Fiscal Responsibility - Part 2: Markets and Innovation, Chapter III: Runaway Leader Problem

A great deal of Libertarian thinkers have highly seductive theories about social order stemming from the complex interactions between interested stakeholders. As a believer in the power of capitalism myself, Libertarianism has some natural draw. However, we must remember that when the government keeps out of the business of business, bad things happen. As much as I would like to say that the Invisible Hand works, it simply does not. If we are fine with an economic life that is "brutish and short" for the majority of the people that inhabit the wilds of near unrestricted capitalism, then the laissez-faire capitalist ideal of Libertarianism is for us. As it stands, my belief in capitalism is the same as my belief in the power of Mother Nature: Her Laws are immutable. You diverge from the laws to your own detriment. You cannot defy the laws of nature just as you cannot defy the laws of money. Nature seeks energy from niches, business seeks profit from margins. Any and all economic thinking must take these simple immutable laws into account.

I will go further and say that companies that fail to follow the laws of the market should be allowed to die. It is only by clearing their niche and letting the little companies vie for their place in the sun that the economy renews itself. Those companies that have trouble deriving profit from the environment should pass away, and better-suited companies will follow. The key, then, is to make companies die for reasons that fit national policy, and let new companies grow for reasons that fit national policy. The market will handle the rest. National policy should, instead of regulating and restricting, make unethical and inefficient business practices inherently more costly than efficient and ethical practices. By hampering the ability of inefficient companies to derive profit from the market, policy is able to guide existing immutable market forces rather than trying to stand in their way. It's much easier to guide the flow of a river than dam it up. Even from a dam, water must pass through or the dam will overflow. When the river's direction is changed, the natural flow of water works to the advantage of the engineer rather than to her disadvantage.

All this is to say that I believe the death of companies that are unable to take profit from the market is a good thing for the economy. Subsidies are inherently flawed in application, as constant subsidy only rewards bad behaviour and inefficient business practice. This may sound Libertarian, but it's simply good business sense. Arguments could be made that subsidies destroyed the cod fishery in the east because it encouraged overfishing. If the fishery had been allowed to evolve without subsidy, there might still be cod fishermen on the east coast (assuming, also, that we had a Lord Admiral Brian Tobin at the helm of Fisheries and Oceans to protect the catch from Spanish overfishing).

The problem currently is that the climax community corporations of each industry tend to be able to squeeze out up-and-coming new companies attempting to make a niche of their own within these industries. This is something we call the "Runaway Leader" problem in game design: the person who starts leading gets a stronger position, and from this strong position has a greater ability to keep on leading. Naturally, companies with more money can stand to make more money, and newcomers to an industry are more or less at the whim of the established companies there. To use another game analogy, spawn camping is both an effective way to play a deathmatch first-person shooter but it also punishes new players. Established companies are able to choose to "spawn-camp" new companies because of their established positions. This decreases competition based on innovation, and instead encourages competition through other more Machiavellian/minimax business practices. The solution must allow for one of three things to happen in the economy: allow for the large companies that stifle innovation to die under the weight of efficiency-minded taxes and feebates; force large companies to spend money on taxes, feebates, and upgrades so that they are rendered financially unable to engage in minimaxing behaviour, thereby allowing the development of unprotected niches in their industry that newcomers can fill; or simply force large climax community businesses to advance and innovate in order to hold their apex position in the industry rather than doing so through more Machiavellian means. If the market is like nature, then we must treat both the life and death of companies with reverence, for both things happen for a reason. National policy allows a government to intervene in how natural selection occurs in the market, and the rise and fall of companies in response to natural selection must be allowed to proceed, uninterrupted by subsidies. This is how to solve the runaway leader problem, and go from monopoly to competition.

MARKETS AND INNOVATION
Combating the Runaway Leader Problem - from monopoly to competition.

As we've already discussed, big companies are able to make advantages for themselves through their sheer size. There's a teaching in Kendo (Japanese swordfighting) that says there are "three things to kill" the opponent: his sword, his technique, and his spirit. In a similar fashion, there are three things to kill in the business world in order to quash competition: the marketing, the product, or the money. Of these three, money is the easiest thing for big corporations to attack. Unless the small company has a superior marketing strategy, or a game-changing product, they will inevitably lose when fighting a monetary battle of attrition. In some cases, they will still lose even with better marketing or products. He who has the gold, in effect, makes the rules.

This is sad, because it would be far better for the consumer if the product was the most important or effective deciding factor in competition. The logic of money being the supreme arbiter of commercial success is that we presuppose that the best product will invariably succeed on the market. This is simply not true. Often, the product that succeeds is simply the one that has a lapsed patent, or that is well-branded, or that has the most caffeine in it. Since we are on the topic of game design, Yahtzee was a game developed by a couple to play while out on their yacht (now the name makes sense, no?). They sold it to a marketer lock, stock, and barrel. The marketer was keen to promote it because all the profit from the idea from that point on would be his. Would he have tried as hard to make it a success if the yachting couple still owned the rights at the end of the day? In a word, no. Yahtzee is not a good game, but it sells like hotcakes. Did it sell because it somehow was appreciated by a huge number of people who play it every weekend, or did it sell because a good marketer got a hold of the rights to something he could sell to lots of people who would play it once or twice and then put it in their closet? I think we know the answer to that question.

Consumers do not make rational choices to purchase the product that will best fulfil their existing needs. There is no chance that a consumer, who purchases a faux Fabergé egg on the home shopping channel at 2 a.m. after a long night alone doing crosswords and listening to soppy love songs, is buying a product because the product itself fills a need. Utility maximisation and the rational consumer being a myth, the idea that the company with more money makes a better product is also recognised for a myth. We are reduced to seeing the market cynically as a place where - since value is subjective - the art of selling is actually a process of perception manipulation rather than a game of who makes the product best suited to the real needs of the consumer. The market, therefore, doesn't choose the best product, just as it does not choose the most efficient process, or the least wasteful manufacturer. It is up to national policy to define these traits as desirable through financial penalties and rewards. Competition is the only way the market improves, and innovative new companies must be given a fighting chance to establish themselves so that competition is increased. More companies means more competition.

The big box stores also eliminate entire ecologies of little shops. Businesses buy more "stuff" than most consumers do, and business to business purchases are far more lucrative than selling to individuals. It makes sense that the more businesses there are, the more purchasing there will be. Big box stores can cut costs and streamline - they pay minimum wage, buy in bulk, and can derive benefit from economies of scale. They have logistical networks and dedicated sources to get all their supplies in the most efficient and cheap manner possible. Mom and pop stores can't. The little shops may each individually make less money, but they also keep more money in the local environment. Their lack of continental supply chains makes it necessary for them to spend locally for what they need. They have to pay their workers (mom and pop) a living wage and they can't normally benefit from economies of scale. Keeping the big stores from establishing control over a market niche therefore not only increases competition, but increases overall consumption as well!

A couple previous discussions play directly into this topic. One, the "national labour law", and the other, feebates. The national labour law we talked about before was about two things. It was mainly about wage equity and freeing workers from being simple expendable pawns in the great game of profit maximisation. A knock-on effect that comes into play here is that it cuts into the scale advantage that large companies have. The larger the company, the more specialised it can make its workers, and the more efficient it can make its processes. This efficiency means profit, because a larger company typically pays less dollars of salary per dollar of income than a smaller company does. This is a contributor to the runaway leader problem, and wage equity just happens to cut into the ability of any leader to "run away". Second, feebates will penalise inefficient companies that are unable to improve their wasteful processes and practices. Letting the big companies hit by this double-whammy fail is part and parcel of the program: through the death of the inefficient, the efficient are given the chance to grow. If the big companies adapt and improve, the result is the same: both wage equity and efficiency is enhanced, and innovation flourishes.

