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What Can Be Done About Canada’s Debt Problem?

Presenters at last year’s C.D. Howe Institute’s conference on Canada’s debt problem had some pointed advice for our federal and provincial governments:

  • Canada’s public debt should be reduced about 10 percentage points of Canada’s GDP to ensure fiscal policy can be used to cushion the effects of future economic crises. Since major crises happen frequently, prudence suggests that the target should be achieved before the decade is out.
  • Tax increases harm economic performance, so elimination of public spending that does not provide enough benefits to offset this damage should be the first step in reducing deficits and debt. This will require undertaking comprehensive value-for-money assessments to identify wasteful spending.
  • Post-conference analysis found that achieving this prudent debt target would require increasing the combined federal-provincial primary balance by 1.4 percent of GDP, or $43 billion, starting in 2025/26. This amount includes a buffer – ensuring an 80 percent probability of meeting the debt target – to account for inevitable economic downturns, other crises that raise deficits and debt, and the uncertainty posed by fluctuating interest rates on financing costs.
  • The conference was one of four on deficits and debt held in Canada over the past 40 years. A clear and consistent message from these conferences – which politicians have yet to fully absorb – is that debt has economic costs and, therefore, imposes a burden on future generations. In this Commentary, the authors report on, and offer their analysis of, the findings of the latest conference.

Introduction

Does Canada have a debt problem? The answer from a recent C.D. Howe Institute conference is a resounding “yes.” Canada’s public debt should be about 10 percentage points of GDP lower to ensure sustainability. Given that major crises, which put upward pressure on deficits and debt, happen frequently, this target should be achieved before the decade is out.

The May 2024 conference was one of four on deficits and debt held in Canada over the past 40 years. Each aimed to provide guidance to policymakers on managing deficits and debt. While a common thread was concern about the economic cost of public debt, each conference provided context-specific policy advice.

The first conference, “Deficits: How Big and How Bad?” (Conklin and Courchene 1983), occurred when debt levels were rising rapidly but still relatively low. The key policy issue then was whether fiscal consolidation or expansion to support the economy was appropriate.

In the 1994 conference, “Deficit Reduction – What Pain, What Gain?” (Robson and Scarth 1994), and the 2002 conference, “Is the Debt War Over?” (Ragan and Watson 2004), there were clear recommendations to reduce debt levels. In 1994, this was motivated by concerns over economic damage caused by debt approaching 100 percent of GDP and questions about fiscal sustainability. By 2002, although the debt ratio had fallen substantially, further debt reduction was still advocated to reduce the burden on future generations who will not benefit from the spending.

A combination of discretionary measures and sustained economic growth led to a substantial reduction in the combined federal-provincial debt ratio from 2002 until the global financial crisis of 2007-2009. The debt ratio stabilized at a relatively high level after the crisis until the pandemic. The massive increase in debt during the pandemic and subsequent government spending raised the overall federal-provincial net debt ratio to about 75 percent of GDP, nearing levels from the time of the “Debt War” conference. This surge, combined with concerns about further increases, refocused attention on debt sustainability. This concern was reflected in the May conference, “Does Canada Have a Debt Problem?”, which recommended a debt target based on the need for fiscal prudence.

The latest conference included sessions on the economic costs of debt, the sustainability of federal debt, guidance for policymakers on a prudent and fair debt target, and reforming the federal fiscal framework. However, given the one-day format, not all issues could be thoroughly addressed. This report not only summarizes the proceedings but also fills some gaps by providing additional analysis to complement the presenters’ advice.

Economic Costs of Public Debt

Interest expenses were central to the analysis by University of Calgary economist Trevor Tombe of the economic costs of public debt. Interest paid on the public debt is often considered a transfer among individuals with no real impact on the economy. However, higher interest payments for a given level of program spending necessitate higher taxes, which harm economic performance by affecting incentives to work, save and invest. If not financed by tax increases, higher interest payments will crowd out valued program spending.

When discussing the opportunity cost of interest payments – the benefits of lower tax rates or higher program spending – Tombe cited work by Dahlby and Ferede (2022). They estimate the economic cost of raising an extra dollar of tax revenue, referred to as the “marginal cost of public funds” (MCPF). The MCPF includes both the dollar taken from the private sector and the loss in output per dollar of tax revenue raised due to reduced incentives to work, save and invest. Higher taxes shrink the tax base not only because of reduced economic activity but also due to efforts to reduce taxable income without changing economic behaviour.

Dahlby and Ferede (2022) find a very high cost from raising taxes. For the corporate income tax, the federal MCPF in 2021 was approximately two.1The MCPF from raising the top federal personal income tax rate has been higher than its corporate tax counterpart since 2012, when the corporate tax rate was reduced to 15 percent. The gap increased in 2016 when the top federal marginal personal income tax rate increased to 33 percent, pushing the MCPF to about 2.9.

The federal government expects to pay $54.1 billion in public debt charges in the current fiscal year. The economic cost of these payments is substantial. If the opportunity cost of these payments is lower corporate income taxes, their economic cost would also be about $54 billion. If their opportunity cost is a lower top personal income tax rate, their economic cost would exceed $100 billion. If the contribution from corporate income and top personal income tax were equal, the economic cost would be about $75 billion.

Other costs of public debt arise from a reduction in the national savings rate, which is the sum of public and private sector savings rates. Government deficits represent public sector dissaving, so with a constant private savings rate, national savings will decline when governments run deficits. Tombe highlighted the impact of lower national savings on investment, presenting data showing a negative correlation between debt ratios and investment ratios across countries (Figure 1). He stated there is “probably” a causal relationship between higher debt ratios and lower investment ratios.

Although Tombe did not elaborate, there are reasons to be circumspect about asserting causality. One reason is that the private savings rate may rise in response to budget deficits if economic agents anticipate higher future taxes to service the debt. Households might increase savings in anticipation, partially offsetting the decline in national savings. There is evidence that expansionary fiscal policy is partially offset by increased household savings. Johnson (2004) concluded that household savings would increase by 30-50 percent of the increase in government debt. In a recent study of fiscal expansions in the Euro area from 1999 to 2019, Checherita-Westphal and Stechert (2021) found that 19 percent of a fiscal stimulus is offset by higher household savings in the short-term, rising to 41 percent in the long-term.

Another reason for being cautious about inferring causality is that in an open economy, a decline in national savings does not necessarily lead to lower domestic investment, as any shortfall can be offset by borrowing from abroad. However, interest payments on borrowed funds and the return on foreign-owned capital reduce national income. An additional cost arises because the resulting current account deterioration must be offset by higher net exports, which requires a reduction in real wages in the export sector.

To complement Tombe’s analysis, we present an estimate of the economic cost of reduced national savings. In a closed economy with constant household savings, a budget deficit leads to a dollar-for-dollar crowding out of investment. Using historical returns on capital and assuming that national savings decline by 60 percent of the deficit due to offsetting increases in household savings, the $1,372 billion in federal net debt in the current fiscal year would have an economic cost of about $90 billion.2 This calculation does not capture the impact of lower capital intensity on productivity, so it underestimates the true cost.

If foreign savings offset the decline in national savings and foreigners invest directly in Canada, they receive the return on this capital, so the gross economic cost remains the same. However, the return is subject to corporate income tax, so the net economic cost would be about 25 percent lower. If Canadian firms borrow abroad to finance domestic investment, the economic cost is the interest paid to foreigners. While gross interest payments to foreigners will be less than the return on capital unless there is a large country-risk premium, interest payments are taxed more lightly.3 Therefore, the net economic cost may not differ substantially.

An additional cost of accessing foreign savings arises because higher capital servicing charges put downward pressure on the current account balance, which must be offset by an increase in net exports. In a small economy, export and import prices are determined in world markets, so the increase in net exports requires a decline in real wages in the export sector. However, if a country’s exports have unique features, increased supply can lower export prices, adding to the economic cost of borrowing from abroad (Burgess 1996).

Calculating the economic cost of investment crowding out when foreign borrowing is possible as the net-of-tax return on capital paid to foreigners establishes a minimum cost because it excludes the reductions in real wages required to increase net exports. The minimum cost would, therefore, be 0.75 x $90 billion = $68 billion, where the $90 billion reflects the economic cost of lower investment, adjusted by a factor of 0.75 to represent corporate income taxes on the returns paid to foreign investors. The $75 billion cost associated with raising taxes to finance higher federal interest expenses does not change with the availability of foreign financing, so the overall cost of the federal debt is approximately $142 billion, or 4.7 percent of GDP in 2024/25.

A similar calculation can be performed for overall provincial debt. In 2021/22, provincial net debt amounted to $784.7 billion, with debt service charges of $30.6 billion. Using the same weighted average economic cost of taxation as for the federal government, the economic cost of provincial debt service charges was $42 billion. The cost of investment crowding out adds another $39 billion, bringing the total cost of debt at the provincial level to $81 billion, or 3.2 percent of GDP in 2021/22. Assuming provincial debt remains at the same percentage of GDP from 2021/22 to 2024/25, the overall cost of Canada’s debt is about 8 percent of GDP.

Benefits of Debt and Its Optimal Level

Tombe also discussed the benefits of public debt, noting its role in financing long-lived assets, stabilizing the economy and smoothing tax rates over time. Governments should borrow to finance investments that will benefit future generations and should finance current expenditures out of current taxes. Spending on education, health and knowledge creation raises special concerns because it benefits both current and future generations. However, since each generation must make these investments, financing them through current revenues typically aligns with the benefit principle.

Counter-cyclical fiscal policy enhances social well-being by mitigating costly deviations from full employment. Additionally, governments can reduce the harmful effects of distortionary taxes by keeping them stable. Since the efficiency cost of taxes is higher when rates are above average than when rates are below average,4 governments should set tax rates at levels sufficient to support expected spending over the cycle and allow deficits to rise and fall in response to unexpected expenditures.5

An issue absent from discussions at the conference was the role of public debt in addressing market imperfections, which can improve efficiency. One such imperfection is the lack of adequate insurance markets against individual-specific wage income losses. As a result, individuals “self-insure” by increasing savings, which is more costly than paying the premiums in a well-functioning insurance market. Public debt puts upward pressure on interest rates and provides a safe savings instrument, allowing households to reduce their savings closer to the efficient level.

Unlike the efficiency gains from using public debt to stabilize the economy and smooth tax rates, mitigating the impact of inadequate insurance markets may justify a permanent increase in public debt. With a well-functioning insurance market, the optimal public debt ratio would be negative – governments should be net savers rather than net debtors. This would allow governments to finance expenditures from interest received on assets rather than from distortionary taxes.6

Empirical issues raised by the inadequate insurance-market approach include whether correcting the market failure is sufficient to make the optimal debt ratio positive and whether the penalty for deviating from the optimal ratio is significant enough to affect the choice of a debt target. Early analyses of incomplete markets found a positive optimal debt ratio. For instance, Aiyagari and McGrattan (1998) calculated an optimal debt ratio of 66 percent of GDP for the US economy. However, Peterman and Sager (2018), using a model with many of the same features as Aiyagari and McGrattan but incorporating multiple generations with standard life cycles instead of a single generation with an infinite life span, found that net government saving is optimal in the US economy. The main reason for the different result is that individuals in a life-cycle model spend a substantial fraction of their working lives accumulating enough savings to make self-insurance possible, so the benefit from self-insurance is smaller than if infinite life spans are assumed.

These results are less relevant for Canada for two reasons. First, employment insurance and other income support measures are more generous in Canada, so self-insurance leading to excess saving is less of an issue. Second, the US analysis assumes deficits are financed entirely by domestic savings, which is a much less realistic assumption for Canada. Foreign borrowing reduces the optimal debt ratio because it lessens the upward pressure on interest rates, which diminishes the impact of public debt on “self-insurance” savings and raises the cost of debt. James and Karam (2001) modified the Aiyagari and McGrattan model to allow borrowing from abroad, which changes the optimal debt ratio from 66 percent to about -80 percent. This qualitative result – that access to foreign savings reduces the optimal debt ratio – has been confirmed by other researchers (Nakajima and Takahashi 2017; Okamoto 2024; and Cozzi 2022).

This review suggests that the inadequate-markets approach does not reverse the conclusion from standard models that the optimal debt ratio is negative, implying that welfare gains can be realized when debt levels are reduced. However, the studies reviewed indicate that the penalty for deviating from the optimal debt ratio is small. In three of the six optimal debt studies reviewed, it is possible to compare the estimated economic costs. In the Peterman/Sager and Nakajima/Takahashi studies, a one-percentage-point increase in the debt ratio reduces consumption by .003 percent. The corresponding figure in the Cozzi study is much higher, approximately .02 percent. These estimates are very low relative to the estimates presented earlier, which imply a loss of .05 percent per percentage-point increase in the debt ratio.

It seems likely that these models are substantially understating the cost of debt. The benefits would have to be understated by an even larger percentage to overturn the conclusion that governments should be creditors not debtors. Since the argument for incurring debt to improve market efficiency is weak, the debt ratio should be chosen by considering only its impact on generational fairness. However, since debt is one of several factors affecting generational transfers, debt policy may have to deviate from the benefit principle to achieve a desired balance of the well-being of current and future generations.

Sustainability Analysis

High debt also raises concerns about its prudence or sustainability: can the interest expense be financed without requiring tax increases or cuts in program spending in the future? In his presentation, Alex Laurin, the Institute’s Vice President and Director of Research, challenged the federal budget’s claim that federal public finances are sustainable (Canada 2024, 382). The federal government’s sustainability claim is based on long-term projections showing a continuously declining debt-to-GDP ratio, reaching nine percent by 2055/56. Moreover, this trend holds even with less optimistic assumptions about interest rates and economic growth.

Laurin argued that this projection is not a convincing demonstration of sustainability for three reasons:

1) Interest Rate Assumptions: In the base case, the effective interest rate on federal debt (r) remains below the growth rate of the economy (g) for 32 years, which puts continuous downward pressure on the debt ratio. This assumption is inconsistent with the historical record. Over the past 35 and 45 years ending in 2022/23, averages of r-g are positive, at 0.8 and 0.4 percentage points, respectively. Only when the averaging period is extended back to include the high-inflation period starting in the 1970s does the multi-year average turn negative.7

2) Program Spending Assumptions: While revenues are assumed to grow in line with GDP, program spending decreases by about one percentage point of GDP over the projection period, causing the primary surplus to rise and putting downward pressure on the debt ratio. A more realistic “no policy change” assumption would keep the share of program spending roughly constant, allowing an assessment of the sustainability of current spending levels.

3) Exclusion of Economic Downturns: The projection fails to explicitly include economic downturns. Over the last 60 years, Canada has experienced five recessions, each prompting discretionary temporary stimulus measures that permanently increased debt. The policy response averaged 1.09 percentage points of potential GDP for each percentage point deviation from potential GDP (Table 1).

