an economy resilient is not always what makes it efficient. In an interesting blog post on efficiency, Peter Radford examines in general what Jane Jacobs has been saying since the early 60s: efficiency is good at extracting profit from the existing system; efficient companies survive a change in the system at a rate inverse to their efficiency. In other words, efficiency is fragile. Efficiency means a company is optimised, that it has specialised in its form of profit generation. If the system has a shock of any kind, such as in 1979, or 2008, efficient companies shatter like a crystal vase. The higher you build, the less sure your footing.

Companies need room to manoeuvre, the ability to change direction, some degree of leeway in order to adapt to shifts in the economic climate. Sometimes companies have to be forced to do this in spite of themselves. That was the reason that Chretien didn't let the banks merge - guess what? Canada weathered the financial crisis better than any other G8 nation. Bank mergers would have given Canada some enormous banks able to contest on the global market with the likes of Sumitomo and Deutsche Bank. It would have allowed a much higher degree of efficiency and far more leverage... under the pre-2008 system. Lucky we didn't go there, I guess. Canada also doesn't allow a home-buyer to purchase a house without equity unless they buy mandatory mortgage insurance. Guess what? No mortgage crisis. China is sitting on a raft of bad loans, Japan and the US have already had their mortgage-induced hangover, but the only place with a problematic price bubble in Canada is Vancouver (and that's because Mainland Chinese investors keep buying houses there on speculation. I'm actually not kidding there, it's serious... but that's another discussion entirely).

For reasons that are inherent to the nature of corporations, big corporations often do not make the choice to spend money on long-term efficiency and instead opt for short-term profitability and growth. The only time a corporation tends to make huge monetary outlays for strategic purposes is when it is a matter of survival or the inability to access a market. Natural Capitalism isn't progressing as fast as a rational person might think it should due to this systemic corporate myopia. I've written about this myopia here and here. To sum up the cause of this problem, corporations are run by shareholders who want to profit from shares, and share price does not perfectly track corporate profit or future profitability. This is a break from the fundamental urge of the capitalist ecology: to derive profit from margins between outlay and income. (As an aside, this ignoring of the need for markets to exploit margins is at the root of the failure of centrally-planned economies, but the sins of central planning against the market are far more grave than those of the corporation. Still, it's the same sin - the only difference is the order of magnitude.) Part of the problem of the market, then, is that corporations have to be compelled to do what's good for their long-term survival - often against their own shareholders' will. Another problem of the market is that short-term profit taking can severely undermine long-term strategy. Finally, the nature of big corporations as a "climax community" makes them naturally tend toward monopoly and stifling new energetic companies that might rise up to threaten their niche. The Markets and Innovation part of this text is therefore about going from short-term to long term, profit-taking to profit-making, and monopoly to competition.

MARKETS AND INNOVATION:
Best Available Technology - from short-term to long-term.

Before beginning the main discussion, it would be wise to talk about feebates. Hawkins, Lovins, and Lovins adore feebates, as discussed in Natural Capitalism. Amory Lovins suggested them first for encouraging the development of cleaner automobiles. The concept is that you ding the most inefficient and pay the most efficient. This could be problematic, as most car-makers have several lines of cars, each with their own pollution profile. A decision would have to be made to compare only the most polluting model in the line, naturally, so that the company is only as good as its worst designs. A few issues I have with feebates: if they are applied too broadly, they would have the tendency to cancel one another out. For instance, car manufacturers could make the metrics too narrow and numerous, and by doing so make the whole exercise futile: e.g., Ford has the best catalytic converter, Honda has the lowest emissions, Subaru has the least chemicals in its upholstery, they all pay in and they all cash out. Nobody would be penalised or rewarded, and that would be senseless. To be useful, feebates have to target one, at most two main technologies or metrics of waste that any given industry produces. While Lovins indicates that feebates would be used in a kind of "sliding scale" manner - the most egregious pays the most by proportion to its egregiousness - I feel this also leaves the middle range in a kind of wishy-washy position of neither being rewarded nor penalised enough. To me, feebates are going to represent a kind of yearly "ante" that all businesses in an industry pay into a central kitty. The most efficient gets the whole amount, equally efficient companies divide the kitty proportionally to their net worth. Only the most important metric to the industry is chosen, and companies deposit to the kitty each year 1% of their gross profit... or better still, the degree of their egregiousness in the previous year sets their ante at anywhere between 1-5% of gross profit, just to make sure the worst offenders don't calculate this simply as a "cost of doing business".