A large part of this plan isn't "doing" something so much as it is about doing nothing. The key to this part of the policy is not to bail out that darling company of the swing constituency simply because it's politically expedient. We all know it happens. Strathcona gets a hospital, and Shawinigan gets a national tax processing centre... the swing and home ridings get disproportionate attention. If a company that accounts for a lot of jobs is about to perish, often the government will find funds in order to make certain those jobs survive - even if it encourages poor business practice. Well, I'm a prairie boy. The grass grows up lush and green after a prairie fire. It's a natural form of renewal. There will be a black spot there for a year or two, but the patch will grow up healthier than ever in no time. Stress the big companies, let the small companies develop, and it will be harder for the big companies to compete with them using money alone.

One final thing that is a little off topic, but still along the same lines as the runaway leader problem. Big stores have a great capacity to raise capital through keeping their shares high-priced and raising funds by releasing more shares to the market. If need be, they still have this ability to out-spend their smaller competitors at their fingertips. One way some companies keep their share prices high is, well, through lying. The corporation has evolved into an entity that somehow makes lying (called fraud) a crime without a perpetrator. This seems a little unfair, because with accountability comes responsibility, and responsibility tends to increase self-discipline. I propose, as my final recommendation along these lines, that CEOs, CFOs, and COOs be held accountable for the illegal actions of the corporation as a whole through the doctrine of command responsibility as enshrined in the Geneva Convention. Put simply, it means that if an atrocity is committed under your command, and you didn't try to stop it, you're responsible for it. The end. Lack of knowledge is not a defence (and shouldn't be) because as a commander, it's your damn job to know what's going on. With that happy thought, I will leave you with a short selection from the - rather well-written - Canadian Criminal Code:

Sentencing — aggravating circumstances
380.1 (1) Without limiting the generality of section 718.2, where a court imposes a sentence for an offence referred to in sections 380, 382, 382.1 and 400, it shall consider the following as aggravating circumstances:
(a) the value of the fraud committed exceeded one million dollars;
(b) the offence adversely affected, or had the potential to adversely affect, the stability of the Canadian economy or financial system or any financial market in Canada or investor confidence in such a financial market;
(c) the offence involved a large number of victims; and
(d) in committing the offence, the offender took advantage of the high regard in which the offender was held in the community.

As the saying goes, take care of the pennies, dollars can take care of themselves. With a bit of protection for the small companies, competition is improved and the little guys have a change to become big companies. By letting failing companies die, we not only rid ourselves of inefficiency, but allow for new ideas to fill the niche left by the departed. By increasing accountability, we make it less likely that big companies can game the market, and encourage stability in the national economic system.

Jobs that Pay Nothing

The Economist yet again has stoked my passion against the concept that the law of supply and demand governs wages equitably (no doubt it does govern them, but certainly not equitably). We shouldn't rely on utility maximisation as a rationalisation for not giving someone enough to feed themselves and their families:

With nearly 14 million unemployed workers in America, many have gotten so desperate that they're willing to work for free. While some businesses are wary of the legal risks and supervision such an arrangement might require, companies that have used free workers say it can pay off when done right.

"People who work for free are far hungrier than anybody who has a salary, so they're going to outperform, they're going to try to please, they're going to be creative," says Kelly Fallis, chief executive of Remote Stylist, a Toronto and New York-based startup that provides Web-based interior design services. "From a cost savings perspective, to get something off the ground, it's huge. Especially if you're a small business."

Something about that comment by Kelly Fallis makes me, oh, I don't know, perhaps a little sorry for the state of her eternal soul I guess.

Fiscal Responsibility - Part 1: Wealth Redistribution, Chapter III: Labour Laws

The Economist noted that:

Wages still account for a much greater slice of income than profits, but labour’s share has been in decline across the OECD since 1980. The gap has been particularly marked in America: productivity rose by 83% between 1973 and 2007, but male median real wages rose by just 5%.

So, why are profits going up and salaries staying flat? I personally don't care. The only question to ask is whether salaries are equitable. I doubt many who read this would disagree. There may be some holdouts, who argue that supply and demand determine what goes on in the market, but supply and demand works with only certain things. Work puts food in kids bellies, and sometimes any work is better than hunger. Sadly, many companies are able to depend on that fact to enlist unskilled labour at bargain prices. As the song goes:

What force leads a man to a life filled with danger,
high on seas or a mile underground?
It's when need is his master and poverty's no stranger,
and there is no other work to be found.

One's ability to eat is a hard limit on one's choices for work. If everyone's needs were somehow fulfilled by fantastic food faeries who fed, clothed, and housed the entire population to a minimum standard, then the value of work would truly be set by supply and demand. Then and only then would the worker's want for greater wealth be a determining factor in whether he or she actually wanted to clean toilets for six bucks an hour. Given the choice, I wouldn't clean toilets. If my kids were hungry, and there was no other work, I might reconsider.

The same people might argue that having children is a choice. Well yes, it is. It's a choice the government has been actively trying to encourage for years because of the need to grow the population to grow the economy. It would seem odd to penalise someone for doing something the government wants him or her to do by not allowing him or her to earn enough to feed his or her family. The hundred bucks a month per child is a help, but it doesn't go far when the household is earning part-time minimum wage.

We've already talked about redistribution of wealth through a more progressive tax regime. Now, I would like to talk about how corporations can contribute to equitable wealth distribution. This will happen in two ways: first, through fairness in staff reductions; second, through fairness in base salaries. What corporations will get in return is more freedom to hire and fire, and they will pay a little less income tax. What some currently low-paid workers get in return is a living wage and the freedom from fear of being let go.

REDISTRIBUTION OF WEALTH
Labour Law: from downsizing to conservation

Corporations are able to find ways to cut costs by cutting people, keeping wages low, and forcing salaried workers to do more for the same pay. Large companies, and by large I mean companies that span more than one province or employ more than 200 people (if some king hires me to write policy, I'd try to get someone to help me figure out what that number should be, but for now I'll just pull something out of the air), should no longer be bound by simple provincial regulations. I propose a set of labour relations laws that kick in once a company crosses the line from small to my above definition of "large". These would be national labour laws, instituting a minimum wage for large companies as well as terms of release for workers. The laws would mandate overtime payments for salaried and hourly workers alike. None of these solutions are elegant, but they are necessary, in my opinion, for low-paid workers to stop getting the short end of the stick. Remember, all of this only applies to "large companies". Everyone else abides by existing regulations when it comes to employment. This will give startups a competitive edge to allow them the leeway to become a large company.

Part one, and the first piece of legislation, is quite simple. Every worker earns a $10k or one month salary payout (whichever is larger) per year of work upon leaving the company. After the initiation of the program, this amount can be scaled to inflation, but inflation would not affect the amounts of previous years' payments. This is for a full-time equivalent year, meaning part-timers will have to work longer. For the sake of argument, a full-time equivalent year will be 52x37.5 hours of work (1950) and paid holiday. If a worker is let go by the company in the first year of work, the worker qualifies for the leaving pay. If the employee leaves in the first year of work, the employee does not qualify for the leaving pay. After the first year, whoever terminates the employment, the pay is the same. The application of the concept is simple, but there would have to be details added to protect both worker and company from either gaming the provisions for first year payouts. Funds for this purpose must be set aside in an escrow on a month-by-month basis to ensure the money is there should the company go under. In the event of bankruptcy, this cash would be completely protected from creditors by bankruptcy protection. The company would not have to pay the escrow's interest to the employees, and may use it as it wishes. As a side benefit, this increases the amount of money invested in the market. Companies would be allowed to hire and fire employees more or less freely in exchange for this simple payment, since every transaction has an opportunity cost. This would also eliminate the need for employment insurance. This benefit would not be subject to income taxes.