Laurin presented an alternative debt projection, assuming that overall program spending grows in line with GDP from 2029/30 to 2055/56 and that r equals g on average over the projection period.8 With these changes, the decline in the federal debt ratio is less pronounced, reaching 29 percent in 2055/56 compared to 9 percent in the budget projection.

Economic downturns were included in the projection by simulating 1,000 random probabilistic scenarios – assuming the frequency and magnitude of recessions over the past 60 years are representative of the future. Laurin assessed debt sustainability by calculating the probability that the debt ratio remains at or falls below its initial value over the projection period.9 The simulations showed an even chance that the debt ratio will exceed its 2028/29 value late in the projection period. Under the International Monetary Fund’s classification (IMF 2022), Canada’s federal debt would be considered unsustainable.

Some conference participants suggested that Laurin’s analysis might not fully capture the risks associated with the federal fiscal position because it assesses a single r-g profile. They also emphasized the importance of including provincial and territorial governments in any sustainability analysis, as these levels are most affected by demographic aging.

For this report, Laurin modified his approach to include provincial and territorial governments’ net debt and to capture the risks of r-g deviating from its assumed zero average over the long term. He introduced variability in the interest-rate growth-rate gap based on historical data, allowing for a more comprehensive risk assessment (methods and assumptions are provided in Appendix).

The modified analysis showed that, without any simulated shocks, the combined federal and provincial/territorial net debt-to-GDP ratio initially declines and then stabilizes until 2041/42, when rising healthcare costs due to demographic aging – and the associated interest on provincial debt – cause it to rise steadily (Figure 2, black dashed line). Introducing interest rate and recession shocks significantly alters the outlook, indicating a 50 percent chance that the debt ratio will begin its long-term rise in 2035/36, eventually surpassing 100 percent of GDP (black dotted line). There is a 20 percent chance (the 80th percentile) that the debt ratio will not decrease substantially from its current level and start a steady increase in 2033/34 (grey dotted line). Conversely, there is only a 20 percent chance (the 20th percentile) that the ratio will stay below its near-term value for the entire projection period (gold dotted line).

A Prudent and Fair Target

Prudence

According to McGill economist Christopher Ragan, the main concern about Canada’s high public debt is that it will reduce our ability to borrow to address the next economic crisis. He analysed this issue using three zones for the debt ratio: red (top), yellow (middle) and green (bottom) (Figure 3). The red (top) zone, which represents unsustainable debt, starts roughly five percentage points below the 1995 federal-provincial debt ratio’s peak of 100 percent, when Canada entered a period of “forced austerity.” This entry point to the red (top) zone is higher than the 90 percent threshold for negative effects on growth developed by Reinhart and Rogoff (2010). However, the threshold would be lower if the interest rate on public debt (r) were higher than the rate of economic growth (g).

Ragan argued that the current combined federal-provincial debt-to-GDP ratio is in the yellow (middle) “cautionary” zone. The height of this zone is determined by the buffer required to avoid being pushed into the red (top) zone by an economic crisis. Entering the red (top) zone would mean sharply higher interest rates and lower growth.

To avoid this, Ragan set the buffer at 28 percentage points of GDP, about a quarter more than the increase in the debt ratio during the COVID-19 pandemic. Given the frequency of economic crises, he advocated returning to the green (bottom) zone by 2029/30, nine years after the end of the pandemic-induced recession. This requires reducing the federal-provincial debt ratio by about 10 percentage points.

Laurin followed up by determining the fiscal effort required to return to the green (bottom) zone with high probability. His calculations show that, starting in the next fiscal year (2025/26), the combined federal-provincial primary balance would need to increase permanently by 1.38 percent of GDP – or $42.9 billion in 2025/26.10 If implemented through spending reductions, provincial spending would have to decline by about 7 percent, or federal spending would have to fall by almost 9 percent. Note that such spending reductions would still not fully return the combined federal-provincial program spending/GDP ratio to its pre-pandemic 2018/19 value. The federal government could achieve the same effect by raising the GST to 8.5 percent. However, since most spending pressures from an aging population are on provincial governments, it would be sound policy for the federal government to transfer tax points to provincial governments (Kim and Dougherty 2020). Even with near-term fiscal adjustment, additional consolidation may be necessary in the future to prevent a rise in the debt/GDP ratio.

Ragan favoured achieving the debt target through expenditure restraint rather than raising taxes, which he thinks may have reached their limit. Restraining expenditures will be particularly challenging given medium-term pressures from an aging society, rising military and security needs, and potentially increased public investments for the transition to a green economy. Canada, therefore, needs an ongoing and thorough program review to identify low-priority spending.

Fairness

Financing current government spending with debt is generally considered fair if the debt-to-GDP ratio is constant or declining over time, implying that future generations can receive the same level of government services without facing higher tax rates. However, stable tax rates alone are insufficient to prevent intergenerational transfers. Taxes must increase to finance the interest on the debt or remain higher than they would be otherwise. If the tax increase applies to both current and future generations, tax rates would be stable but higher than they would be without the increased debt. The higher tax rates required to finance debt interest and the deficit-induced reduction in national-savings transfer part of the cost of government spending to future generations who do not benefit from the spending.

Assessing generational fairness requires understanding the extent of intergenerational transfers resulting from fiscal policy. The presentation by Parisa Mahboubi, a Senior Policy Analyst at the Institute, offered insights into this issue using generational accounts. These accounts show lifetime net taxes imposed by federal and provincial governments for each birth cohort from 1923 to 2023 and for a composite future generation consisting of all persons born after 2023. The lifetime tax burdens of the 2023 birth cohort and future generations are comparable because a complete life cycle is captured in both cases. Her analysis shows that future generations are expected to face a slightly higher lifetime net tax burden than the youngest living generation.

Preparing generational accounts requires information on lifetime taxes and transfers for each birth cohort alive today and for future generations. Projected values of taxes paid by current birth cohorts are developed based on age-specific profiles of different types of taxes,11 assuming unchanged tax policies. Spending on health, education, elderly benefits, child benefits, social assistance and GST credits vary by age, while other government expenditures are evenly distributed per capita. Per capita taxes, transfers and expenditures are assumed to grow at the same rate as productivity.

The lifetime net tax burdens for currently alive birth cohorts are calculated as the present value of projected tax payments less the present value of projected government transfers the cohort will receive. Lifetime net tax burdens of future generations are calculated using the “no free lunch” constraint: someone, sometime, must pay for all that the government spends (US Congressional Budget Office 1995). The lifetime net tax burden of future generations equals the amount of future spending not paid by currently alive generations.12

In the baseline scenario, productivity grows 0.94 percent annually, the average GDP per capita growth from 2002 to 2022. The discount rate is the average return on real return bonds over the same period, 1.3 percent.13 Statistics Canada’s medium-growth scenario14 is used for demographic projections, with population growing at an average annual rate of 0.85 percent over the 100-year projection, driven entirely by net immigration. The ratio of those over 65 to those aged 18-65 – the old-age dependency ratio – more than doubles over the projection period, rising from 30 percent to 72 percent (Figure 4).

The increase in the old-age dependency ratio drives upward trends in elderly benefits and health-related expenditures as a share of GDP. Other categories of age-specific spending remain roughly constant.

In the baseline scenario, the lifetime net tax burden of future generations (“unborn”) exceeds that of the cohort born in 2023 (“newborn”) by $23,000 per person (Figure 5). Factors influencing this result include:15

  • Fiscal Position in the Base Year: In 2023, federal and provincial tax revenues exceeded program spending by over one percent of GDP. A smaller primary surplus would have decreased the lifetime net tax burden of the newly born, increasing the burden on the unborn.
  • Population Growth: Faster population growth reduces the relative tax burden on future generations by slowing the rise in the old-age dependency ratio and reducing the per-capita burden of existing debt.
  • Healthcare Costs: If real healthcare costs increase faster than productivity growth, the recently born will pay a smaller share, leaving more for future generations.

The baseline assumptions represent the midpoint of a range of plausible values. While results are sensitive to changes in assumptions, the baseline is considered the most likely outcome. The generational accounts, therefore, suggest that fiscal policy is generationally fair.

However, other factors must be considered when assessing fairness:

  • Population Stability: If there were no net population growth, the tax burden on future generations would be much higher, even if the old-age dependency ratio did not change, because the cost of existing debt would be spread over a smaller population. This observation draws attention to the fact that future generations will be paying for services they did not receive, even with stable lifetime net taxes.
  • Income Growth: Future generations will likely be richer due to productivity growth, which could justify asking them to bear some costs of current consumption. However, parents may not wish to pass on costs to their children, even if incomes are rising over time. Population growth through immigration substantially reduces intergenerational linkages, which could encourage the current generation to increase the target size of intergenerational transfers.
  • New Spending Pressures: The generational accounts do not capture new pressures like rising military and security commitments or higher spending to achieve a net-zero emissions economy. In both cases, underspending in the past has pushed costs into the future. Pre-funding some of this spending by increasing taxes in the near term would even out contributions across generations.
  • Comparisons with Near Term Future Generations: Generational accounts compare a representative future generation with the most recent birth cohort. Comparing the tax burden of living generations with the burden on near-term future generations is also relevant.

While the generational accounts indicate that the federal-provincial fiscal stance is fair to future generations under current assumptions, it is beneficial to supplement this analysis with assessments over shorter time horizons. For example, virtually all living generations benefited from the debt-financed income stabilization and health measures implemented during the pandemic-induced recession. There is a strong fairness argument for paying down pandemic-related debt before the next generation starts working and paying taxes, which would occur over the 2035-to-2045 period (Lester 2021).

Federal and provincial Covid-related spending amounted to approximately $430 billion from 2020/21 to 2022/23.16 Federal and provincial debt was $2,092 million in 2022/23. Reducing the level of debt to $1,660 million no later than 2045/46 would be fair to generations born in 2019 and later. However, in Laurin’s prudent scenario, in which debt is sustainable with 80 percent probability, the level of debt rises continuously over the projection period. The gap between the prudent and fair level of debt is $1,200 million in 2035/36. Achieving a fair level of debt would require more fiscal consolidation than is needed to achieve sustainability.

Reforming Expenditure Management

Ragan’s debt target and the recommendation to achieve it through expenditure restraint raise two issues:

1) Building Consensus: How to build a consensus on the proposed debt target and increase the likelihood of achieving it.

2) Identifying Savings: How to identify programs that don’t provide enough value to justify raising taxes to finance them.

Economist and C.D. Howe Institute Fellow-in-Residence John Lester emphasized that achieving a political consensus on a more prudent fiscal approach requires vigorous and sustained advocacy. Part of this advocacy involves convincing governments to surrender some policy flexibility to increase the odds of achieving the target reduction in debt and reduce the risk of relapse after the next crisis.

Lester and Laurin (2023) propose a principles-based fiscal governance framework intended to reduce the bias toward deficit financing in both good times and bad. Governments should adopt guiding principles for fiscal policy, set operational rules for achieving target outcomes and transparently assess consistency with these principles.

At the conference, Lester expanded upon one element of the governance framework: a binding multi-year ceiling on non-cyclical spending. A key motivation for this proposal is the failure to adhere to spending tracks set out in budgets and fiscal updates. For example, in the federal government’s 2019 Economic and Fiscal Update, program spending was projected to decline as a share of GDP, reaching 13.8 percent by 2024/25. The spending ratio projected for 2024/25 increased in successive budgets so that in 2024-25 it will be almost 2 percentage points higher than projected in 2019.18

Binding multi-year expenditure ceilings apply in 11 OECD member countries (Moretti, Keller, and Majercak 2023).19 In the Netherlands and Switzerland, the ceilings are set out in legislation that constrains expenditure growth. Alberta has recently adopted a similar approach.20 However, in most countries, expenditure ceilings are set by the government to ensure consistency with its self-defined fiscal objectives, which may or may not include expenditure restraint. This is the general approach recommended for Canada, although the hope is that the self-defined objective will be to achieve the debt target through expenditure restraint.

The expenditure ceiling would be binding for five years, ideally developed in the first year of a new electoral mandate after a campaign outlining spending plans in detail. The ceiling would cover all categories of spending directly affected by policy decisions. It would be updated annually to account for forecasting errors in program determinants (e.g., inflation, population growth). There would be escape clauses for major economic recessions, natural disasters and war. The ceiling could include a reserve for new policy initiatives, but in the context of expenditure restraint new initiatives may need to be funded by eliminating or modifying existing programs.

Identifying the programs that should be scaled back or eliminated because they don’t provide enough benefits to justify raising taxes to finance them requires, according to Lester, an overhaul of the way the government manages its spending, particularly the performance management framework that is key to establishing value for money. Yves Giroux set the stage for this discussion by describing the federal government’s current expenditure management system.

The requirement to evaluate programs was formalized following the creation of the Office of the Comptroller General in 1978. Despite several modifications, program evaluations have not been successful in affecting strategic spending decisions. The Ministerial Task Force on Program Review (the Nielsen Task Force) from 1984 to 1986 described evaluations as “generally useless and inadequate for the work of program review” (quoted in Grady and Phidd 1993). More recently, McDavid et al. (2018, 302) conclude that evaluations do not “address questions that would be asked as cabinet decision-makers choose among programs and policies.”

Under the current evaluation policy, federal government departments have considerable flexibility in conducting evaluations. They may focus on design and delivery, program beneficiary responses or a comparison of program costs and benefits. A review of 48 evaluations prepared since 2020 in eight departments21 found that only four went beyond assessing operational efficiency and impacts on beneficiaries to examine whether the program represented value for taxpayer money. Three of these applied formal benefit-cost analysis, which is the standard for assessing regulatory proposals.22

Evaluating programs in terms of operational efficiency and beneficiary impacts helps improve programs, but if evaluations are to inform strategic spending decisions, value-for-money assessments must be mandatory. These assessments should be based on the benefit-cost framework applied to regulatory proposals.

Benefit-cost analysis of regulatory proposals – and by extension, spending programs – assesses the overall social benefits and costs of policy initiatives. The quantitative analysis attempts to determine if the economic pie is larger or smaller after government intervention. For example, economic development programs (business subsidies) are implemented with the expectation that they will increase overall real income. To assess this, benefit-cost analysis considers not only the additional investment and employment resulting from the subsidy but also the opportunity cost of workers and capital – the amount that would have been earned otherwise. The net increase in the economic pie is the incremental earnings of workers and capital less efficiency losses from raising taxes or issuing debt to finance the subsidy and resources used to administer and apply for it.

The nature of the assessment should vary by program type. Business subsidies, labour market development programs and climate change mitigation/adaptation measures have benefits and costs measurable in monetary terms. These programs could be ranked by their net social benefits, allowing comparisons within and across program categories. Programs where benefits are less than costs would be candidates for elimination or modification.