Another problem with feebates is that the government would have to maintain a great deal of administrative overhead in order to monitor this program. This is no small task, monitoring feebate programs in every major industry in the country. There is, however, a solution. Industry associations can oversee the process, only providing the results of certified third-party testing to the government through the Canada Revenue Agency (CRA) with the yearly taxes of each corporation. The CRA would monitor the compliance of corporations in the feebate program as the ante would be paid along with annual taxes, and rewards would be paid out along with tax returns. Industry associations would be awarded 10% (or another suitable amount) of the total kitty as a consideration for monitoring the program, but would never touch the rest of the money. This would incentivise the industry associations to encourage broad participation and report free-riders. The Canadian National Research Council (CNRC) would review the test submissions on a risk-management basis much as tax filings are reviewed now. They would also be in charge of certifying third-party standards institutes within Canada that do the testing for the industry associations. This way, administrative overhead is offloaded to the industry organizations, the CRA does what it does best with very little novel work added, and the CNRC does what it does best - measuring and testing stuff. The matter of paying for such a unit in CNRC, however, does rear its ugly head. Some people don't know this about the government, but some organizations in the Canadian government are classified as financially autonomous. The RCMP Musical Ride is one such organization. Not a penny of taxpayer money supports the Ride. It supports itself by breeding and selling prize horses that fetch prices in the tens to hundreds of thousands of dollars on the auction market. The standards unit of the CNRC used to conduct spot testing and certification could be so classified, so that the entire exercise of maintaining feebates is completely cost-neutral to the taxpayer. They would collect fees as any other standards organization would. Never underestimate the creative use of existing processes to save time and money.

Now, hopefully the description of my conception of feebates is clear, the fact that they would be entirely cost-neutral is established, and that even though they are run by industry organizations they would be impartial - because they get cash out of it and they are monitored by the CRA and CNRC ("trust but verify").  Feebates can be used to encourage the development of the most efficient techniques and technology through two different prongs of the efficiency concept: best available technology and best available practice. For each industry, what these are would be decided by the government based almost solely on input from civil society groups. While industry associations can be consulted in this phase, this is a decisive moment in the program, and industry associations do not have an incentive to pick the most central or important technology in this system. Civilian think-tanks and civil society group consultations are the best way to find the most pressing concern experienced in the industry, and would keep the process from getting torpedoed right out of the dock.

The terms "best available technology" and "best available practice" are covered briefly in The Natural Advantage of Nations. Best available technology (BAT) is a European industrial doctrine. Best available practice (BAP) is a term used to differentiate when industries do not rely on polluting technologies, but can improve their best practices and thereby reduce waste. I am proposing that these concepts not simply be applied to industrial CO2 emissions, but to the central environmental/waste/inefficiency problem in every major industry in Canada. The incentives are properly weighted: civil society groups have an interest in addressing the most serious issues of waste and inefficiency because their purpose is to protect the environment or quality of life of Canadian citizens. Industrial associations would hopefully see the profit (for their own organization) that identifying and addressing a critical industrial need would create. Private standards laboratories would benefit from increased patronage, the CNRC's Standards Unit would be able to maintain itself through consulting to private standards laboratories, and the most efficient companies in an industry are rewarded. Since the entire process can be initiated by industry or civil society groups, it would provide a grassroots level of interest and increase the satisfaction of civil society groups with overall governance. More on this engagement of civil society in the next section. Finally, civil society groups would be given the option to change the focus of BAT/BAP programs if a different problem becomes more pressing.

The economic benefits of this progression of innovation are many. First of all, as is well-argued through The Natural Advantage of Nations, companies which exceed product standards and make innovative leaps in efficiency are better positioned in the market. First, because they can find more large (specifically, government) buyers which can't avoid but purchase socially responsible products due to their own legislation. Second, holding patents in tech advancements that exceed European standards would find a government-mandated market in Europe due to the doctrine of BAT there. Third, buyers are becoming more ecological footprint-conscious, and socially responsible products are demanded by ecologically conscious consumers. There are many other reasons, but technological/technical advancement does pay dividends, even if the only thing a shareholder can comprehend is an "expense". Shareholders will be more keen to lay out a little profit now for a windfall later if their company is able to exceed the BAT of the previous year.

While this is only a teaser for later chapters, this process has the knock-on effect of giving new companies in the market a real fighting chance. If a new and nimble industry is able to bring the BAT into production and clean the clocks of all their competitors' efficiency numbers, they stand to win a disproportionately large windfall that may establish their position in the market for years to come. This is a single way this process combats the "runaway leader" problem inherent in capitalism that I will talk about in a later chapter. Through the adoption of BAT and BAP, implemented with a group of stake-holders through feebates, Canada can pry open new markets. The process will get investors accustomed to capital expenditure on efficiency improvement, and perhaps in some cases, they may demand it. BAT and BAP will start corporations thinking about the long-term survival and competitiveness of their companies rather than squeezing the most out of the current paradigm and changing only when necessary for survival. Constant, incremental improvement is possible with such a program, and competition will move from simply price to innovation. Feebates and BAT/BAP will help Canadian industry go from short-term to long-term in their corporate planning.