The next little piece of legislation would be a regulation setting the "national" minimum wage for hourly workers in large companies. This would be set at $15.39 to begin with, and would be reviewed every year based on inflation. Minimum salary per annum would be set at $30,000. 'Nuff said. Finally, large companies would be forced by law to pay salaried as well as hourly workers 1.5x overtime for work in excess of 9 hours per day or 37.5 hours per week. This would allow for flex time within reason. Salaried overtime would simply be prorated to their salary divided by 1950. These two very basic points are not simply a brute-force solution to wage inequity, they are hopefully an equaliser that will help little companies make a market niche for themselves by being nimble and lower-cost. The playing field has to be levelled so that small companies can compete with large companies, and the way to do that is to force the big boys to pay their employees a living wage. Big businesses that can derive enormous profits can either afford to pay, or they can leave and give back the niches smaller stores once filled. While it seems counterproductive to drive off big businesses, the efficiency and profit maximisation that these big businesses can benefit from actually translates into fewer, lower paid jobs for the regions they move into. Small to mid-size businesses drive the economy, and big businesses will either give their employees enough money to feed a family, or they will vacate the market niche and let small companies re inhabit it.

The reasons why I don't fear driving big, efficient corporations away are going to be covered more in the next part, specifically, in a chapter on equalising the "runaway leader" problem in businesses: big companies make more money and can then choke out competition, which is bad for overall innovation in business. Big companies are also making lots more money, but not passing it on to their workers. This national level labour law is just a brute force solution to that systemic problem that kills two birds with one stone: it forces big companies to put a little more of their profit into their salaries, and allows for leaner small companies to enter niches in the same industries as corporate giants because of their relative salary advantage. Of course, big companies would be rewarded for their adherence to the relevant laws and regulations through lower corporate income taxes. Deadbeat companies would be penalised with standard taxes. If companies come up with a less draconian method to right the wrongs that share-price motive inflicts on workers, I'd love to hear it. For now, however, I think that this is the one thing that strict regulation would solve better than simple incentive measures. 

Artificial Leaf Could Power Your House for a Day

This little story caught my eye when my brother in law posted it to facebook. Apparently, the tech is a few years old but just last year it was "presented to the world" as it were. See the following for details.

Here...
and here...
and here!

Of course, cheap energy from water of any quality - that also produces storable chemical energy as well as fresh water - would be a boon. Let's start buildin' em!

Fiscal Responsibility - Part 1: Wealth Redistribution, Chapter II: Consumption Taxes

Canadians are predominantly slightly left or slightly right of centre. They mainly want less deficit and more services. When voters see government spending go over the top, they are rightly concerned about it, and it becomes a hot political issue... but the national budget is not about "cutting" or "becoming leaner" to be more fiscally conservative. Fiscal conservativism is rooted in only spending what you have, not cutting the services you need. When voters see services cut, they are rightly concerned about it, and it becomes a hot political issue... but providing adequate services for the public isn't a financial issue, it's a matter of accomplishing the will of the electorate. Political parties seem to see "issues" in isolation from one another, like the problem of voters wanting lots of services is somehow perceived separately from the problem that the treasury holds inadequate funds. Most political parties seem to have their approach to budgeting backwards. What political parties don't seem to get is that these two issues are not a problem of leftist voters demanding more services and rightist voters demanding less expenditure.  The problem is that political parties won't do what will solve both problems: select exactly the services that Canadians require, and then raise the revenues to pay for them. Why these two issues continue to be handled in isolation to one another boggles my mind and deprives me of much-needed sleep.

This is why the first part of this plan is about finding more wiggle-room for the government to get its financial footing and fund the programs necessary to support the economy and, more importantly, the electorate. Once the government has the funds, then it can modernise the economy, and seek efficiency through devolution of services to the lowest natural level of government. The function of the federal government must be to collect and direct funds where they need to be. If programs from the Department of Veterans' Affairs or Health Canada (just for random examples) would be better delivered by cities, then cities should not only receive the money but receive the mandate to implement those programs. Here's a bit of foreshadowing: I think cities can do a lot of this stuff, and save money doing it. Each level of government should do what it's good at, and cities are the best place for direct service-delivery to Canadian citizens (and permanent residents).

Consumption taxes, in this scheme, cover off a little bit of each of these issues. In part, they engage all levels of government, they also assist in the delivery of service to Canadians, and offset the hidden subsidies of the items they tax. Except for the GST, all consumption taxes are geared at preventing harmful or costly activity from hurting the treasury too much. By engaging the power of consumption taxes, we can increase the coffers of the governments that fund the programs we require. We can also use them to penalise the inefficient and unsustainable, and make sustainable products and services more appealing to the consumer. In this way, we will assist the market in pushing consumption patterns from the unsustainable to the sustainable.


REDISTRIBUTION OF WEALTH
Consumption Taxes: from the unsustainable to the sustainable

Consumption taxes are an essential tool for governments to offset the costs of unsustainable and dangerous activity. Consumption taxes, in some ways, act as insurance policies: alcohol and tobacco taxes are a case in point. If you drink and smoke often, chances are higher you will contract a disease that is expensive to treat or cause a road accident. Though a few people might chafe at these concepts, look at the insurance industry: they may charge more if you drive a red car rather than a white one, because stats show more red cars are involved in accidents than others. Certainly we can accept that if red cars cause more accidents, drinking and smoking cost the economy more than not drinking and not smoking. The taxes on these products serve to offset the costs these activities incur, or can potentially incur, on the health system of the respective polity.

A solution to this can be implemented by engaging two rather disparate stakeholders: insurance companies and civil society groups. The former, because it has the greatest expertise at estimating the potential costs of a certain activity. The latter, because parts of it have a natural interest in limiting behaviour that is a drain on the treasury. I propose that insurance companies be allowed to bid on contracts to insure potential drains on the treasury. The lowest bidders on the tender will be allowed to participate in the program. The insurers must pay for all issues arising from their given program, but they keep the profits (if any) from the tax levy. Also included in the tax levy will be an incentive to civil society groups to reduce the behaviour that is a drain on the treasury. If the stats show a reduction in the activity, the participating groups get a donation. Insurance companies, of course, would stand to gain considerably through reductions in the behaviour, and therefore would be thrust together with the civil society groups through sheer self-interest... that benefits both the common citizen as well as the treasury. When you create a system that privileges cooperation - get this - cooperation happens. I've seen it before in academic writing on the Prisoner's Dilemma and I even tried it out myself: In a class of MBA students, I got the group to play an iterated version of the Prisoner's Dilemma. We split the group in half: I had the group where I explained the game in cooperative terminology. The actual professor of the class described the game using specially selected competitive terms. Guess what? The people who were instructed the game in cooperative terms were cooperative in the game. That was just changing the framing language of the rules! Imagine if there was monetary incentive for cooperation between groups in the system. Each group will reinforce the other in its own domain. A useful side effect of the engagement of both civil society groups and corporations under the benevolent guidance of the central government is the production of numerous warm and fuzzy anecdotes about working together to solve social problems. Never underestimate the power of a warm and fuzzy anecdote during a political campaign, especially when it can simultaneously involve corporations making money, civil society groups making a difference, and the government saving money. Triple win.