A more nuanced approach is needed when assessing social programs and other measures with a fairness goal for several reasons. Their economic impact is ambiguous, and a negative economic impact is not a sufficient reason to eliminate a program. In addition, support for an income redistribution program depends on who benefits from it. As a result, evaluations of social programs should be more descriptive than prescriptive. They should present information on the economic impacts of measures, their fiscal cost, including administration expenses, and a discussion of who benefits from the program and how they benefit. Evaluations should also assess how the program fits into other measures providing support to the target population. This information will allow elected officials and, since all evaluations would be made public, Canadians, generally, to form an evidence-based opinion on the value for money of social programs.

A thorough assessment of government programs through a value-for-money lens may not identify enough wasteful spending to achieve deficit and debt targets. If so, tax increases should be used to achieve the objectives.

Adopting and achieving the debt target will require a political commitment that currently does not exist. The task for policy analysts is to help build a consensus on a more prudent approach to fiscal policy and a revamped expenditure management system. According to Lester, this consensus should be ratified by legislation setting out general principles for sound fiscal policy, supplemented with non-legislated operational rules to guide annual policy and monitor progress. This approach would impose discipline on fiscal policy while allowing flexibility to address unexpected developments. Legislation would strengthen the consensus on fiscal prudence and help prevent backsliding by future politicians.

Conclusion

The evidence presented at the conference confirmed that Canada has a debt problem. Existing debt levels are not prudent, and they raise concerns about generational fairness. Prudence requires that Canada’s public debt be reduced by about 10 percentage points of GDP before the decade’s end. This would require increasing the combined federal-provincial primary balance by 1.4 percent of GDP, or $43 billion, starting in 2025/26.

Tax increases harm economic performance, so elimination of public spending that does not provide enough benefits to offset this damage should be the first step in reducing deficits and debt. Identifying wasteful spending will require comprehensive value-for-money assessments. Governments must not take the easy way out by implementing across-the-board spending cuts. Successful expenditure restraint will also require setting binding multi-year expenditure ceilings to prevent governments from spending revenue windfalls or from increasing spending to improve chances of electoral success.

Canada’s public debt is imposing a burden on future generations. A comparison of the lifetime tax burden on the recently born with distant future generations reveals only a small generational transfer in favour of the recently born. However, burden shifting is much larger from currently living generations to persons born shortly after the pandemic-induced recession. The $430 billion in pandemic-related debt should be paid down by the people that benefited from the income stabilization measures. Achieving this fairness objective would require more fiscal consolidation than needed to ensure sustainability of the debt. For the Silo, Alexandre Laurin/John Lester via C.D. Howe Institute.

Appendix: Assumptions and Methods for the Sustainability Analysis

References

Aiyagari, S. Rao, and Ellen R. McGrattan. 1998. “The Optimum Quantity of Debt.” Journal of Monetary Economics 42 (3): 447–69.

Ambler, Steve, and Craig Alexander. 2015. “One Percent? For Real? Insights from Modern Growth Theory about Future Investment Returns.” E-Brief. Toronto: C.D. Howe Institute. October.

Burgess, David F. 1996. “Fiscal Deficits and Intergenerational Welfare in Almost Small Open Economies.” Canadian Journal of Economics, 885–909.

Canada. 2024. “Budget 2024.” Department of Finance Canada. April.

Checherita-Westphal, Cristina D., and Marcel Stechert. 2021. “Household Saving and Fiscal Policy: Evidence for the Euro Area from a Thick Modelling Perspective.” Available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3992188.

Conklin, David, and Thomas Courchene. 1983. “Deficits: How Big and How Bad?” Special Research Report. Toronto: Ontario Economic Council.

Cozzi, Marco. 2022. “Has Public Debt Been Too High in Canada and the US? A Quantitative Assessment.” University of Victoria, Economics. Available at: http://www.uvic.ca/socialsciences/economics/assets/docs/discussion/ddp2007.pdf.

Dahlby, Bev, and Ergete Ferede. 2022. “What Are the Economic Costs of Raising Revenue by the Canadian Federal Government?” Fraser Institute. Available at: https://roam.macewan.ca/items/73cf71a0-209f-4634-91a7-98d019750638/full.

Grady, Patrick, and Richard W. Phidd. 1993. “Budget Envelopes, Policy Making and Accountability.” Government and Competitiveness Project, School of Policy Studies, Queen’s University. http://global-economics.ca/budgetenvelopes.pdf.

International Monetary Fund (IMF). 2022. “Staff Guidance Note on the Sovereign Risk and Debt Sustainability Framework for Market Access Countries.” 2022–039. IMF Policy Papers.

James, Steven, and Philippe Karam. 2001. “The Role of Government Debt in a World of Incomplete Financial Markets.” Department of Finance, Economic and Fiscal Policy Branch.

Jenkins, Glenn, and Chun-Yan Kuo. 2007. “The Economic Opportunity Cost of Capital for Canada-an Empirical Update.” Queen’s Economics Department Working Paper. Available at: https://www.econstor.eu/handle/10419/189409.

Johnson, David. 2004. “Does the Debt Matter?” In Is the Debt War Over, pp. 173–96. Montreal: Institute for Research on Public Policy. Available at: https://books.google.com/books?hl=en&lr=&id=s4VcGvjVX0MC&oi=fnd&pg=PA173&dq=%E2%80%9CDoes+the+debt+matter%3F%E2%80%9D+&ots=t0fNWzkyoC&sig=TIQrfQbAitqgSIDuHypw_FT6Eeo.

Kim, Junghum, and Sean Dougherty (eds.) 2020. “Adaptability, accountability and sustainability: Intergovernmental fiscal arrangements in Canada,” in Ageing and Fiscal Challenges across Levels of Government, OECD Publishing, Paris.

Lester, John. 2024. “Minding the Purse Strings: Major Reforms Needed to the Federal Government’s Expenditure Management System.” Available at: https://www.cdhowe.org/sites/default/files/2024-09/For%20advance%20release%20EMS%20E-Brief_359.pdf.

Lester, John, and Alexandre Laurin. 2023. “Ottawa Needs a New Approach to Fiscal Policy.” E-Brief 338. Toronto: C.D. Howe Institute. Available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4397967.

Mahboubi, Parisa. 2019. Intergenerational Fairness: Will Our Kids Live Better than We Do? Commentary 529. Toronto: C.D. Howe Institute. January.

McDavid, Jim, Astrid Brousselle, Robert P. Shepherd, and David Zussman. 2018. “Linking Evaluation and Spending Reviews: Challenges and Prospects.” Canadian Journal of Program Evaluation 32 (3): 297–304. https://doi.org/10.3138/cjpe.43176.

Modigliani, Franco. 1983. “Government Deficits, Inflation and Future Generations.” In Deficits: How Big and How Bad, pp. 55–71.

Moretti, Delphine, Anne Keller, and Marco Majercak. 2023. “Medium-Term and Top-down Budgeting in OECD Countries.” OECD Journal on Budgeting 23 (3). https://www.oecd-ilibrary.org/content/paper/39425570-en.

Nakajima, Tomoyuki, and Shuhei Takahashi. 2017. “The Optimum Quantity of Debt for Japan.” Journal of the Japanese and International Economies 46:17–26.

Okamoto, Akira. 2024. “The Optimum Quantity of Debt for an Aging Japan: Welfare and Demographic Dynamics.” The Japanese Economic Review. May. Available at: https://doi.org/10.1007/s42973-024-00156-7.

Panizza, Ugo, Richard Varghese, and Yi Huang. 2019. “Public debt and private investment.” Centre for Economic Policy Research. VOXEU Column. December 4.

Peterman, William, and Erick Sager. 2018. “Optimal Public Debt with Life Cycle Motives.” https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3187698.

Ragan, Christopher, and William G. Watson. 2004. “Is the Debt War Over?: Dispatches from Canada’s Fiscal Frontline.” Vol. 45. IRPP. Available at: https://books.google.com/books?hl=en&lr=&id=s4VcGvjVX0MC&oi=fnd&pg=PP11&dq=%22Is+the+debt+war+over%3F%22&ots=t0fNWqoDsw&sig=Q1poOT4AbHtIkx_NVf5GjrcXEtc.

Reinhart, Carmen M., and Kenneth S. Rogoff. 2010. “Growth in a Time of Debt.” American Economic Review 100 (2): 573–78. https://doi.org/10.1257/aer.100.2.573.

Robson, William, and Parisa Mahboubi. 2024. Another Day Older and Deeper in Debt: The Fiscal Implications of Demographic Change for Ottawa and the Provinces. Commentary 665. Toronto: C.D. Howe Institute. August.

Robson, William, and William Scarth. 1994. Deficit Reduction – What Pain, What Gain? (Policy Study 23). Toronto: C.D. Howe Institute.

US Congressional Budget Office. 1995. “Who Pays and When? An Assessment of Generational Accounting.” Available at: https://www.cbo.gov/sites/default/files/cbofiles/attachments/Genacct.pdf.

Why Canada Capital Gains Tax Increase Is Bad Idea

January , 2025 – One of the most consequential policy changes in this year’s federal budget – an increase in the capital gains inclusion rate – would have far-reaching consequences for Canadians, many of which are underestimated by the government, according to a new study from the C.D. Howe Institute. Leading economist and former President and CEO of the C.D. Howe Institute, Jack Mintz, examines the extensive economic repercussions of this proposed change in his latest report available in full at the end of this article.

Fiscal and Tax Policy

With Parliament prorogued on January 6, the future of the proposed capital gains tax increase remains uncertain. Canadians face the possibility of the measure being passed, amended, or withdrawn entirely under a new government.

Meanwhile, tax planners and the affected individuals and corporations must await the outcome, even though the Canada Revenue Agency began administering the tax on June 25, 2024, after it was announced in the spring budget. At this time, taxpayers could be assessed interest and penalties if they do not comply with the proposed law. If the law is never passed, taxpayers will have to claim refunds. The provincial budgets reliant on the new revenues will be affected if the planned measure is ultimately withdrawn, adding to the confusion and disruption.

“The planned measure to increase the capital gains inclusion rate should never see the light of day when Parliament resumes after March 24, nor be revived thereafter by a new government,” says Mintz. “The hike would create a triple threat: harming Canadian businesses, discouraging investment, and penalizing middle-income Canadians.”

While the government estimated this change would only impact 40,000 individual tax filers and 307,000 corporations, Mintz’s analysis, using longitudinal data, reveals the true impact would be significantly broader. Over 1.26 million Canadians would be affected over their lifetimes – representing 4.3 percent of taxpayers or some 22,000 Canadians per year – with many middle-income earners among those hardest hit.

The report projects significant economic harm caused by the proposed increase – Canada’s capital stock would decline by $127 billion, GDP would fall by nearly $90 billion, and real per-capita GDP would drop by 3 percent. Further, employment would decline by 414,000 jobs, which would raise unemployment from 1.5 million to 1.9 million workers. Importantly, half of the affected individuals would be earning otherwise less than $117,000 annually, with 10 percent earning as little as $18,000, excluding capital gains income.

“This would not just be a tax on the wealthy,” says Mintz. “Many middle-income Canadians would bear the brunt of this increase, and the economic costs would ripple across the entire economy.”

Mintz also highlights the broader implications for Canadian businesses. The planned measure would likely deter equity financing, discourage investment, and exacerbate inefficiencies in financial and corporate structures. Contrary to government claims of “neutrality,” he argues the tax would disproportionately harm domestic companies. These companies will pay corporate capital gains taxes that will increase investment costs. Moreover, they are dependent on Canadian investors due to “home bias” in equity markets. The changes would risk weakening Canada’s productivity and competitiveness at a critical time.

The report further critiques the lack of mechanisms to mitigate the effects of “lumpy” capital gains. Significant asset disposals, such as selling real estate, farmland, business assets, secondary homes or during events like death or emigration, may occur only once or twice in a person’s lifetime. Without provisions to average or defer taxes, individuals would face disproportionately higher burdens. Additionally, the planned tax hike would exacerbate the “lock-in effect,” which discourages the efficient reallocation of capital.

“If the proposed law does not proceed, it would be worthwhile for a government to review capital gains taxation as part of a general tax review that would improve opportunities for economic growth rather than hurt it,” says Mintz.

Read the full report here.

Basic Living Standard Arithmetic For Ottawa And All Governments

September , 2024

To: Canadians concerned about prosperity 
From: Don Wright 
Date: September 4, 2024
Re: Some Basic Living Standard Arithmetic for Governments

Governments often talk about “creating jobs,” but what they really do is choose some jobs at the expense of others. With their myriad spending, taxing and regulatory decisions, all governments try to direct job growth to different sectors – public or private, services or goods, resources or non-resources, and so on.

We all hope governments choose wisely.

It would help if they started paying more explicit attention to one factor: The impact of their decisions on Canadians’ standard of living.

A country’s standard of living is largely determined by the wages and net government revenue its tradeable goods and services sector can pay while remaining competitive against international competitors. If a company or sector is uncompetitive, it will have to either lower its wages, pay less tax or go out of business. These pressures on companies are never-ending. They determine both the wages a sector can afford to pay, and, through the interconnectedness of labour markets, average wages across the economy.

Some industries are so productive they can pay relatively high wages and significant taxes and yet remain competitive.

Industries that aren’t as productive can only pay lower wages and less tax.

Governments whose policies have the effect of moving labour from one sector to another had better pay attention to such facts.

Canadians may not like it but many of the country’s best-paying and most tax-rich jobs are found in natural resources. I was head of British Columbia’s public service. For most of B.C.’s history the province’s economic base has been dominated by natural resource industries – forestry, mining, oil and gas, agriculture and fishing. For a variety of reasons, these industries face strong political headwinds. Many groups press to constrain them and diversify away from them. The alternatives proposed include technology, film and tourism.

A few years ago, I asked officials in the province’s finance ministry to assess the relative performance of these different industries along the two key dimensions of average wages and net government revenue. In 2019-20 B.C. spent approximately $11,700 per citizen. Half the population was employed that year. So, to “break even” (i.e., have a balanced budget), the province had to collect $23,400 per employed person. If you look at things this way, each industry’s “profit” or “loss” is simply its revenue per employee less $23,400.

No such calculation will be exact, of course.

Several assumptions have to be made to get to an average “profit” or “loss” per employee. But, with that caveat, the numbers the officials brought back were telling. The industry with the biggest return to the province was oil and gas, at $35,500 per employee. Forestry was next, at $32,900. Then mining, at $14,900, and technology, though only at $900.

By this measure of profit and loss, however, film was a money loser, at -$13,400, and so was tourism, at -$6,900.

The negative numbers for the film industry reflect the very significant subsidies that B.C. (like many other provinces) provides to this sector. The negative number for the tourism sector primarily reflects low average wages per employee, which translate into relatively low personal income tax, sales tax and other taxes paid by employees.