Consumption taxes are, however, more than simply tools to offset costs. They can also redress hidden subsidies. I was talking to a man who is in the mining industry about the price of gas at the pump, and he indicated (only partly correctly) that a large part of the cost of gas is tax. Yes, there is a lot of tax on gas, but not enough. This isn't because of carbon emissions or environmental impact or anything of the sort (though that does matter). No, it is principally because the petroleum industry receives ample subsidies from the government for supporting the overuse of gas. Let me raise just two:
1) Roads - while most people will scoff at the insinuation that roads are a subsidy to gas companies, we should remind ourselves that the suburb - that road-intensive invention of the 50's - necessitated a huge increase in road building. Trucks carry huge numbers of containers across country that could be handled more efficiently and cost-effectively by train, but instead we insist on maintaining enormous trans-continental stretches of road all so that cars and trucks can burn gas on it. Gas prices should reflect ALL costs inherent in road construction and maintenance at all levels of government. Canada is one of those weird and rare animals that has only a couple real toll roads. The rest are all totally free of charge. This needs to change, and users should pay.
2) Accidents - cars cause automobile accidents. All costs related to the direct car-related health problems should be borne by gas prices. Natural Capitalism suggests that car insurance payments be made directly at the pump, and this is not a bad idea. It is perhaps easier to simply ask the cities to make a cost estimate for emergency and police services related to traffic accidents and pass this directly on to the pump.

Again, through the engagement of civil society and all levels of government, the central government can identify the hidden subsidies being given to industry and offset them with appropriate taxation. Increased prices for these products means better services related to those products and, hopefully, reduced consumption and increased conservation.

Finally, there is a need to encourage  recycling and conservation as well as discouraging waste and linear production models. To list the fundamentals of such a consumption tax regime, I'd identify the following points:

• If it isn't recyclable, add to its cost.
• If it's within a class of "industrial nutrient" (something that can be reused over and over again in industrial processes) per Cradle to Cradle, give a rebate.
• If it's virgin raw material, add to its cost.
• If it's recycled material, give a rebate.

Taxing waste directly would also assist in its reduction.

All together, there are ample tools here to guide the market along a sustainable path and raise funds at the same time. The end result of this taxation regime must be a reduction in the taxed behaviour, and therefore a reduction in the amount of tax paid. This is fine. The key is to build up a head of financial steam in the beginning, and let off pressure as the economy changes tack. Part of the pressure will be let off simply by the economy shifting to sustainable practices. Part of the pressure will be let off by more responsible consumption. In the end, the government will take in much less money for all consumption taxes included in this regime, and that is exactly what this regime of taxes is designed to do: move purchasing behaviour from the unsustainable to the sustainable.

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.

"Green Capitalism: the god that failed"

I just read this article forwarded by a friend by a person rather ironically named Smith. The premise of the article is succinctly stated in the following excerpt:

In short, for all the green initiatives, corporate business practices have changed little -- or the little they’ve changed has had no great effect. From Kyoto to Cancun, governments have all made it  abundantly clear that  they will not accept binding limits on greenhouse gas emissions. They will not sacrifice growth today to save the planet tomorrow. Europe’s cap and trade scheme, the first large scale effort, enriched traders and polluters but failed to put the brakes on the relentless rise of greenhouse gas emissions. What few carbon taxes governments actually imposed have likewise failed to stem emissions. At the end of the day, the project of green capitalism is in disarray.

 (emphasis mine)

The bolded line is the crux of this argument, but it could also be stated "They will not sacrifice growth today to save money tomorrow". I'm not of the school that saving the environment is the sole end of Natural Capitalism. I believe that Natural Capitalism's draw - for me at least - comes from the fact that it is an opportunity to force a paradigm shift on the market. The paradigm shift is that of increasing competitiveness in the market driven by innovation and efficiency rather than competition driven by hammering down the cost of inputs. It is a chance to end race-to-the-bottom economics and increase profit margins through improving the cost effectiveness of the processes rather than getting a lower price on raw materials and labour. It has been proven, time and time again, that efficiency and innovation can and do create savings over the long run, but the business cycle for shareholders is different from that of the business cycle for infrastructure. Shareholders do not appreciate opportunity costs. To shareholders looking at the quarterly report, an opportunity cost is just a cost; not a potential return over time. All one has to do to see the benefits of radical efficiency and waste reduction is read the case studies in Natural Capitalism, Cradle to Cradle, Factor 5, and The Natural Advantage of Nations, to see that real-world examples of massive long-term savings are wholly based in reality. Empirical evidence supports the claim that waste reduction and efficiency reduce costs, and cost reduction is a better way to increase margin because price to the consumer is not increased. The problem, as with so many things, is in the nature of the system. In that, Smith is partly correct. Capitalism itself is not to blame, though. It's that the way we run corporations is simply not set up for true long-term profit maximisation. I've already gone into this in a previous blog post, but I suppose I will go more into it now.

"CEOs might embrace environmentalism so long as this also increases profits but they’re not free to subordinate profit maximizing to saving the world because to do so would be to risk shareholder flight or worse."
This is perfectly true, and Smith uses this statement to exemplify why Natural Capitalism is a non-starter: shareholders demand growth, or they jump ship. To put it another way, CEO's will not sacrifice growth today to save the planet (or money) tomorrow. This is all about opportunity costs. While Natural Capitalism advocates state that there is an early adopter advantage, most corporate-minded business leaders would simply see it as an early-adopter risk. There are several reasons for this. Jumping to a new technology or process is an unknown, and CEOs are in the habit of managing rather than taking risks. Cost now for opportunity later could influence share price now, which reduces capitalisation now, which makes companies more risk averse the more capitalization they have tied in the stock market. Diminished capitalisation (or diminished ability to leverage perceived corporate profitability for capitalisation on the stock market) diminishes the ability of the company to pay its way out of a poor strategic direction. This creates a vicious circle: if we try something, it will cost us now, which will reduce our ability to raise capital, which will reduce our ability to get out of the mess if it fails, which will cost us, which will reduce our ability to raise capital... In this instance again, the quarterly report itself is in conflict with the long term viability of the corporation. This statement is correct, as is its corresponding thesis, because Smith is not actually talking about capitalism, he's talking about corporations. Corporations are motivated solely by share price. Sometimes altruism and profitability collide, but not always. Profit motive - or as I like to say, share price motive - is still king of the corporation.

The remainder of the assertions made in the paper under the "five theses" are, to put it bluntly, both putting the cart before the horse and confusing capitalism with the corporate system. Smith is presenting the idea that capitalism must be replaced because "capitalism is eco-suicidal". This is unsupported by the evidence in the paper. What is supported in the paper is that corporations, and perhaps more importantly, the investors who purchase shares in corporations, are interested in short-term return on their investments. This is a problem of not being specific enough: the problem is not capitalism, the problem is the timeframe on which investors expect a return on investment and their inability to suffer short-term loss for long-term gain.

But the problem is not just special interests, lobbyists and corruption.  And courageous political leaders could not turn the situation around. Because that’s not problem [sic]. The problem is capitalism. Because, given capitalism, it is, perversely, in the general interest, in everyone’s immediate interests to do all we can to maxmize [sic] growth right now, therefore, unavoidably, to maximize fossil fuel consumption right now – because practically every job in the country is, in one way or another, dependent upon fossil fuel consumption.

(italics mine)
If you replaced "capitalism" with "share-price motive" in that paragraph, and took out the italicised bit, you'd have a truism. The italicised bit is a facile overgeneralisation that sees the fossil fuels as a product and not a service. The economy is dependent on energy, but not all energy is fossil fuel based. I will come back to that later. As the quote stands, you have an overgeneralisation. Don't throw the baby out with the bathwater. Not even the ideas behind the corporation itself should be entirely scrapped; the ability of a group of people to pool their resources for the purposes of a business venture is very useful. The system that supports the capitalisation of business ventures, however, could afford restructuring. It's broken, but don't worry... a lot of the parts of the system can still be recycled. Furthermore,

Since no government is going to impose carbon taxes, the entire green tax strategy collapses because, as Hawken, Brown and Cairncross freely concede, profit-seeking and environmental protection are irreconcilably opposed. Yet the worst problem with the carbon tax idea is that even if serious carbon taxes were actually imposed,  there is no guarantee whatsoever that they would reduce greenhouse gas emissions because they would do little if anything to stop overall growth and consumption.

Hawken, along with Lovins and Lovins, in Natural Capitalism consistently stated that profit-seeking and environmental protection are complimentary. The statement that Hawkins concedes the opposition of environmental protection and profit-seeking is a patent falsehood, and draws hyperbolic conclusions from limited statements. As I've stated above, and has been proven by real-world results, profit motive goes hand in hand with waste reduction and efficiency, which is good for the environment. To state that a call for full-cost accounting - that would likely drive the coal industry out of business - is equivalent to stating profit and environmentalism can't coexist is extrapolating a great deal. A common example cited is that of the whale oil industry. Whale oil did not disappear because we ran out of whales. Whale oil disappeared from the market because a lower-cost alternative appeared. Smith's fallacy here is to assume that the death of an industry is the death of an economy. This reasoning is hyperbolic in the extreme. Sometimes industries simply pass away to new types of industry - but the demand remains. Coal fills a demand. Another substance can fill that demand. Given time, when coal becomes scarce and scarcity combines with carbon taxes to make alternatives more marketable, the coal industry will die - and yet, there will still be another industry to supplant it. More interestingly... there will still be coal in the ground when coal becomes irrelevant.

I could go through the paper at this point and examine it paragraph by paragraph, but the fact is that Smith repeatedly comes back to the basic point with which I agree, if defined specifically: corporations (not capitalism) are unable to sacrifice growth now for any gain (not just environmental protection) later. He also comes back repeatedly to one point that is simply incorrect, which is that environmental protection and profit motive are irreconcilable. Finally, he persists in making the hyperbolic claim that the death of fossil fuels is the death of the global economy. As for the first, we know I agree. As for the second, Smith extrapolates this "fact" from statements made by leaders in the Natural Capitalist camp that have been overextended through the use of his third point, which is, of course, hyperbole. Certainly, our environmental impact is huge, and there is a definite problem with our overconsumption of resources. Smith supports these statements (to a degree) with stats. I do not see any substantive support for his claim that the death of the coal industry would mean the death of the global economy. I realise I'm simplifying the claim, but there is not much more substance to it than "lots of jobs rely on carbon, and losing carbon would lose those jobs". Coal is simply one part of an ecosystem, and nature despises a vacuum. When the death of coal makes a niche in the economy, something will already be moving in to fill it.

Large corporations act like apex predators or climax communities in the global economic ecology. In a purely capitalist system where there are no controls, the system naturally moves towards monopoly, which is the natural climax community of unrestricted capitalism. Each new market would, just like the succession of seral communities, begin with small opportunistic pioneers (high-risk small-scale entrepreneurs), and proceed through to stable domination by a single main species. Species that become dominant develop strategies to protect their dominance in an ecology, just as large corporations do. They all seek to derive maximum energy (or profit) from the system through maintaining their central position in the ecology. This may mean spending some energy in fending off species that might encroach on their monopoly of a given source of nutrients/profit. The more we proceed toward an apex community of business, the more the business model is dominated by risk management than risk taking. Pioneers and many start-ups benefit from a highly risky environment precisely because they take that initial risk and are able to prosper in an area devoid of competition. Large companies are inherently cowardly, and prefer to allow smaller companies to take risks for them, and then acquire the smaller companies once they have proven their model to be successful. Global corporations inhabit this climax community of business where the dominant strategy for maximising returns is preserving the existing ecology.

I have a good friend who likes to say "Nature's smarter than you", and he's right. No matter how much I want to, I am not able to have much of an effect on how an ecosystem chooses to derive its nutrients from its environment. Something will always fill a niche and derive the maximum benefit possible from it. I can, however, make it tough for the stuff I don't want to live there and make it easy for the stuff I do want to live there. Nature does things nature's way, just like the business community does things the way it does. I've seen rampant capitalism here in China, and profit motive reigns supreme. A new regulation is simply a new chance to make a margin on something. Here, just as elsewhere, the market derives its nutrients from margins, and that simply is a fact of life that can't be changed about the market. What I'm trying to say is that the market, capitalism, is natural. Corporations are a mild perversion of capitalism that have shown themselves incapable of adapting to long-term profitability because they deny the true nature of the market: the market is about profit, not deriving wealth from share value. That disconnect is far more grievous than the straw man disconnect between environmental concerns and profitability. Perhaps the most grievous of all, though, is Smith's final recommendation, that:

The huge global problems we face require the visible hand of direct economic planning to re-organize the world economy to meet the needs of humans and the environment, to enforce limits on consumption and pollution, to fairly ration and distribute the goods and services we produce for the benefit of each and every person on the planet, and to conserve resources so that future generations of humans and other life forms can also live their lives to the full.

Central planning. All my talk about markets being nature? The concepts of central planning have been refuted by history precisely because they deny the force of nature that is the market. If you make a law against it, you don't create economic abstinence, you produce a black market. If you establish a cap, you simply create bribery cases against regulatory officials. I have seen it time and time again, and not only in China (though this is a superb example of an over-regulated market that heeds not its helmsmen). Market forces are immutable. Illegal drugs are still openly available even though there are rules against them. The best thing to do is to work with the forces of nature, guide the development of the market, perhaps remove a tree here or a shrub there to encourage new growth. I assure you, the patch of earth that is left behind will be a verdant green in a few months' time. Niches will be filled if they are profitable, and where there is a margin, there will be business. Policy must guide the type of "plant" that fills that niche, not tell the trees they can only grow so high. I assure you, no matter what you do, they won't listen.

Fiscal Responsibility - Part 1: Wealth Redistribution, Chapter I: Income Tax

This is the first part in a series on what I think the important issues are in Canada at the moment... that don't seem to be talked about by any politicians. These policies are aimed at sustainability, but I think address many needs of Canadians simultaneously. Right off the bat, the topic that seizes my attention is the size of the budget deficit over the past couple years. Now, Paul Martin was a lot of things, but he did balance the books. With Canada knee-deep in recovery (and having weathered the economic crisis very well), we don't currently seem to have much money in the treasury to show for it. Partly, it seems a decrease in the GST to 5% diminished revenues somewhat. It certainly doesn't account for the whole deficit, not by a long shot, but it's something. Canadians are not afraid of taxes if they get reasonable services. We shouldn't fall into the the Reaganomic trap of outspending and undertaxing the populace to leave political opponents with a bitter debt pill to deal with that hobbles their chances at reelection. My concept for fiscal responsibility urges we pay a bit more for a couple years in order to create virtuous circles of positive economic feedback. These concepts argue for a new definition of fiscal responsibility.