These “profit or loss” numbers are not in any way a judgment about workers in these sectors. People find the best employment available to them in the labour market. Relative demands in that market are determined by many factors, none of which workers control. That said, if governments consciously move resources from the “profit” industries to the “loss” industries, they had better be aware of the consequences for wages, taxes and the overall standard of living.

The numbers I’ve cited were for a single year in British Columbia. The same analysis for other provinces or for Canada as a whole would likely produce different numbers – though I’d be surprised if the overall pattern were much different. Voters will draw their own conclusions about the impact on British Columbians’ standard of living from constraining the resource industries and promoting other industries instead.

Unfortunately, this type of analysis is rarely done when Canadian governments make decisions about what types of jobs they want to give preference to through their taxation, spending and regulatory decisions. They should do more of it. Ultimately, if [they] care about Canadians’ standard of living, governments need to start paying attention to the basic arithmetic of that standard of living.

Don Wright, senior fellow at the C.D. Howe Institute and senior counsel at Global Public Affairs, previously served as deputy minister to B.C.’s premier, cabinet secretary and head of the public service.

7000 Words About The Dubious Refragmentation Of The Economy

One advantage of being old is that you can see change happen in your lifetime.

A lot of the change I’ve seen is fragmentation. For example, US politics and now Canadian politics are much more polarized than they used to be. Culturally we have ever less common ground and though inclusiveness is preached by the media and the Left, special interest groups and policies have a polarizing effect. The creative class flocks to a handful of happy cities, abandoning the rest. And increasing economic inequality means the spread between rich and poor is growing too. I’d like to propose a hypothesis: that all these trends are instances of the same phenomenon. And moreover, that the cause is not some force that’s pulling us apart, but rather the erosion of forces that had been pushing us together.

Worse still, for those who worry about these trends, the forces that were pushing us together were an anomaly, a one-time combination of circumstances that’s unlikely to be repeated—and indeed, that we would not want to repeat.

Describe How a Mass Culture Developed in America - JeankruwHumphrey

The two forces were war (above all World War II), and the rise of large corporations.

The effects of World War II were both economic and social. Economically, it decreased variation in income. Like all modern armed forces, America’s were socialist economically. From each according to his ability, to each according to his need. More or less. Higher ranking members of the military got more (as higher ranking members of socialist societies always do), but what they got was fixed according to their rank. And the flattening effect wasn’t limited to those under arms, because the US economy was conscripted too. Between 1942 and 1945 all wages were set by the National War Labor Board. Like the military, they defaulted to flatness. And this national standardization of wages was so pervasive that its effects could still be seen years after the war ended. [1]

Business owners weren’t supposed to be making money either.

FDR said “not a single war millionaire” would be permitted. To ensure that, any increase in a company’s profits over prewar levels was taxed at 85%. And when what was left after corporate taxes reached individuals, it was taxed again at a marginal rate of 93%. [2]

Socially too the war tended to decrease variation. Over 16 million men and women from all sorts of different backgrounds were brought together in a way of life that was literally uniform. Service rates for men born in the early 1920s approached 80%. And working toward a common goal, often under stress, brought them still closer together.

Though strictly speaking World War II lasted less than 4 years for the USA, its effects lasted longer and cycled North towards Canada.

Wars make central governments more powerful, and World War II was an extreme case of this. In the US, as in all the other Allied countries, the federal government was slow to give up the new powers it had acquired. Indeed, in some respects the war didn’t end in 1945; the enemy just switched to the Soviet Union. In tax rates, federal power, defense spending, conscription, and nationalism the decades after the war looked more like wartime than prewar peacetime. [3] And the social effects lasted too. The kid pulled into the army from behind a mule team in West Virginia didn’t simply go back to the farm afterward. Something else was waiting for him, something that looked a lot like the army.

If total war was the big political story of the 20th century, the big economic story was the rise of new kind of company. And this too tended to produce both social and economic cohesion. [4]

The 20th century was the century of the big, national corporation. General Electric, General Foods, General Motors. Developments in finance, communications, transportation, and manufacturing enabled a new type of company whose goal was above all scale. Version 1 of this world was low-res: a Duplo world of a few giant companies dominating each big market. [5]

The late 19th and early 20th centuries had been a time of consolidation, led especially by J. P. Morgan. Thousands of companies run by their founders were merged into a couple hundred giant ones run by professional managers. Economies of scale ruled the day. It seemed to people at the time that this was the final state of things. John D. Rockefeller said in 1880

Image result for john d rockefeller

The day of combination is here to stay. Individualism has gone, never to return.

He turned out to be mistaken, but he seemed right for the next hundred years.

The consolidation that began in the late 19th century continued for most of the 20th. By the end of World War II, as Michael Lind writes, “the major sectors of the economy were either organized as government-backed cartels or dominated by a few oligopolistic corporations.”

For consumers this new world meant the same choices everywhere, but only a few of them. When I grew up there were only 2 or 3 of most things, and since they were all aiming at the middle of the market there wasn’t much to differentiate them.

One of the most important instances of this phenomenon was in TV.

Popular culture and daily life of Americans in the 1950s - WWJD

Here there were 3 choices: NBC, CBS, and ABC. Plus public TV for eggheads and communists (jk). The programs the 3 networks offered were indistinguishable. In fact, here there was a triple pressure toward the center. If one show did try something daring, local affiliates in conservative markets would make them stop. Plus since TVs were expensive whole families watched the same shows together, so they had to be suitable for everyone.

And not only did everyone get the same thing, they got it at the same time. It’s difficult to imagine now, but every night tens of millions of families would sit down together in front of their TV set watching the same show, at the same time, as their next door neighbors. What happens now with the Super Bowl used to happen every night. We were literally in sync. [6]

In a way mid-century TV culture was good. The view it gave of the world was like you’d find in a children’s book, and it probably had something of the effect that (parents hope) children’s books have in making people behave better. But, like children’s books, TV was also misleading. Dangerously misleading, for adults. In his autobiography, Robert MacNeil talks of seeing gruesome images that had just come in from Vietnam and thinking, we can’t show these to families while they’re having dinner.

I know how pervasive the common culture was, because I tried to opt out of it, and it was practically impossible to find alternatives.

When I was 13 I realized, more from internal evidence than any outside source, that the ideas we were being fed on TV were crap, and I stopped watching it. [7] But it wasn’t just TV. It seemed like everything around me was crap. The politicians all saying the same things, the consumer brands making almost identical products with different labels stuck on to indicate how prestigious they were meant to be, the balloon-frame houses with fake “colonial” skins, the cars with several feet of gratuitous metal on each end that started to fall apart after a couple years, the “red delicious” apples that were red but only nominally apples. And in retrospect, it was crap. [8]

But when I went looking for alternatives to fill this void, I found practically nothing. There was no Internet then. The only place to look was in the chain bookstore in our local shopping mall. [9] There I found a copy of The Atlantic. I wish I could say it became a gateway into a wider world, but in fact I found it boring and incomprehensible. Like a kid tasting whisky for the first time and pretending to like it, I preserved that magazine as carefully as if it had been a book. I’m sure I still have it somewhere. But though it was evidence that there was, somewhere, a world that wasn’t red delicious, I didn’t find it till college.

It wasn’t just as consumers that the big companies made us similar. They did as employers too. Within companies there were powerful forces pushing people toward a single model of how to look and act. IBM was particularly notorious for this, but they were only a little more extreme than other big companies. And the models of how to look and act varied little between companies. Meaning everyone within this world was expected to seem more or less the same. And not just those in the corporate world, but also everyone who aspired to it—which in the middle of the 20th century meant most people who weren’t already in it. For most of the 20th century, working-class people tried hard to look middle class. You can see it in old photos. Few adults aspired to look dangerous in 1950.

But the rise of national corporations didn’t just compress us culturally. It compressed us economically too, and on both ends.

Along with giant national corporations, we got giant national labor unions. And in the mid 20th century the corporations cut deals with the unions where they paid over market price for labor. Partly because the unions were monopolies. [10] Partly because, as components of oligopolies themselves, the corporations knew they could safely pass the cost on to their customers, because their competitors would have to as well. And partly because in mid-century most of the giant companies were still focused on finding new ways to milk economies of scale. Just as startups rightly pay AWS a premium over the cost of running their own servers so they can focus on growth, many of the big national corporations were willing to pay a premium for labor. [11]

As well as pushing incomes up from the bottom, by overpaying unions, the big companies of the 20th century also pushed incomes down at the top, by underpaying their top management. Economist J. K. Galbraith wrote in 1967 that “There are few corporations in which it would be suggested that executive salaries are at a maximum.” [12]

Speaking Out Meant Standing Alone

To some extent this was an illusion.

Much of the de facto pay of executives never showed up on their income tax returns, because it took the form of perks. The higher the rate of income tax, the more pressure there was to pay employees upstream of it. (In the UK, where taxes were even higher than in the US, companies would even pay their kids’ private school tuitions.) One of the most valuable things the big companies of the mid 20th century gave their employees was job security, and this too didn’t show up in tax returns or income statistics. So the nature of employment in these organizations tended to yield falsely low numbers about economic inequality. But even accounting for that, the big companies paid their best people less than market price. There was no market; the expectation was that you’d work for the same company for decades if not your whole career. [13]

Your work was so illiquid there was little chance of getting market price. But that same illiquidity also encouraged you not to seek it. If the company promised to employ you till you retired and give you a pension afterward, you didn’t want to extract as much from it this year as you could. You needed to take care of the company so it could take care of you. Especially when you’d been working with the same group of people for decades. If you tried to squeeze the company for more money, you were squeezing the organization that was going to take care of them. Plus if you didn’t put the company first you wouldn’t be promoted, and if you couldn’t switch ladders, promotion on this one was the only way up. [14]

To someone who’d spent several formative years in the armed forces, this situation didn’t seem as strange as it does to us now. From their point of view, as big company executives, they were high-ranking officers. They got paid a lot more than privates. They got to have expense account lunches at the best restaurants and fly around on the company’s Gulfstreams. It probably didn’t occur to most of them to ask if they were being paid market price.

The ultimate way to get market price is to work for yourself, by starting your own company. That seems obvious to any ambitious person now. But in the mid 20th century it was an alien concept. Not because starting one’s own company seemed too ambitious, but because it didn’t seem ambitious enough. Even as late as the 1970s, when I grew up, the ambitious plan was to get lots of education at prestigious institutions, and then join some other prestigious institution and work one’s way up the hierarchy. Your prestige was the prestige of the institution you belonged to. People did start their own businesses of course, but educated people rarely did, because in those days there was practically zero concept of starting what we now call a startup: a business that starts small and grows big. That was much harder to do in the mid 20th century. Starting one’s own business meant starting a business that would start small and stay small. Which in those days of big companies often meant scurrying around trying to avoid being trampled by elephants. It was more prestigious to be one of the executive class riding the elephant.

By the 1970s, no one stopped to wonder where the big prestigious companies had come from in the first place.

Famous 1970s Logos: The Best 70s Logo Design Examples

It seemed like they’d always been there, like the chemical elements. And indeed, there was a double wall between ambitious kids in the 20th century and the origins of the big companies. Many of the big companies were roll-ups that didn’t have clear founders. And when they did, the founders didn’t seem like us. Nearly all of them had been uneducated, in the sense of not having been to college. They were what Shakespeare called rude mechanicals. College trained one to be a member of the professional classes. Its graduates didn’t expect to do the sort of grubby menial work that Andrew Carnegie or Henry Ford started out doing. [15]

And in the 20th century there were more and more college graduates. They increased from about 2% of the population in 1900 to about 25% in 2000. In the middle of the century our two big forces intersect, in the form of the GI Bill, which sent 2.2 million World War II veterans to college. Few thought of it in these terms, but the result of making college the canonical path for the ambitious was a world in which it was socially acceptable to work for Henry Ford, but not to be Henry Ford. [16]

I remember this world well. I came of age just as it was starting to break up. In my childhood it was still dominant. Not quite so dominant as it had been. We could see from old TV shows and yearbooks and the way adults acted that people in the 1950s and 60s had been even more conformist than us. The mid-century model was already starting to get old. But that was not how we saw it at the time. We would at most have said that one could be a bit more daring in 1975 than 1965. And indeed, things hadn’t changed much yet.

But change was coming soon.

And when the Duplo economy started to disintegrate, it disintegrated in several different ways at once. Vertically integrated companies literally dis-integrated because it was more efficient to. Incumbents faced new competitors as (a) markets went global and (b) technical innovation started to trump economies of scale, turning size from an asset into a liability. Smaller companies were increasingly able to survive as formerly narrow channels to consumers broadened. Markets themselves started to change faster, as whole new categories of products appeared. And last but not least, the federal government, which had previously smiled upon J. P. Morgan’s world as the natural state of things, began to realize it wasn’t the last word after all.

What J. P. Morgan was to the horizontal axis, Henry Ford was to the vertical. He wanted to do everything himself. The giant plant he built at River Rouge between 1917 and 1928 literally took in iron ore at one end and sent cars out the other. 100,000 people worked there. At the time it seemed the future. But that is not how car companies operate today. Now much of the design and manufacturing happens in a long supply chain, whose products the car companies ultimately assemble and sell. The reason car companies operate this way is that it works better. Each company in the supply chain focuses on what they know best. And they each have to do it well or they can be swapped out for another supplier.

Why didn’t Henry Ford realize that networks of cooperating companies work better than a single big company?

One reason is that supplier networks take a while to evolve. In 1917, doing everything himself seemed to Ford the only way to get the scale he needed. And the second reason is that if you want to solve a problem using a network of cooperating companies, you have to be able to coordinate their efforts, and you can do that much better with computers. Computers reduce the transaction costs that Coase argued are the raison d’etre of corporations. That is a fundamental change.

In the early 20th century, big companies were synonymous with efficiency. In the late 20th century they were synonymous with inefficiency. To some extent this was because the companies themselves had become sclerotic. But it was also because our standards were higher.

It wasn’t just within existing industries that change occurred. The industries themselves changed. It became possible to make lots of new things, and sometimes the existing companies weren’t the ones who did it best.

Microcomputers are a classic example.

Ms Dos 1.25 (1982)(Microsoft) Game

The market was pioneered by upstarts like Apple, Radio Shack and Atari. When it got big enough, IBM decided it was worth paying attention to. At the time IBM completely dominated the computer industry. They assumed that all they had to do, now that this market was ripe, was to reach out and pick it. Most people at the time would have agreed with them. But what happened next illustrated how much more complicated the world had become. IBM did launch a microcomputer. Though quite successful, it did not crush Apple. But even more importantly, IBM itself ended up being supplanted by a supplier coming in from the side—from software, which didn’t even seem to be the same business. IBM’s big mistake was to accept a non-exclusive license for DOS. It must have seemed a safe move at the time. No other computer manufacturer had ever been able to outsell them. What difference did it make if other manufacturers could offer DOS too? The result of that miscalculation was an explosion of inexpensive PC clones. Microsoft now owned the PC standard, and the customer. And the microcomputer business ended up being Apple vs Microsoft.