If you think about it, most of the laws we live by have been made to protect our ability to plan ahead and take calculated risks. This is done in three basic ways: to redistribute wealth, to provide fundamental services, and to construct infrastructure. Redistribution of wealth is necessary because it increases the total number of consumers (welfare), increases the amount of money available to purchase goods, and primes the pumps of local economies (stimulus). Services that defend against crime, ill health, and unemployment are necessary because these ills hurt the economy; damage or devalue human, corporate, or natural capital; or diminish the ability of a person to participate in the economy. Infrastructure construction is necessary because it assists in the flow of goods and commerce (roads, railways, and ports), increases our ability to participate in the economy (schools, electrical lines, and telephone lines), or because it is a hedge against future misfortune (fire hydrants, breakwaters, and reservoirs). As the first part of this discussion, I'd like to talk about redistribution of wealth.

REDISTRIBUTION OF WEALTH: 
Personal Income Tax - from the rich to the poor.

Every nation in the world has a Byzantine labyrinth of taxes, user fees, subsidies, duties, and rebates. This reality reflects the concept of the central government as a redistributor of wealth. Income tax was the source of about 28% of total Canadian federal government revenue in 2009, and 51% of all tax revenue. Income tax is the largest segment of Canadian government revenue, period. Greater amounts of government revenue could be raised by either a) increasing total taxation, b) moving tax brackets into lower incomes, or c) increasing salaries across the board. Neither a nor b are palatable scenarios. In the case of c, increasing the lowest salaries would have the most telling effect, as they are both numerous and currently untaxed. In 2007, the lowest quintile of the Canadian population earned an average of $7900 per year, meaning that far more than half of this population paid no taxes at all. In 2007, with about a 33M person population, the families that comprise a population of over 6.6M souls mainly paid no taxes. Moving that 6.6M people into the next tax bracket would increase revenues a great deal. Emancipation from wage slavery should therefore be in the interest of the federal government, as it increases this "user fee" income. The inverse is also true - the topmost salary bands should be taxed further in order to assist in this emancipation of the working poor.

We have seen it again and again - the rich don't create jobs when they get more money, they just get more money. The middle class is (to put it cynically) the group of people who have enough income to sustain the payment of taxes, but not enough income to avoid them through write-offs and tax shelters. That means that the elevation of the working poor into the middle class is the surest way to increase tax revenues. This is true of both income and consumption taxes: higher income naturally means higher income tax, but it also means more money available for consumption. Only a select few can pull themselves up by their bootstraps. The rest could use a little boost from a more equitable tax regime. The money the government needs to do that is found in the top-earning income quintile. The lowest fifth of the population made 11 times less - in 2007 (see p. 81 of the linked document), on average - than the top fifth of the population. Equitable income taxes are one tool to get income equity done.

In 2011, the tax brackets are:
$0 – $10,382  (0%)
$10,383 - $41,544  (15%)
$41,544 - $83,088  (22%)
$83,088 - $128,800  (26%)
over $128,800  (29%)

I am constantly left wondering why we stop the tax brackets at $128,800. We need to decide that, at a certain point, money no longer becomes an incentive to do more business, it simply becomes an incentive to make more money. What we require, in order to prime our fiscal responsibility pump, is a more strict progressive tax regime. Often people who argue against high tax brackets for Canadians in the upper income echelons argue that capital flight would occur if taxes were drastically raised. I don't agree, but let the evidence speak for itself: for example, Finland's tax brackets hit 30% at only about 66k Euro. New Zealand hits 39% at 70k Kiwidollars (45% for people who fail to fill out a claim form). Australia taxes 45% over 180k Aussiedollars. As a matter of fact, 45% as an upper limit is in no way abnormal. Denmark goes as high as 60% on amounts over about 36k Euro. Certainly Denmark seems to have a draconian tax system from the outside, but how many people are fleeing Denmark's tax system? A unifying factor in all these nations is that they are rather nice places to live, with stable and mature economies and a reasonable prime interest rate. That's the carrot. The stick is that there are progressive tax rates elsewhere, so the grass is not necessarily greener. Add to that the fact that tax evasion is a crime, and the Canadian government can deny passport privileges to criminals... and the cons of fleeing taxes are outnumbered by the pros of just paying up. If we accept the most draconian 60% as a maximum upper limit of taxes payable (as in the Danish example - nobody can pay more than 59% of their gross income in tax, meaning that at the highest levels, payments toward all other taxes can count as deductions on income tax), the highest level tax bracket could begin at somewhere between 200-500k CAD.

In the long run, however, a more progressive income tax system is only the first phase of a more equitable taxation regime. Consumption taxes are better than income taxes for two reasons: one, people simply have more money in their pockets to do with as they please when their income tax is lower. Two, consumption taxes can be used as incentives to change behaviours. The first is important, the second is extremely useful from a sustainability standpoint. I will come back to this later, but the end goal of this tax regime is to guide the market into sustainability by gently influencing purchasing behaviour. Within this greater goal, the purpose of a more progressive tax regime, therefore, is to give the government a big enough head of steam - that is to say, surplus - to implement the necessary shift to greater reliance on consumption taxes. First among these changes would be the reinstatement of a 7% GST, the scrapping of GST refunds, and the elimination of the "Value Added Tax" traits of GST. In short, make the GST a flat tax on all purchases, period. The progress of these changes would be gradual, but offset by an overall surplus in government revenues. For lack of a better word, I'd call this redistribution regime a "Robin Hood" Rebate program.

Higher sales taxes hurt lower incomes most. The gradual reduction of government reliance on income tax should therefore occur from the bottom up. There must be enough surplus in the treasury to play with to be able to effect these changes. The surplus would be used in part to pay down debt, but also in part to pay up those in lower income brackets. Up to the limit of the surplus, all taxes paid by the lowest tax bracket would be reduced by an equal amount. This may mean that some taxpayers at the very bottom of the bracket end up making back slightly more money than they paid in. This could act as an incentive to the lowest wage earners to jump into the first taxpaying bracket. The Robin Hood Rebate would be tacked on to the taxpayer's normal tax refund. Lower income taxpayers have to spend a greater proportion of their funds on necessities than the rich. Lower income brackets are, therefore, more likely to spend on consumer goods, by proportion, than higher income brackets. This means more money enters the market for consumer goods, and the amount of sales tax collected increases. With an increase in sales tax, the Robin Hood Rebate increases. A virtuous circle is created, allowing for the overall decrease in reliance on income tax.

Gradually, over a period of five to ten years, the system could be brought into balance such that income taxes are reduced, and at the same time, revenues from consumption taxes are increased. The progressive tax regime gives more to the low income earners and takes a bit more from the high income earners, so it's a program that moves wealth "from rich to poor". The complimentary system to the personal income tax system is the network of consumption taxes that will guide market behaviour. Consumption taxes are not just the GST. There are liquor taxes, tobacco taxes, and fuel taxes, to name a few. These taxes are levied to cover the extra costs these substances incur society. The next part of the wealth distribution is not about moving wealth from "rich to poor" but from unsustainable activities to sustainable activities.

Life Support

Back in the Cold War, there were just two megaregions: "Capitalism and friends" and "Communism and friends". There are a few more major political systems operating in the world today, chief amongst them being that of the USA and its close allies - the ostensible winners of the Cold War. Nowadays, we can add to that the EU, India and environs, China and environs, the Gulf and Maghreb, and those few outliers who dabble their feet in two or more ponds. I recognise other groupings such as BRIC and the Nonaligned Movement as political forces in their own right, but (unlike a Political Scientist) I won't find some methodological sleight-of-hand to remove them from my analysis. I'll simply say that I don't think they are that important to the discussion of politico-economic systems. They seem more like coalitions of convenience than genuine blocs.

The United States (and friends) won the Cold War, which, for many, validated its economic and political system. As a matter of fact, people still backhandedly compliment China on being an autocracy that can actually function economically. It appears that to many people, the outcome of the Cold War had ended discussion on the matter: you need to be a democratic free-market to survive. It's clearly not true now, and it wasn't true then. The Gulf has proven you can be a rich kingdom without any trace of real democracy. India, confusingly, is one of the oldest democracies and yet has generally failed to get particularly rich. What gives? Shouldn't this have been decided long ago?

Well, in a word, no. The Cold War wasn't a battle of which system was "better". It wasn't a competition to determine the best way to run a country. It was much more like a drinking contest. The last nation left standing wins. It doesn't mean that nation doesn't leave the contest dead drunk... it just means it walks away as opposed to being carried. Another analogy might be a pair of aging siblings who have named one another executors of their wills. The one who lives longest gets the spoils... but is still close to becoming topsoil themselves. The battle between systems is a game of who dies last, not who is correct.

Certainly, over a long period of time, one could argue that systems undergo a form of Darwinian selection that winnows out the ineffective and allows the effective to propagate. Perhaps that is true to a degree. But if we accept a Darwinian answer to the problem of the propagation of political systems, then what traits does it appear the ecology of nations privileges over others? Historically, it seems that the capacity to produce (food or rubber duckies or what have you) seems to be a major determining factor. Agrarians had the advantage of population over hunter-gatherers. The factories of England had material advantages over the artisanal manufacturing processes of the Zulus. The economic engine of the United States had more feedbacks and self-regulating processes than that of the Soviet Union, and ended up being far more productive in every sense.

But this fact presupposes something. If we accept that systems are promoted to the ranks of posterity by Darwinian processes, and then accept that the ability to be productive is one of the chief (if not the single) reason that nations tend to succeed other nations... then we are admitting that the Realists were right. This is simply because the ability to out-produce someone is only a useful trait when competing with them. If the overarching arena in which systems and nations compete was not zero-sum and competitive, the capacity to outproduce would not be a primary factor for selection. It might, for example, be the capacity to cooperate... if that is what we as tribes of humans had evolved to do.

I suppose we have selected systems that allow nations to cooperate, but seldom is it that the overarching systems themselves cooperate with one another. To be more specific, they may cooperate initially, but they don't cooperate with one another for long. Eventually, the worm turns. The USSR wasn't terrible... until after WWII. Prussia wasn't a problem... until it unified and built a fleet. Sometimes a system is comfortable coexisting with another system... up to a point. Eventually, the systems diverge on something, and all hell breaks loose. That's when the ability to outproduce the other guy comes in useful. At some point, you're going to have to lay it on the table.

So now we have several nations competing within blocs of - generally - similar systems. Again, I'm purposely ignoring the countries with different systems who get together, mainly because I believe they join together opportunisticaly rather than systemically. OK, fine, it's a sleight-of-hand, but it sounds right to me. These systems are not really competing to prove which is the most effective through some kind of footrace analogy. The system that is left standing will be that which survives, not which reaches X GNP per capita. Nations within the systems that are competing are expending massive amounts of energy for a competitive advantage. Typically, that competitive advantage comes from production, and production relies on access to primary resources.

Chief among the primary resources are those that produce energy: oil, coal, and yellowcake; those that produce food: arable land, fresh water, and coastline; and those that nourish industry: iron, copper, nickel, coltan, platinum, and gold. Of these, only the first two are hard limits. That is to say that production of stuff can occur without the raw materials I noted above. Resources and food themselves can be sold for a profit, and simple products can be made without the need for large supplies of metals or chemicals. Food and energy, however, are game-changers. Without either, the economic engine of the nations - and therefore the system - hits a brick wall.

Everyone is with me so far: without energy or food, a nation basically bows out of the contest and takes up, at best, a supporting role in the Great Game. Worse still, it may take a bit part as an extra in someone else's hinterland. No wonder that China is seeking oil concessions wherever it can get them. It's why China is active in the Marshalls and in Africa, the places where it might be able to get a marginally secure source of oil. It's the reason for China's interest in the Senkaku Islands. This is equally true in the inverse: the systems competing against China's are all interested in the denial of this same resource to her. As a matter of fact, China was looking for a route for a Caspian pipeline before 2001. A seemingly random act of warmaking intervened when several western nations entered Afghanistan. The USA signed on a bunch of other 'Stans - you know, the ones that happen to be between China and the Caspian Sea - as allies. That Caspian pipeline ended up taking a lot longer than China expected to get going.

A problem with today's food stocks is that their existence is more or less predicated on the existence of fossil fuels. Fertiliser is affected by potash and urea prices, but a major component of fertiliser manufacture is methane. Ever since the Green Revolution, this has been the case. So really, energy is perhaps even more important than food itself. It not only helps us make, move, and sell our products... we eat it, too. But there is a further problem with this situation. Fertiliser, as I have said before, is becoming less and less effective as time goes on. We are losing topsoil year on year, areas of the very limited arable land on the planet are becoming deserts. Like it or not, the application of further fertiliser will not increase yields, and as the biota of the soil are strangled out of their once diverse and rich habitat, yields will only get worse. The world has already been through a food shock, and we will likely do it again this year.

So, who will be the one who survives? Oddly enough, the one that can feed itself will probably end up being the winner this time around. Europe and North America can thank their governments for keeping farmers subsidised and yields high enough for export. While I am not a fan of farm subsidies, they certainly have proven themselves strategic investments. As for China, she is feeling the pinch of rising food prices. But then again, so is Europe and North America. So what would be the competitive advantage that would set one system above the others? One would be the elimination of fossil fuel inputs in the agricultural stream so output can remain high without relying on a product with a price driven by gas. The other would be the adoption of efficiency measures to make all energy inputs go farther. In short, the competitive advantage is sustainability.

The interesting thing about sustainability, as a practice, is that it's intrinsically non-competitive. It is a concept that envisions reversing the tragedy of the commons and instead has nations competing to take less stuff as opposed to more. It avoids more and steeper competition for natural resources. Through Darwinian selection in a competitive zero-sum system, it could be that the answer to this entire dilemma is completely counterintuitive: cooperation is actually the most effective key to survival.

"Burning down your house to generate heat"

An excellent post by blogger Ian Welsh.

"An actual capitalist society (which we do not live in) makes cashing out very difficult.  You don’t want people creating money by destroying value, and you don’t want viable ongoing concerns arbitrarily destroyed or weakened.  Whenever a company is bought out by borrowing the money, then making that company take on a loan to pay back the original loan and then another loan to pay the buyers even more money, money has been extracted while value has been destroyed (layoffs and other cost cutting inevitably follow)."

Great analysis of a problem central to our current economic system - that we sacrifice capital for currency. Just like in an ecosystem, the greater the amount of capital, the more of a buffer we have against shocks, and the more carrying capacity the system has. The more capital exists, and by that I mean ALL capital - natural and man-made, the richer the economy and the greater its ability to support life. The company that sacrifices capital to make a profit is, in effect, eating itself.

City States

I challenged several friends to come up with a city-state that wasn't rich. We all failed to find any.