Basically, Apple bumped IBM and then Microsoft stole its wallet. That sort of thing did not happen to big companies in mid-century. But it was going to happen increasingly often in the future.

Change happened mostly by itself in the computer business. In other industries, legal obstacles had to be removed first. Many of the mid-century oligopolies had been anointed by the federal government with policies (and in wartime, large orders) that kept out competitors. This didn’t seem as dubious to government officials at the time as it sounds to us. They felt a two-party system ensured sufficient competition in politics. It ought to work for business too.

Gradually the government realized that anti-competitive policies were doing more harm than good, and during the Carter administration started to remove them.

The word used for this process was misleadingly narrow: deregulation. What was really happening was de-oligopolization. It happened to one industry after another. Two of the most visible to consumers were air travel and long-distance phone service, which both became dramatically cheaper after deregulation.

Deregulation also contributed to the wave of hostile takeovers in the 1980s. In the old days the only limit on the inefficiency of companies, short of actual bankruptcy, was the inefficiency of their competitors. Now companies had to face absolute rather than relative standards. Any public company that didn’t generate sufficient returns on its assets risked having its management replaced with one that would. Often the new managers did this by breaking companies up into components that were more valuable separately. [17]

Version 1 of the national economy consisted of a few big blocks whose relationships were negotiated in back rooms by a handful of executives, politicians, regulators, and labor leaders. Version 2 was higher resolution: there were more companies, of more different sizes, making more different things, and their relationships changed faster. In this world there were still plenty of back room negotiations, but more was left to market forces. Which further accelerated the fragmentation.

It’s a little misleading to talk of versions when describing a gradual process, but not as misleading as it might seem. There was a lot of change in a few decades, and what we ended up with was qualitatively different. The companies in the S&P 500 in 1958 had been there an average of 61 years. By 2012 that number was 18 years. [18]

The breakup of the Duplo economy happened simultaneously with the spread of computing power. To what extent were computers a precondition? It would take a book to answer that. Obviously the spread of computing power was a precondition for the rise of startups. I suspect it was for most of what happened in finance too. But was it a precondition for globalization or the LBO wave? I don’t know, but I wouldn’t discount the possibility. It may be that the refragmentation was driven by computers in the way the industrial revolution was driven by steam engines. Whether or not computers were a precondition, they have certainly accelerated it.

The new fluidity of companies changed people’s relationships with their employers. Why climb a corporate ladder that might be yanked out from under you? Ambitious people started to think of a career less as climbing a single ladder than as a series of jobs that might be at different companies. More movement (or even potential movement) between companies introduced more competition in salaries. Plus as companies became smaller it became easier to estimate how much an employee contributed to the company’s revenue. Both changes drove salaries toward market price. And since people vary dramatically in productivity, paying market price meant salaries started to diverge.

By no coincidence it was in the early 1980s that the term “yuppie” was coined. That word is not much used now, because the phenomenon it describes is so taken for granted, but at the time it was a label for something novel. Yuppies were young professionals who made lots of money. To someone in their twenties today, this wouldn’t seem worth naming. Why wouldn’t young professionals make lots of money? But until the 1980s being underpaid early in your career was part of what it meant to be a professional. Young professionals were paying their dues, working their way up the ladder. The rewards would come later. What was novel about yuppies was that they wanted market price for the work they were doing now.

The first yuppies did not work for startups.

AM2407 Spark blog: 1980s - The Yuppie

That was still in the future. Nor did they work for big companies. They were professionals working in fields like law, finance, and consulting. But their example rapidly inspired their peers. Once they saw that new BMW 325i, they wanted one too.

Underpaying people at the beginning of their career only works if everyone does it. Once some employer breaks ranks, everyone else has to, or they can’t get good people. And once started this process spreads through the whole economy, because at the beginnings of people’s careers they can easily switch not merely employers but industries.

But not all young professionals benefitted. You had to produce to get paid a lot. It was no coincidence that the first yuppies worked in fields where it was easy to measure that.

More generally, an idea was returning whose name sounds old-fashioned precisely because it was so rare for so long: that you could make your fortune. As in the past there were multiple ways to do it. Some made their fortunes by creating wealth, and others by playing zero-sum games. But once it became possible to make one’s fortune, the ambitious had to decide whether or not to. A physicist who chose physics over Wall Street in 1990 was making a sacrifice that a physicist in 1960 wasn’t.

The idea even flowed back into big companies. CEOs of big companies make more now than they used to, and I think much of the reason is prestige. In 1960, corporate CEOs had immense prestige. They were the winners of the only economic game in town. But if they made as little now as they did then, in real dollar terms, they’d seem like small fry compared to professional athletes and whiz kids making millions from startups and hedge funds. They don’t like that idea, so now they try to get as much as they can, which is more than they had been getting. [19]

Meanwhile a similar fragmentation was happening at the other end of the economic scale. As big companies’ oligopolies became less secure, they were less able to pass costs on to customers and thus less willing to overpay for labor. And as the Duplo world of a few big blocks fragmented into many companies of different sizes—some of them overseas—it became harder for unions to enforce their monopolies. As a result workers’ wages also tended toward market price. Which (inevitably, if unions had been doing their job) tended to be lower. Perhaps dramatically so, if automation had decreased the need for some kind of work.

And just as the mid-century model induced social as well as economic cohesion, its breakup brought social as well as economic fragmentation. People started to dress and act differently. Those who would later be called the “creative class” became more mobile. People who didn’t care much for religion felt less pressure to go to church for appearances’ sake, while those who liked it a lot opted for increasingly colorful forms. Some switched from meat loaf to tofu, and others to Hot Pockets. Some switched from driving Ford sedans to driving small imported cars, and others to driving SUVs. Kids who went to private schools or wished they did started to dress “preppy,” and kids who wanted to seem rebellious made a conscious effort to look disreputable. In a hundred ways people spread apart. [20]

Almost four decades later, fragmentation is still increasing.

Has it been net good or bad? I don’t know; the question may be unanswerable. Not entirely bad though. We take for granted the forms of fragmentation we like, and worry only about the ones we don’t. But as someone who caught the tail end of mid-century conformism, I can tell you it was no utopia. [21]

My goal here is not to say whether fragmentation has been good or bad, just to explain why it’s happening. With the centripetal forces of total war and 20th century oligopoly mostly gone, what will happen next? And more specifically, is it possible to reverse some of the fragmentation we’ve seen?

If it is, it will have to happen piecemeal. You can’t reproduce mid-century cohesion the way it was originally produced. It would be insane to go to war just to induce more national unity. And once you understand the degree to which the economic history of the 20th century was a low-res version 1, it’s clear you can’t reproduce that either.

20th century cohesion was something that happened at least in a sense naturally. The war was due mostly to external forces, and the Duplo economy was an evolutionary phase. If you want cohesion now, you’d have to induce it deliberately. And it’s not obvious how. I suspect the best we’ll be able to do is address the symptoms of fragmentation. But that may be enough.

The form of fragmentation people worry most about lately is economic inequality, and if you want to eliminate that you’re up against a truly formidable headwind—one that has been in operation since the stone age: technology. Technology is a lever. It magnifies work. And the lever not only grows increasingly long, but the rate at which it grows is itself increasing.

Which in turn means the variation in the amount of wealth people can create has not only been increasing, but accelerating.

The unusual conditions that prevailed in the mid 20th century masked this underlying trend. The ambitious had little choice but to join large organizations that made them march in step with lots of other people—literally in the case of the armed forces, figuratively in the case of big corporations. Even if the big corporations had wanted to pay people proportionate to their value, they couldn’t have figured out how. But that constraint has gone now. Ever since it started to erode in the 1970s, we’ve seen the underlying forces at work again. [22]

Not everyone who gets rich now does it by creating wealth, certainly. But a significant number do, and the Baumol Effect means all their peers get dragged along too. [23] And as long as it’s possible to get rich by creating wealth, the default tendency will be for economic inequality to increase. Even if you eliminate all the other ways to get rich. You can mitigate this with subsidies at the bottom and taxes at the top, but unless taxes are high enough to discourage people from creating wealth, you’re always going to be fighting a losing battle against increasing variation in productivity. [24]

That form of fragmentation, like the others, is here to stay. Or rather, back to stay. Nothing is forever, but the tendency toward fragmentation should be more forever than most things, precisely because it’s not due to any particular cause. It’s simply a reversion to the mean. When Rockefeller said individualism was gone, he was right for a hundred years. It’s back now, and that’s likely to be true for longer.

I worry that if we don’t acknowledge this, we’re headed for trouble.

If we think 20th century cohesion disappeared because of few policy tweaks, we’ll be deluded into thinking we can get it back (minus the bad parts, somehow) with a few countertweaks. And then we’ll waste our time trying to eliminate fragmentation, when we’d be better off thinking about how to mitigate its consequences.

Notes

[1] Lester Thurow, writing in 1975, said the wage differentials prevailing at the end of World War II had become so embedded that they “were regarded as ‘just’ even after the egalitarian pressures of World War II had disappeared. Basically, the same differentials exist to this day, thirty years later.” But Goldin and Margo think market forces in the postwar period also helped preserve the wartime compression of wages—specifically increased demand for unskilled workers, and oversupply of educated ones.

(Oddly enough, the American custom of having employers pay for health insurance derives from efforts by businesses to circumvent NWLB wage controls in order to attract workers.)

[2] As always, tax rates don’t tell the whole story. There were lots of exemptions, especially for individuals. And in World War II the tax codes were so new that the government had little acquired immunity to tax avoidance. If the rich paid high taxes during the war it was more because they wanted to than because they had to.

After the war, federal tax receipts as a percentage of GDP were about the same as they are now.

In fact, for the entire period since the war, tax receipts have stayed close to 18% of GDP, despite dramatic changes in tax rates. The lowest point occurred when marginal income tax rates were highest: 14.1% in 1950. Looking at the data, it’s hard to avoid the conclusion that tax rates have had little effect on what people actually paid.

[3] Though in fact the decade preceding the war had been a time of unprecedented federal power, in response to the Depression. Which is not entirely a coincidence, because the Depression was one of the causes of the war. In many ways the New Deal was a sort of dress rehearsal for the measures the federal government took during wartime. The wartime versions were much more drastic and more pervasive though. As Anthony Badger wrote, “for many Americans the decisive change in their experiences came not with the New Deal but with World War II.”

[4] I don’t know enough about the origins of the world wars to say, but it’s not inconceivable they were connected to the rise of big corporations. If that were the case, 20th century cohesion would have a single cause.

[5] More precisely, there was a bimodal economy consisting, in Galbraith’s words, of “the world of the technically dynamic, massively capitalized and highly organized corporations on the one hand and the hundreds of thousands of small and traditional proprietors on the other.” Money, prestige, and power were concentrated in the former, and there was near zero crossover.

[6] I wonder how much of the decline in families eating together was due to the decline in families watching TV together afterward.

[7] I know when this happened because it was the season Dallas premiered. Everyone else was talking about what was happening on Dallas, and I had no idea what they meant.

[8] I didn’t realize it till I started doing research for this essay, but the meretriciousness of the products I grew up with is a well-known byproduct of oligopoly. When companies can’t compete on price, they compete on tailfins.

[9] Monroeville Mall was at the time of its completion in 1969 the largest in the country. In the late 1970s the movie Dawn of the Dead was shot there. Apparently the mall was not just the location of the movie, but its inspiration; the crowds of shoppers drifting through this huge mall reminded George Romero of zombies. My first job was scooping ice cream in the Baskin-Robbins.

[10] Labor unions were exempted from antitrust laws by the Clayton Antitrust Act in 1914 on the grounds that a person’s work is not “a commodity or article of commerce.” I wonder if that means service companies are also exempt.

[11] The relationships between unions and unionized companies can even be symbiotic, because unions will exert political pressure to protect their hosts. According to Michael Lind, when politicians tried to attack the A&P supermarket chain because it was putting local grocery stores out of business, “A&P successfully defended itself by allowing the unionization of its workforce in 1938, thereby gaining organized labor as a constituency.” I’ve seen this phenomenon myself: hotel unions are responsible for more of the political pressure against Airbnb than hotel companies.

[12] Galbraith was clearly puzzled that corporate executives would work so hard to make money for other people (the shareholders) instead of themselves. He devoted much of The New Industrial State to trying to figure this out.

His theory was that professionalism had replaced money as a motive, and that modern corporate executives were, like (good) scientists, motivated less by financial rewards than by the desire to do good work and thereby earn the respect of their peers. There is something in this, though I think lack of movement between companies combined with self-interest explains much of observed behavior.

[13] Galbraith (p. 94) says a 1952 study of the 800 highest paid executives at 300 big corporations found that three quarters of them had been with their company for more than 20 years.

[14] It seems likely that in the first third of the 20th century executive salaries were low partly because companies then were more dependent on banks, who would have disapproved if executives got too much. This was certainly true in the beginning. The first big company CEOs were J. P. Morgan’s hired hands.

Companies didn’t start to finance themselves with retained earnings till the 1920s. Till then they had to pay out their earnings in dividends, and so depended on banks for capital for expansion. Bankers continued to sit on corporate boards till the Glass-Steagall act in 1933.

By mid-century big companies funded 3/4 of their growth from earnings. But the early years of bank dependence, reinforced by the financial controls of World War II, must have had a big effect on social conventions about executive salaries. So it may be that the lack of movement between companies was as much the effect of low salaries as the cause.

Incidentally, the switch in the 1920s to financing growth with retained earnings was one cause of the 1929 crash. The banks now had to find someone else to lend to, so they made more margin loans.

[15] Even now it’s hard to get them to. One of the things I find hardest to get into the heads of would-be startup founders is how important it is to do certain kinds of menial work early in the life of a company. Doing things that don’t scale is to how Henry Ford got started as a high-fiber diet is to the traditional peasant’s diet: they had no choice but to do the right thing, while we have to make a conscious effort.

[16] Founders weren’t celebrated in the press when I was a kid. “Our founder” meant a photograph of a severe-looking man with a walrus mustache and a wing collar who had died decades ago. The thing to be when I was a kid was an executive. If you weren’t around then it’s hard to grasp the cachet that term had. The fancy version of everything was called the “executive” model.

[17] The wave of hostile takeovers in the 1980s was enabled by a combination of circumstances: court decisions striking down state anti-takeover laws, starting with the Supreme Court’s 1982 decision in Edgar v. MITE Corp.; the Reagan administration’s comparatively sympathetic attitude toward takeovers; the Depository Institutions Act of 1982, which allowed banks and savings and loans to buy corporate bonds; a new SEC rule issued in 1982 (rule 415) that made it possible to bring corporate bonds to market faster; the creation of the junk bond business by Michael Milken; a vogue for conglomerates in the preceding period that caused many companies to be combined that never should have been; a decade of inflation that left many public companies trading below the value of their assets; and not least, the increasing complacency of managements.