Let's get a list to start with:
Argentina - Buenos Aires
Australia - Canberra
Austria - Vienna
Belgium - Brussels
Brazil – Brasília
Ethiopia - Addis Ababa and Dire Dawa
Germany - Berlin, Hamburg, Bremen
Russia - Moscow, Saint Petersburg
Switzerland - Geneva, Basel-Stadt
United Arab Emirates - Abu Dhabi, Dubai (et. al.).
India – Delhi, Chandigarh (Union Territories)
Malaysia – Kuala Lumpur, Putrajaya, Labuan (Federal Territories)
Mexico – Mexico City (being the Mexican Federal District)
Nigeria – Abuja, Federal Capital Territory
Pakistan – Islamabad (being the Islamabad Capital Territory)
United States – Washington, D.C.
Spain - Ceuta, Melilla (enclaves)
China - Hong Kong, Macau, Shanghai, Tianjin, Beijing, Chongqing

I populated this list with cities noted from wikipedia, but also added the four "Prefecture-Level Municipalities" of the PRC: Shanghai, Tianjin, Beijing, and Chongqing. First off, what's the best way of determining "rich"? I'd have to say that if the GDP of the city is greater than the national average by a substantial margin, we can consider that city relatively rich. How do the cities stack up?

Buenos Aires makes close to 4x the per capita GDP of Argentina.

"Canberra households had the highest average income of any capital city."

In Germany, Berlin: €24,900; Hamburg: €48,600  (highest in Germany); Bremen: €38,200 (second highest in Germany)...

In China, Macao and Hong Kong are #1 and #2 respectively for per-capita GDP. Shanghai is 8th, Beijing 17th, Tianjin 23rd, and Chongqing 74th respectively. The average per capita GDP in China is between $7400-7500 USD (PPP) depending on whether you trust the world bank or CIA world factbook. All of the cities named above are above that line by at least $1000 USD except Chongqing, which is substantially under.

I ask anyone who reads this to look up the other locations... it seems there is something here. I've got to go back to Thinking in Systems so I can be read up for my next Amazon shipment!

Last of the Jane Jacobs Books

I finished Dark Age Ahead on the plane up to Beijing. This work has a lot more of Jane in it, and a lot more Canada. I have to admit, there were a number of things that moved me deeply, and I can't help but be affected by what she calls the "provincial kleptocracy". The type of bookeeping provinces are able to keep makes it nigh impossible to trace what is done with a lot of money transferred from the federal government. Only about 6% of the money collected by the government from Toronto, for example, actually goes back to Toronto. While we can make fun of the bluster and silliness of Rob Ford, there is one thing that links him to every other mayor of Toronto... his job basically necessitates he go cap in hand to the province for money, because the only way he can raise money is through property taxes and user fees... and user fees don't really pay for much.

Jacobs makes the point that government close to the population does the best service for the population. Cities provide direct services to Canadians. Whereas Health and Education have tidbits of themselves at every level of government, Calgary has the Calgary Health Region and the Calgary School Board - not the Alberta Health Region and the Alberta School Board. Why does the federal government constantly have to give earmarked money to provinces instead of disbursing extraordinary financing (financing outside the official budget) directly to cities? There is nothing to stop them from doing so except the ire of the provinces themselves. Provinces can't smear the central government much if the fed is giving money directly to the cities filled with voters.

The overall budget of Calgary is (net) $774,281,300. That's less than a billion dollars net expenditure. The federal government is spending $280 billion. $19 billion of that is on stimulus packages. It would be a drop in the bucket to give back money to the cities. Imagine a payment of $1000 per capita directly to each municipality from the treasury. That's a grand total of $32 billion. Slightly more than 10% of the natioal budget to make certain the most essential services Canadians require are protected and improved.

Local governments all have local problems. Luckily, they have local thinkers who can devise local solutions. By devolving this tax money back down to the municipal level, each city would be able to solve its problems in its own way, as opposed to overarching programs that may benefit some municipalities and leave others behind. Some issues are purely local.

During the recession, Canada lost jobs overall. This is a useful metric for the nation to show that there was an economic slowdown, but if you break it down, you'll see the overarching picture is not the picture in the regions. Ontario lost 71,000 jobs in the Dec 2008- Jan 2009 period. Alberta gained 3300. BC lost 35,100; Saskatchewan gained 1600. Where is the stimulus required most? These numbers are terribly disparate. I tell you what would be even more of a spanner in the stats... what if we knew what was going on in each city?

The purpose is not to illustrate that cities should be the ones to go about creating jobs - though they could. The intent here is simply to show how the Canadian economy is in no way monolithic, and different regions respond differently to complex economic situations. We should help the regions better deal with these conditions by allowing them the financial leeway to solve their pressing local problems. One size doesn't fit all.

End of the Profit Motive

I'm a reasonably staunch capitalist, and as such, I think the profit motive can be quite useful. Notice I say "useful" and not "good". A hammer is always useful, but only good if it hammers nails. It's evil if it hammers people. Same thing goes for profit motive.

A lot of people blame a lot of corporate greed and malfeasance - especially the most recent economic scams, from Enron to Goldman Sachs - on the profit motive. This blame is partly misplaced. Corporations no longer exist based on the profit motive. The profit motive exists in people - not in corporations. Corporations are made of people with a profit motive. Shareholders want to make the most money they can for themselves. They choose a CEO and structure his salary so that he's got a base income, share price incentives (so he gets paid more when share price goes up), and some stock options of his own. CEO Maxwell wants to make the most money he can for himself. He gets a salary and a bonus based on share performance, and a pile of company shares. He will have only a short time in his position - maybe 6.5 years, perhaps closer to the average 540 days of the last few Goldman Sachs CFOs. How does he maximise his profit in that framework?

Well, for one, he can increase share value. It makes sense. The board of shareholders wants share price to increase, and the CEO's salary is structured to privilege increasing share prices. It's a no-brainer. Button up, stop the outflow of cash, streamline, conquer new markets, widen the profit margin. What a great story to put in Maxwell's next quarterly report!

But all the work is only occasionally noticed. As a matter of fact, Maxwell starts to realise that - no matter what he does - his shares only really move when something good or bad is reported about the company. What good is it if people don't know about all the cost-cutting measures Maxwell is implementing? So the next step is a no-brainer. Invest in a sweet communications strategy. Press releases! Ads! Focus groups! Surveys!

Then Maxwell relises that everyone is doing that. The ecology is full of press releases and most don't get published or noticed at all. It's supply and demand, Maxwell! The greater the supply, the lower the relative demand - in this case, for information. Poor Maxwell... he increased his costs for only marginal share value increases. He did learn something though: he learned that shares start moving when the news does. He learned that share value has little to do with profit, cost-cutting, or market viability. Shares are a speculation based on information, not fundamentals. CEO Maxwell has a control of the fundamentals from his mighty helm in the boardroom - but he can't control the news.

Or can he?

He has the regular forum of the quarterly report. Since that's numbers, nobody could fudge that in a way that the shareholders wouldn't notice, right?

Right?

...so, maybe what I'm saying here is that - if you look at it from a human perspective - the current system incentivises financial fraud. Profit motive is a human trait, not a corporate trait. Corporations do what their humans tell them to. The humans who own corporations own them through shares. The share owners want their value to increase. They create incentives for their helmsmen to increase share value. The helmsmen discover that share values aren't based on facts, they are based on interpretations. The helmsmen then set about manipulating those interpretations.

All of a sudden we've gone and given CEO Maxwell a silver hammer.