[18] Foster, Richard. “Creative Destruction Whips through Corporate America.” Innosight, February 2012.

[19] CEOs of big companies may be overpaid. I don’t know enough about big companies to say. But it is certainly not impossible for a CEO to make 200x as much difference to a company’s revenues as the average employee. Look at what Steve Jobs did for Apple when he came back as CEO. It would have been a good deal for the board to give him 95% of the company. Apple’s market cap the day Steve came back in July 1997 was 1.73 billion. 5% of Apple now (January 2016) would be worth about 30 billion. And it would not be if Steve hadn’t come back; Apple probably wouldn’t even exist anymore.

Merely including Steve in the sample might be enough to answer the question of whether public company CEOs in the aggregate are overpaid. And that is not as facile a trick as it might seem, because the broader your holdings, the more the aggregate is what you care about.

[20] The late 1960s were famous for social upheaval. But that was more rebellion (which can happen in any era if people are provoked sufficiently) than fragmentation. You’re not seeing fragmentation unless you see people breaking off to both left and right.

[21] Globally the trend has been in the other direction. While the US is becoming more fragmented, the world as a whole is becoming less fragmented, and mostly in good ways.

[22] There were a handful of ways to make a fortune in the mid 20th century. The main one was drilling for oil, which was open to newcomers because it was not something big companies could dominate through economies of scale. How did individuals accumulate large fortunes in an era of such high taxes? Giant tax loopholes defended by two of the most powerful men in Congress, Sam Rayburn and Lyndon Johnson.

But becoming a Texas oilman was not in 1950 something one could aspire to the way starting a startup or going to work on Wall Street were in 2000, because (a) there was a strong local component and (b) success depended so much on luck.

[23] The Baumol Effect induced by startups is very visible in Silicon Valley. Google will pay people millions of dollars a year to keep them from leaving to start or join startups.

[24] I’m not claiming variation in productivity is the only cause of economic inequality in the US. But it’s a significant cause, and it will become as big a cause as it needs to, in the sense that if you ban other ways to get rich, people who want to get rich will use this route instead.

Thanks to Sam Altman, Trevor Blackwell, Paul Buchheit, Patrick Collison, Ron Conway, Chris Dixon, Benedict Evans, Richard Florida, Ben Horowitz, Jessica Livingston, Robert Morris, Tim O’Reilly, Geoff Ralston, Max Roser, Alexia Tsotsis, and Qasar Younis for reading drafts of this. Max also told me about several valuable sources. Essay from http://paulgraham.com/re.html

Bibliography

Allen, Frederick Lewis. The Big Change. Harper, 1952.

Averitt, Robert. The Dual Economy. Norton, 1968.

Badger, Anthony. The New Deal. Hill and Wang, 1989.

Bainbridge, John. The Super-Americans. Doubleday, 1961.

Beatty, Jack. Collossus. Broadway, 2001.

Brinkley, Douglas. Wheels for the World. Viking, 2003.

Brownleee, W. Elliot. Federal Taxation in America. Cambridge, 1996.

Chandler, Alfred. The Visible Hand. Harvard, 1977.

Chernow, Ron. The House of Morgan. Simon & Schuster, 1990.

Chernow, Ron. Titan: The Life of John D. Rockefeller. Random House, 1998.

Galbraith, John. The New Industrial State. Houghton Mifflin, 1967.

Goldin, Claudia and Robert A. Margo. “The Great Compression: The Wage Structure in the United States at Mid-Century.” NBER Working Paper 3817, 1991.

Gordon, John. An Empire of Wealth. HarperCollins, 2004.

Klein, Maury. The Genesis of Industrial America, 1870-1920. Cambridge, 2007.

Lind, Michael. Land of Promise. HarperCollins, 2012.

Mickelthwaite, John, and Adrian Wooldridge. The Company. Modern Library, 2003.

Nasaw, David. Andrew Carnegie. Penguin, 2006.

Sobel, Robert. The Age of Giant Corporations. Praeger, 1993.

Thurow, Lester. Generating Inequality: Mechanisms of Distribution. Basic Books, 1975.

Witte, John. The Politics and Development of the Federal Income Tax. Wisconsin, 1985.

 

Threat to Prosperity: Canada Should Mind Business Investment Gap

August, 2022 – Business investment in Canada is so weak that capital per member of the labour force is falling, and the implications for incomes and competitiveness are ominous. Governments, particularly the federal government, need to get serious about growth to get workers more of the tools they require to compete and thrive, according to a new report from the C.D. Howe Institute.

In “Decapitalization: Weak Business Investment Threatens Canadian Prosperity”, authors William B.P. Robson and Mawakina Bafale write that since 2015 Canada’s stock of capital per available worker has been declining and its rate of gross investment per worker has been well below that in the United States and other OECD countries.

Capital= Business “bread and butter”

They examine why Canada might be lagging as well as what action to take.

“Business investment and productivity are closely related: productivity growth inspires investment by creating opportunities, and investment drives productivity growth by equipping workers with more and better tools,” says Robson. “Investment per available worker lower in Canada than abroad tells us that businesses see less opportunity in Canada, and prefigures weaker growth in Canadian earnings and living standards than in other OECD countries.”

New investment per available worker in Canada, adjusted for purchasing power, was only slightly above 50 cents for every dollar of investment per available United States worker in 2021 – lower than at any point since the beginning of the 1990s. In addition, in 2022, OECD projections show that Canadian workers will likely enjoy only 73 cents of new capital for every dollar enjoyed by their counterparts in the OECD excluding the US, according to Robson and Bafale.

The authors’ calculations from OECD projections for 2022 show $20,400 of new capital per available worker this year for OECD countries excluding the United States, compared to $14,800 for Canada.

In other words, new capital per available worker in Canada will be more than one-quarter less than in those countries this year.

Declines in the stock of machinery and equipment (M&E) and intellectual property (IPP) per member of the workforce are particularly worrisome, the authors explain, because those types of capital may be particularly important for economy-wide productivity. “Whatever special messages the recent M&E and IPP numbers may convey, the message from stocks of business capital overall is clear: the average member of Canada’s labour force began 2022 with less capital to work with than she or he had in 2014,” says Bafale.

Robson and Bafale identify a few probable causes for Canada’s dismal investment performance. These include: weak business in the natural resource industries; restricted access to finance for small and mid-size firms; a loss in Canada’s competitive edge in business taxation, notably against the United States; an uncongenial environment for IP investment; regulatory uncertainly; unpredictable fiscal policy; and governments’ in-house spending and transfers to households that are steering resources into consumption and housing rather than non-residential investment.

Is business investment capital trajectory predetermined?

“The prospect that Canadians will find themselves increasingly relegated to lower value-added activities relative to workers in the United States and elsewhere, who are raising their productivity and earnings faster, should spur Canadian policymakers to action,” conclude Robson and Bafale. “The first step is to recognize that recent trends are a symptom of threats to Canada’s prosperity and competitiveness – that low business investment is a problem that governments can and should address.”

Supplemental- Are you a small Canadian business frustrated with the difficulties involved in accessing capital? For example, our experience has shown that the multitude of Business Development Corporations operate with autonomy but without accountability, poor vision and nepotism. Essentially, gleaning business plans and strategies before revealing ‘jump through these application hoops” which include personal finance and personal life details. It is sobering to discover that they also receive a hefty commission % for every applicant they ‘certify as successful’. Do you agree or have you had a more positive experience? We want to hear from you in the comments below.

Cost Of Marijuana In 120 Cities And How Much Tax Revenue If Legalized

First a few quick facts….

‏Tokyo, Japan has the most expensive cannabis‏ ‏, at 32.66 USD per gram. ‏

‏Quito, Ecuador has the least expensive marijuana‏ ‏, at 1.34 USD per gram.‏

‏Based on the average US marijuana tax rates currently implemented, ‏ ‏New York City could generate the highest potential tax revenue by legalizing weed‏ ‏, with 156.40 million USD per year. New York City also has the highest consumption rate of cannabis, at 77.44 metric tons per year.‏

‏Cannabis costs ‏ ‏$7.82 per gram in Toronto, Canada‏ ‏. ‏

‏Berlin, Germany – ‏ ‏Automatic cultivator device, ‏ ‏Seedo‏ ‏, after much research and data gathering, previously released the 2018 Cannabis Price Index, detailing the cost of marijuana in 120 global cities. Seedo is one of the many new ventures embracing the newly legalized cannabis industry. Their main goal is to allow both medicinal and recreational consumers to grow their own supply, avoiding extra taxes and bypassing harmful pesticides. The aim of this study is to illustrate the continuous need for legislative reform on cannabis use around the world, and to determine if there are any lessons to be learned from those cities at the forefront of marijuana legalisation.

‏Although Seedo’s technology enables smokers to get off the grid, this study considers one of the biggest byproducts of legalising cannabis—the potential tax revenue for the local government body. For this reason, Seedo decided not only to research the cost of cannabis around the world, but also to calculate how much potential tax a city could generate if they were to legalise marijuana. ‏

‏The study began first by selecting 120 cities across the world, including locations where cannabis is currently legal, illegal and partially legal, and where marijuana consumption data is available. Then, they looked into the price of weed per gram in each city. To calculate how much potential tax a city could make by legalising weed, Seedo investigated how much tax is paid on the most popular brand of cigarettes, as this offers the closest comparison. They then looked at what percentage marijuana is currently taxed in cities where it’s already legalised in the US. ‏

‏“This study has revealed some incredible insights into the kind of tax revenue that legalising weed could generate.” says Uri Zeevi, CMO at Seedo. “Take New York City for instance, which has the highest consumption level in the study at 77.44 metric tons of cannabis per year. If they taxed marijuana at the average US cannabis tax level, the city could make $‏ ‏156.4‏ ‏ million in potential tax revenue per year. This is equivalent to providing nearly 3 months worth of free school meals to every single public school kid in New York City.” ‏

‏The table below reveals a sample of the results for ‏ ‏Toronto, Canada‏ ‏:‏

‏City‏

‏Legality‏

‏Price per gram, US$‏

‏Total possible tax collection, if taxed at cigarette level, mil US$‏

‏Total possible tax collection, if taxed at average US marijuana taxes, mil US$‏

‏Total consumption in metric tons‏

‏Toronto‏

‏Partial‏

‏7.82‏

‏124.15‏

‏33.38‏

‏22.75‏

‏The table below shows the ‏ ‏top 10 most and least expensive cities for cannabis‏ ‏:‏

‏Top 10 Most Expensive Cities‏

‏Top 10 Least Expensive Cities‏

‏#‏

‏City‏

‏Country‏

‏Legality‏

‏Price per gram, US$‏

‏#‏

‏City‏

‏Country‏

‏Legality‏

‏Price per gram, US$‏

‏1‏

‏Tokyo‏

‏Japan‏

‏Illegal‏

‏32.66‏

‏1‏

‏Quito‏

‏Ecuador‏

‏Partial‏

‏1.34‏

‏2‏

‏Seoul‏

‏South Korea‏

‏Illegal‏

‏32.44‏

‏2‏

‏Bogota‏

‏Colombia‏

‏Partial‏

‏2.20‏

‏3‏

‏Kyoto‏

‏Japan‏

‏Illegal‏

‏29.65‏

‏3‏

‏Asuncion‏

‏Paraguay‏

‏Partial‏

‏2.22‏

‏4‏

‏Hong Kong‏

‏China‏

‏Illegal‏

‏27.48‏

‏4‏

‏Jakarta‏

‏Indonesia‏

‏Illegal‏

‏3.79‏

‏5‏

‏Bangkok‏

‏Thailand‏

‏Partial‏

‏24.81‏

‏5‏

‏Panama City‏

‏Panama‏

‏Illegal‏

‏3.85‏

‏6‏

‏Dublin‏

‏Ireland‏

‏Illegal‏

‏21.63‏

‏6‏

‏Johannesburg‏

‏South Africa‏

‏Illegal‏

‏4.01‏

‏7‏

‏Tallinn‏

‏Estonia‏

‏Partial‏

‏20.98‏

‏7‏

‏Montevideo‏

‏Uruguay‏

‏Legal‏

‏4.15‏

‏8‏

‏Shanghai‏

‏China‏

‏Illegal‏

‏20.82‏

‏8‏

‏Astana‏

‏Kazakhstan‏

‏Illegal‏

‏4.22‏

‏9‏

‏Beijing‏

‏China‏

‏Illegal‏

‏20.52‏

‏9‏

‏Antwerp‏

‏Belgium‏

‏Partial‏

‏4.29‏

‏10‏

‏Oslo‏

‏Norway‏

‏Partial‏

‏19.14‏

‏10‏

‏New Delhi‏

‏India‏

‏Partial‏

‏4.38‏

‏N.B. These tables are a sample of the full results. To find the complete results for all 120 cities, please see the bottom of the press release. ‏

‏The table below shows the ‏ ‏top 10 cities who could generate the most potential tax ‏ ‏by legalising cannabis, if taxed at the same rate as the most popular cigarette brand:‏

‏#‏

‏City‏

‏Country‏

‏Legality‏

‏Price per gram, US$‏

‏% of cigarette tax‏

‏Possible tax revenue, mil US$ ‏

‏1‏

‏Cairo‏

‏Egypt‏

‏Illegal‏

‏16.15‏

‏73.13‏

‏384.87‏

‏2‏

‏New York‏

‏USA‏

‏Partial‏

‏10.76‏

‏42.54‏

‏354.48‏

‏3‏

‏London‏

‏UK‏

‏Illegal‏

‏9.20‏

‏82.16‏

‏237.35‏

‏4‏

‏Sydney‏

‏Australia‏

‏Partial‏

‏10.79‏

‏56.76‏

‏138.36‏

‏5‏

‏Karachi‏

‏Pakistan‏

‏Illegal‏

‏5.32‏

‏60.7‏

‏135.48‏

‏6‏

‏Melbourne‏

‏Australia‏

‏Partial‏

‏10.84‏

‏56.76‏

‏132.75‏

‏7‏

‏Moscow‏

‏Russia‏

‏Partial‏

‏11.84‏

‏47.63‏

‏128.97‏

‏8‏

‏Toronto‏

‏Canada‏

‏Partial‏

‏7.82‏

‏69.8‏

‏124.15‏

‏9‏

‏Chicago‏

‏USA‏

‏Partial‏

‏11.46‏

‏42.54‏

‏119.61‏

‏10‏

‏Berlin‏

‏Germany‏

‏Partial‏

‏13.53‏

‏72.9‏

‏114.77‏

‏N.B. % of cigarette tax refers to the tax percentage on the most popular brand. Possible tax revenue refers to the total possible tax collection per year, if taxed at cigarette level. For a full explanation of how the study was conducted, please see the methodology at the bottom of the press release. ‏

‏The table below shows the ‏ ‏top 10 cities who could generate the most potential tax‏ ‏ by legalising cannabis, if taxed at the average US marijuana tax rate:‏

‏#‏

‏City‏

‏Country‏

‏Legality‏

‏Price per gram, US$‏

‏Possible tax revenue, mil US$‏

‏1‏

‏New York‏

‏USA‏

‏Partial‏

‏10.76‏

‏156.4‏

‏2‏

‏Cairo‏

‏Egypt‏

‏Illegal‏

‏16.15‏

‏98.78‏

‏3‏

‏London‏

‏UK‏

‏Illegal‏

‏9.20‏

‏54.22‏

‏4‏

‏Chicago‏

‏USA‏

‏Partial‏

‏11.46‏

‏52.77‏

‏5‏

‏Moscow‏

‏Russia‏

‏Partial‏

‏11.84‏

‏50.82‏

‏6‏

‏Sydney‏

‏Australia‏

‏Partial‏

‏10.79‏

‏45.75‏

‏7‏

‏Melbourne‏

‏Australia‏

‏Partial‏

‏10.84‏

‏43.9‏

‏8‏

‏Karachi‏

‏Pakistan‏

‏Illegal‏

‏5.32‏

‏41.89‏

‏9‏

‏Houston‏

‏USA‏

‏Partial‏

‏10.03‏

‏39.32‏

‏10‏

‏Toronto‏

‏Canada‏

‏Partial‏

‏7.82‏

‏33.38‏

‏N.B. Possible tax revenue refers to the total possible tax collection per year, if taxed at average US marijuana tax rate.‏

‏The table below shows the‏ ‏ top 10 cities with the highest and lowest consumption of cannabis, ‏ ‏per year:‏

‏Highest Consumers of Cannabis‏

‏ Lowest Consumers of Cannabis‏

‏#‏

‏City‏

‏Country‏

‏Legality‏

‏Price per gram, US$‏

‏Total consumption, metric tons‏

‏#‏

‏City‏

‏Country‏

‏Legality‏

‏Price per gram, US$‏

‏Total consumption, metric tons‏

‏1‏

‏New York‏

‏USA‏

‏Partial‏

‏10.76‏

‏77.44‏

‏1‏

‏Singapore‏

‏Singapore‏

‏Illegal‏

‏14.01‏

‏0.02‏

‏2‏

‏Karachi‏

‏Pakistan‏

‏Illegal‏

‏5.32‏

‏41.95‏

‏2‏

‏Santo Domingo‏

‏Dominican Rep.‏

‏Illegal‏

‏6.93‏

‏0.16‏

‏3‏

‏New Delhi‏

‏India‏

‏Partial‏

‏4.38‏

‏38.26‏

‏3‏

‏Kyoto‏

‏Japan‏

‏Illegal‏

‏29.65‏

‏0.24‏

‏4‏

‏Los Angeles‏

‏USA‏

‏Legal‏

‏8.14‏

‏36.06‏

‏4‏

‏Thessaloniki‏

‏Greece‏

‏Partial‏

‏13.49‏

‏0.29‏

‏5‏

‏Cairo‏

‏Egypt‏

‏Illegal‏

‏16.15‏

‏32.59‏

‏5‏

‏Luxembourg City‏

‏Luxembourg‏

‏Partial‏

‏7.26‏

‏0.32‏

‏6‏

‏Mumbai‏

‏India‏

‏Partial‏

‏4.57‏

‏32.38‏

‏6‏

‏Panama City‏

‏Panama‏

‏Illegal‏

‏3.85‏

‏0.37‏

‏7‏

‏London‏

‏UK‏

‏Illegal‏

‏9.20‏

‏31.4‏

‏7‏

‏Reykjavik‏

‏Iceland‏

‏Illegal‏

‏15.92‏

‏0.44‏

‏8‏

‏Chicago‏

‏USA‏

‏Partial‏

‏11.46‏

‏24.54‏

‏8‏

‏Asuncion‏

‏Paraguay‏

‏Partial‏

‏2.22‏

‏0.46‏

‏9‏

‏Moscow‏

‏Russia‏

‏Partial‏

‏11.84‏

‏22.87‏

‏9‏

‏Colombo‏

‏Sri Lanka‏

‏Illegal‏

‏9.12‏

‏0.59‏

‏10‏

‏Toronto‏

‏Canada‏

‏Partial‏

‏7.82‏

‏22.75‏

‏10‏

‏Manila‏

‏Philippines‏

‏Illegal‏

‏5.24‏

‏0.6‏

‏N.B. Total consumption is calculated per annum. ‏

‏Additional quotes:‏

‏“The way that the legalised cannabis industry is rapidly evolving alongside new technologies shows how innovative emerging tech companies are today.” says Uri Zeevi, CMO at Seedo. “Take the way that cannabis and cryptocurrency have joined forces, with ‏ ‏examples such as HempCoin or nezly, which manage processes and payments in the new marijuana industry.‏ ‏ When you consider too the potential that these new technologies have to disrupt the cannabis industry, there’s no denying that these are very exciting times.” ‏

‏“At Seedo, we’ve built technology that helps regular smokers to grow cannabis plants of the utmost quality from the comfort of their own home, avoiding pesticides and taking ownership of their personal supply.” says Uri Zeevi, CMO at Seedo. “We believe that by understanding the cost of weed around the world, we can help to educate smokers about the potential financial benefits of hydroponic growing technology.” ‏

‏“That illegal cannabis use is so high in countries that still carry the death penalty, such as Pakistan and Egypt, those in power ought to see how desperately new legislation is needed.” comments Uri Zeevi, CMO at Seedo. “By removing the criminal element from marijuana, governments will then able to more safely regulate production, take away power from underground gangs, and as we’ve shown in this study, generate huge tax revenues.”‏

‏Further findings:‏

‏New York City, USA has the highest consumption rate of cannabis‏ ‏, at 77.44 metric tons per year.‏

‏Boston, USA has the most expensive cannabis of all the cities where it’s legal‏ ‏, at 11.01 USD, while Montevideo, Uruguay has the least expensive at 4.15 USD. ‏

‏While Tokyo, Japan has the most expensive cannabis of all cities where it’s illegal, at 32.66 USD, ‏ ‏Jakarta, Indonesia has the least expensive at 3.79 USD, despite being classed as a Group 1 drug with harsh sentences such as life imprisonment and the death penalty.‏ ‏ ‏

‏For cities where cannabis is partially legal, Bangkok, Thailand has the most expensive at 24.81 USD, while Quito, Ecuador has the least expensive at 1.34 USD. ‏

‏Bulgaria has the highest tax rates for the most popular brand of cigarettes, at 82.65%, while Paraguay has the lowest, with rates of 16%. ‏

‏Cairo, Egypt would gain the most revenue in tax if they were to legalise cannabis‏ ‏ and tax it as the same rate as cigarettes, at 384.87 million USD. Singapore, Singapore would gain the least, at 0.14 million USD, due in part to the city’s low consumption of marijuana at 0.02 metric tons per annum.‏

‏Based on the average US marijuana tax rates currently implemented,‏ ‏ New York City could generate the highest potential tax revenue by legalising weed, with 156.4 million USD per year‏ ‏. Singapore, Singapore would gain the least, at 0.04 million USD

‏About “Seedo”‏ ‏: Seedo is a fully automated hydroponic growing device which lets you grow your own medicinal herbs and vegetables from the comfort of your own home. Seedo controls and monitors the growing process, from seed to plant, while providing optimal lab conditions to assure premium quality produce year-round. Seedo’s goal is to simplify the growing process, making it accessible for everyone, without compromising on quality. ‏

‏The full results of the 2018 Cannabis Price Index:‏

‏#‏

‏City‏

‏Country‏

‏Legality‏

‏Price per gram, US$‏

‏Taxes of cigarettes, % of the most sold brand‏

‏Total possible tax collection, if taxed at cigarette level, mil US$‏

‏Total possible tax collection, if taxed at average US marijuana taxes, mil US$‏

‏Total Consumption in metric tons‏

‏1‏

‏Tokyo‏

‏Japan‏

‏Illegal‏

‏32.66‏

‏64.36‏

‏32.14‏

‏9.37‏

‏1.53‏

‏2‏

‏Seoul‏

‏South Korea‏

‏Illegal‏

‏32.44‏

‏61.99‏

‏31.61‏

‏9.57‏

‏1.57‏

‏3‏

‏Kyoto‏

‏Japan‏

‏Illegal‏

‏29.65‏

‏64.36‏

‏4.64‏

‏1.35‏

‏0.24‏

‏4‏

‏Hong Kong‏

‏China‏

‏Illegal‏

‏27.48‏

‏44.43‏

‏19.72‏

‏8.33‏

‏1.62‏

‏5‏

‏Bangkok‏

‏Thailand‏

‏Partial‏

‏24.81‏

‏73.13‏

‏99.11‏

‏25.44‏

‏5.46‏

‏6‏

‏Dublin‏

‏Ireland‏

‏Illegal‏

‏21.63‏

‏77.80‏

‏29.31‏

‏7.07‏

‏1.74‏

‏7‏

‏Tallinn‏

‏Estonia‏

‏Partial‏

‏20.98‏

‏77.24‏

‏22.13‏

‏5.38‏

‏1.37‏

‏8‏

‏Shanghai‏

‏China‏

‏Illegal‏

‏20.82‏

‏44.43‏

‏49.12‏

‏20.75‏

‏5.31‏

‏9‏

‏Beijing‏

‏China‏

‏Illegal‏

‏20.52‏

‏44.43‏

‏43.10‏

‏18.21‏

‏4.73‏

‏10‏

‏Oslo‏

‏Norway‏

‏Partial‏

‏19.14‏

‏68.83‏

‏19.28‏

‏5.26‏

‏1.46‏

‏11‏

‏Washington, DC‏

‏USA‏

‏Partial‏

‏18.08‏

‏42.54‏

‏47.51‏

‏20.96‏

‏6.18‏

‏12‏

‏Cairo‏

‏Egypt‏

‏Illegal‏

‏16.15‏

‏73.13‏

‏384.87‏

‏98.78‏

‏32.59‏

‏13‏

‏Reykjavik‏

‏Iceland‏

‏Illegal‏

‏15.92‏

‏56.40‏

‏3.97‏

‏1.32‏

‏0.44‏

‏14‏

‏Belfast‏

‏Ireland‏

‏Illegal‏

‏15.81‏

‏77.80‏

‏13.55‏

‏3.27‏

‏1.10‏

‏15‏

‏Minsk‏

‏Belarus‏

‏Illegal‏

‏15.80‏

‏51.15‏

‏9.08‏

‏3.33‏

‏1.12‏

‏16‏

‏Athens‏

‏Greece‏

‏Partial‏

‏14.95‏

‏79.95‏

‏7.42‏

‏1.74‏

‏0.62‏

‏17‏

‏Auckland‏

‏New Zealand‏

‏Partial‏

‏14.77‏

‏77.34‏

‏106.03‏

‏25.73‏

‏9.28‏

‏18‏

‏Munich‏

‏Germany‏

‏Partial‏

‏14.56‏

‏72.90‏

‏50.90‏

‏13.10‏

‏4.80‏

‏19‏

‏Helsinki‏

‏Finland‏

‏Partial‏

‏14.42‏

‏81.53‏

‏27.12‏

‏6.24‏

‏2.31‏

‏20‏

‏Singapore‏

‏Singapore‏

‏Illegal‏

‏14.01‏

‏66.23‏

‏0.14‏

‏0.04‏

‏0.02‏

‏21‏

‏Berlin‏

‏Germany‏

‏Partial‏

‏13.53‏

‏72.90‏

‏114.77‏

‏29.55‏

‏11.64‏

‏22‏

‏Stuttgart‏

‏Germany‏

‏Partial‏

‏13.50‏

‏72.90‏

‏20.20‏

‏5.20‏

‏2.05‏

‏23‏

‏Thessaloniki‏

‏Greece‏

‏Partial‏

‏13.49‏

‏79.95‏

‏3.17‏

‏0.75‏

‏0.29‏

‏24‏

‏Stockholm‏

‏Sweden‏

‏Illegal‏

‏13.20‏

‏68.84‏

‏15.06‏

‏4.11‏

‏1.66‏

‏25‏

‏Vienna‏

‏Austria‏

‏Partial‏

‏12.87‏

‏74.00‏

‏59.21‏

‏15.02‏

‏6.22‏

‏26‏

‏Copenhagen‏

‏Denmark‏

‏Partial‏

‏12.47‏

‏74.75‏

‏20.65‏

‏5.18‏

‏2.22‏

‏27‏

‏Moscow‏

‏Russia‏

‏Partial‏

‏11.84‏

‏47.63‏

‏128.97‏

‏50.82‏

‏22.87‏

‏28‏

‏Hamburg‏

‏Germany‏

‏Partial‏

‏11.64‏

‏72.90‏

‏50.16‏

‏12.92‏

‏5.91‏

‏29‏

‏Chicago‏

‏USA‏

‏Partial‏

‏11.46‏

‏42.54‏

‏119.61‏

‏52.77‏

‏24.54‏

‏30‏

‏Philadelphia‏

‏USA‏

‏Partial‏

‏11.30‏

‏42.54‏

‏68.37‏

‏30.16‏

‏14.22‏

‏31‏

‏Bucharest‏

‏Romania‏

‏Partial‏

‏11.18‏

‏75.41‏

‏17.23‏

‏4.29‏

‏2.04‏

‏32‏

‏Cologne‏

‏Germany‏

‏Partial‏

‏11.14‏

‏72.90‏

‏28.51‏

‏7.34‏

‏3.51‏

‏33‏

‏Geneva‏

‏Switzerland‏

‏Partial‏

‏11.12‏

‏61.20‏

‏5.90‏

‏1.81‏

‏0.87‏

‏34‏

‏Boston‏

‏USA‏

‏Legal‏

‏11.01‏

‏42.54‏

‏28.59‏

‏12.61‏

‏6.10‏

‏35‏

‏Adelaide‏

‏Australia‏

‏Partial‏

‏10.91‏

‏56.76‏

‏41.60‏

‏13.75‏

‏6.72‏

‏36‏

‏Istanbul‏

‏Turkey‏

‏Partial‏

‏10.87‏

‏82.13‏

‏21.79‏

‏4.98‏

‏2.44‏

‏37‏

‏Melbourne‏

‏Australia‏

‏Partial‏

‏10.84‏

‏56.76‏

‏132.75‏

‏43.90‏

‏21.58‏

‏38‏

‏Sydney‏

‏Australia‏

‏Partial‏

‏10.79‏

‏56.76‏

‏138.36‏

‏45.75‏

‏22.59‏

‏39‏

‏New York‏

‏USA‏

‏Partial‏

‏10.76‏

‏42.54‏

‏354.48‏

‏156.40‏

‏77.44‏

‏40‏

‏Düsseldorf‏

‏Germany‏

‏Partial‏

‏10.70‏

‏72.90‏

‏15.82‏

‏4.07‏

‏2.03‏

‏41‏

‏Brisbane‏

‏Australia‏

‏Partial‏

‏10.63‏

‏56.76‏

‏66.88‏

‏22.12‏

‏11.09‏

‏42‏

‏Hanover‏

‏Germany‏

‏Partial‏

‏10.51‏

‏72.90‏

‏13.46‏

‏3.47‏

‏1.76‏

‏43‏

‏Prague‏

‏Czech Rep.‏

‏Partial‏

‏10.47‏

‏77.42‏

‏63.95‏

‏15.50‏

‏7.89‏

‏44‏

‏Frankfurt‏

‏Germany‏

‏Partial‏

‏10.29‏

‏72.90‏

‏18.06‏

‏4.65‏

‏2.41‏

‏45‏

‏Wellington‏

‏New Zealand‏

‏Partial‏

‏10.11‏

‏77.34‏

‏19.53‏

‏4.74‏

‏2.50‏

‏46‏

‏Dallas‏

‏USA‏

‏Partial‏

‏10.03‏

‏42.54‏

‏51.01‏

‏22.50‏

‏11.95‏

‏47‏

‏Houston‏

‏USA‏

‏Partial‏

‏10.03‏

‏42.54‏

‏89.13‏

‏39.32‏

‏20.89‏

‏48‏

‏Vilnius‏

‏Lithuania‏

‏Illegal‏

‏10.00‏

‏75.76‏

‏5.20‏

‏1.29‏

‏0.69‏

‏49‏

‏Zurich‏

‏Switzerland‏

‏Partial‏

‏9.71‏

‏61.20‏

‏10.33‏

‏3.17‏

‏1.74‏

‏50‏

‏Montpellier‏

‏France‏

‏Illegal‏

‏9.70‏

‏80.30‏

‏12.21‏

‏2.85‏

‏1.57‏

‏51‏

‏Canberra‏

‏Australia‏

‏Partial‏

‏9.65‏

‏56.76‏

‏10.96‏

‏3.63‏

‏2.00‏

‏52‏

‏Zagreb‏

‏Croatia‏

‏Partial‏

‏9.43‏

‏75.26‏

‏24.35‏

‏6.07‏

‏3.43‏

‏53‏

‏Nice‏

‏France‏

‏Illegal‏

‏9.40‏

‏80.30‏

‏15.80‏

‏3.69‏

‏2.09‏

‏54‏

‏Phoenix‏

‏USA‏

‏Partial‏

‏9.35‏

‏42.54‏

‏58.26‏

‏25.71‏

‏14.65‏

‏55‏

‏Paris‏

‏France‏

‏Illegal‏

‏9.30‏

‏80.30‏

‏102.25‏

‏23.90‏

‏13.69‏

‏56‏

‏Miami‏

‏USA‏

‏Partial‏

‏9.27‏

‏42.54‏

‏16.24‏

‏7.16‏

‏4.12‏

‏57‏

‏San Francisco‏

‏USA‏

‏Legal‏

‏9.27‏

‏42.54‏

‏30.94‏

‏13.65‏

‏7.85‏

‏58‏

‏London‏

‏UK‏

‏Illegal‏

‏9.20‏

‏82.16‏

‏237.35‏

‏54.22‏

‏31.40‏

‏59‏

‏Colombo‏

‏Sri Lanka‏

‏Illegal‏

‏9.12‏

‏73.78‏

‏3.98‏

‏1.01‏

‏0.59‏

‏60‏

‏Riga‏

‏Latvia‏

‏Illegal‏

‏9.00‏

‏76.89‏

‏10.23‏

‏2.50‏

‏1.48‏

‏61‏

‏Bratislava‏

‏Slovakia‏

‏Illegal‏

‏8.92‏

‏81.54‏

‏7.24‏

‏1.67‏

‏1.00‏

‏62‏

‏Milan‏

‏Italy‏

‏Partial‏

‏8.85‏

‏75.68‏

‏46.06‏

‏11.42‏

‏6.88‏

‏63‏

‏Varna‏

‏Bulgaria‏

‏Illegal‏

‏8.83‏

‏82.65‏

‏4.84‏

‏1.10‏

‏0.66‏

‏64‏

‏Marseille‏

‏France‏

‏Illegal‏

‏8.69‏

‏80.30‏

‏36.23‏

‏8.47‏

‏5.19‏

‏65‏

‏Glasgow‏

‏UK‏

‏Illegal‏

‏8.65‏

‏82.16‏

‏15.21‏

‏3.47‏

‏2.14‏

‏66‏

‏Toulouse‏

‏France‏

‏Illegal‏

‏8.62‏

‏80.30‏

‏18.67‏

‏4.36‏

‏2.70‏

‏67‏

‏Birmingham‏

‏UK‏

‏Illegal‏

‏8.58‏

‏82.16‏

‏27.73‏

‏6.34‏

‏3.93‏

‏68‏

‏Kuala Lumpur‏

‏Malaysia‏

‏Illegal‏

‏8.54‏

‏55.36‏

‏6.61‏

‏2.24‏

‏1.40‏

‏69‏

‏Monterrey‏

‏Mexico‏

‏Partial‏

‏8.45‏

‏65.87‏

‏4.17‏

‏1.19‏

‏0.75‏

‏70‏

‏Edinburgh‏

‏UK‏

‏Illegal‏

‏8.41‏

‏82.16‏

‏12.22‏

‏2.79‏

‏1.77‏

‏71‏

‏Lisbon‏

‏Portugal‏

‏Partial‏

‏8.36‏

‏74.51‏

‏4.69‏

‏1.18‏

‏0.75‏

‏72‏

‏Strasbourg‏

‏France‏

‏Illegal‏

‏8.35‏

‏80.30‏

‏11.13‏

‏2.60‏

‏1.66‏

‏73‏

‏Warsaw‏

‏Poland‏

‏Partial‏

‏8.31‏

‏80.29‏

‏29.27‏

‏6.84‏

‏4.39‏

‏74‏

‏Lyon‏

‏France‏

‏Illegal‏

‏8.20‏

‏80.30‏

‏19.45‏

‏4.55‏

‏2.95‏

‏75‏

‏Los Angeles‏

‏USA‏

‏Legal‏

‏8.14‏

‏42.54‏

‏124.88‏

‏55.10‏

‏36.06‏

‏76‏

‏Liverpool‏

‏UK‏

‏Illegal‏

‏7.94‏

‏82.16‏

‏10.86‏

‏2.48‏

‏1.67‏

‏77‏

‏Amsterdam‏

‏Netherlands‏

‏Partial‏

‏7.89‏

‏73.40‏

‏20.94‏

‏5.35‏

‏3.61‏

‏78‏

‏Manchester‏

‏UK‏

‏Illegal‏

‏7.88‏

‏82.16‏

‏58.99‏

‏13.48‏

‏9.11‏

‏79‏

‏Rome‏

‏Italy‏

‏Partial‏

‏7.86‏

‏75.68‏

‏88.16‏

‏21.86‏

‏14.82‏

‏80‏

‏Toronto‏

‏Canada‏

‏Partial‏

‏7.82‏

‏69.80‏

‏124.15‏

‏33.38‏

‏22.75‏

‏81‏

‏Denver‏

‏USA‏

‏Legal‏

‏7.79‏

‏42.54‏

‏20.53‏

‏9.06‏

‏6.20‏

‏82‏

‏Naples‏

‏Italy‏

‏Partial‏

‏7.75‏

‏75.68‏

‏29.82‏

‏7.40‏

‏5.08‏

‏83‏

‏Leeds‏

‏UK‏

‏Illegal‏

‏7.67‏

‏82.16‏

‏16.93‏

‏3.87‏

‏2.69‏

‏84‏

‏Seattle‏

‏USA‏

‏Legal‏

‏7.58‏

‏42.54‏

‏20.59‏

‏9.08‏

‏6.39‏

‏85‏

‏Madrid‏

‏Spain‏

‏Partial‏

‏7.47‏

‏78.09‏

‏93.40‏

‏22.45‏

‏16.01‏

‏86‏

‏Calgary‏

‏Canada‏

‏Partial‏

‏7.30‏

‏69.80‏

‏52.23‏

‏14.05‏

‏10.25‏

‏87‏

‏Luxembourg City‏

‏Luxembourg‏

‏Partial‏

‏7.26‏

‏70.24‏

‏1.62‏

‏0.43‏

‏0.32‏

‏88‏

‏San Jose‏

‏Costa Rica‏

‏Partial‏

‏7.23‏

‏69.76‏

‏7.84‏

‏2.11‏

‏1.56‏

‏89‏

‏Buenos Aires‏

‏Argentina‏

‏Partial‏

‏7.13‏

‏69.84‏

‏25.32‏

‏6.81‏

‏5.09‏

‏90‏

‏Brussels‏

‏Belgium‏

‏Partial‏

‏7.09‏

‏75.92‏

‏15.50‏

‏3.83‏

‏2.88‏

‏91‏

‏Santo Domingo‏

‏Dominican Rep.‏

‏Illegal‏

‏6.93‏

‏58.87‏

‏0.67‏

‏0.21‏

‏0.16‏

‏92‏

‏Graz‏

‏Austria‏

‏Partial‏

‏6.84‏

‏74.00‏

‏4.81‏

‏1.22‏

‏0.95‏

‏93‏

‏Budapest‏

‏Hungary‏

‏Illegal‏

‏6.74‏

‏77.26‏

‏7.70‏

‏1.87‏

‏1.48‏

‏94‏

‏Sofia‏

‏Bulgaria‏

‏Illegal‏

‏6.66‏

‏82.65‏

‏12.83‏

‏2.91‏

‏2.33‏

‏95‏

‏Ottawa‏

‏Canada‏

‏Partial‏

‏6.62‏

‏69.80‏

‏35.43‏

‏9.53‏

‏7.67‏

‏96‏

‏Vancouver‏

‏Canada‏

‏Partial‏

‏6.40‏

‏69.80‏

‏23.44‏

‏6.30‏

‏5.25‏

‏97‏

‏Sao Paulo‏

‏Brazil‏

‏Partial‏

‏6.38‏

‏64.94‏

‏68.55‏

‏19.81‏

‏16.55‏

‏98‏

‏Rotterdam‏

‏Netherlands‏

‏Partial‏

‏6.33‏

‏73.40‏

‏12.75‏

‏3.26‏

‏2.74‏

‏99‏

‏Ljubljana‏

‏Slovenia‏

‏Partial‏

‏6.32‏

‏80.41‏

‏3.43‏

‏0.80‏

‏0.67‏

‏100‏

‏Barcelona‏

‏Spain‏

‏Partial‏

‏6.23‏

‏78.09‏

‏39.59‏

‏9.51‏

‏8.14‏

‏101‏

‏Montreal‏

‏Canada‏

‏Partial‏

‏6.15‏

‏69.80‏

‏60.52‏

‏16.27‏

‏14.10‏

‏102‏

‏Kiev‏

‏Ukraine‏

‏Partial‏

‏6.00‏

‏74.78‏

‏14.73‏

‏3.70‏

‏3.28‏

‏103‏

‏Abuja‏

‏Nigeria‏

‏Illegal‏

‏5.88‏

‏20.63‏

‏7.40‏

‏6.73‏

‏6.10‏

‏104‏

‏Lima‏

‏Peru‏

‏Partial‏

‏5.88‏

‏37.83‏

‏12.28‏

‏6.09‏

‏5.52‏

‏105‏

‏Mexico City‏

‏Mexico‏

‏Partial‏

‏5.87‏

‏65.87‏

‏22.58‏

‏6.43‏

‏5.84‏

‏106‏

‏Cape Town‏

‏South Africa‏

‏Illegal‏

‏5.82‏

‏48.80‏

‏2.47‏

‏0.95‏

‏0.87‏

‏107‏

‏Karachi‏

‏Pakistan‏

‏Illegal‏

‏5.32‏

‏60.70‏

‏135.48‏

‏41.89‏

‏41.95‏

‏108‏

‏Manila‏

‏Philippines‏

‏Illegal‏

‏5.24‏

‏74.27‏

‏2.32‏

‏0.59‏

‏0.60‏

‏109‏

‏Rio de Janeiro‏

‏Brazil‏

‏Partial‏

‏5.11‏

‏64.94‏

‏28.82‏

‏8.33‏

‏8.69‏

‏110‏

‏Mumbai‏

‏India‏

‏Partial‏

‏4.57‏

‏60.39‏

‏89.38‏

‏27.78‏

‏32.38‏

‏111‏

‏New Delhi‏

‏India‏

‏Partial‏

‏4.38‏

‏60.39‏

‏101.20‏

‏31.45‏

‏38.26‏

‏112‏

‏Antwerp‏

‏Belgium‏

‏Partial‏

‏4.29‏

‏75.92‏

‏4.10‏

‏1.01‏

‏1.26‏

‏113‏

‏Astana‏

‏Kazakhstan‏

‏Illegal‏

‏4.22‏

‏39.29‏

‏1.78‏

‏0.85‏

‏1.07‏

‏114‏

‏Montevideo‏

‏Uruguay‏

‏Legal‏

‏4.15‏

‏66.75‏

‏19.54‏

‏5.50‏

‏7.06‏

‏115‏

‏Johannesburg‏

‏South Africa‏

‏Illegal‏

‏4.01‏

‏48.80‏

‏3.76‏

‏1.45‏

‏1.92‏

‏116‏

‏Panama City‏

‏Panama‏

‏Illegal‏

‏3.85‏

‏56.52‏

‏0.81‏

‏0.27‏

‏0.37‏

‏117‏

‏Jakarta‏

‏Indonesia‏

‏Illegal‏

‏3.79‏

‏53.40‏

‏1.92‏

‏0.68‏

‏0.95‏

‏118‏

‏Asuncion‏

‏Paraguay‏

‏Partial‏

‏2.22‏

‏16.00‏

‏0.16‏

‏0.19‏

‏0.46‏

‏119‏

‏Bogota‏

‏Colombia‏

‏Partial‏

‏2.20‏

‏49.44‏

‏15.80‏

‏6.00‏

‏14.53‏

‏120‏

‏Quito‏

‏Ecuador‏

‏Partial‏

‏1.34‏

‏70.39‏

‏0.56‏

‏0.15‏

‏0.60‏

‏Methodology‏

‏Selection of the cities:‏

‏To select the cities for the study, Seedo first looked at the top and bottom cannabis consuming countries around the world. Then they analysed nations where marijuana is partially or completely legal, as well as illegal, and selected the final list of 120 cities in order to best offer a representative comparison of the global cannabis price. ‏

‏Data:‏

‏Price per gram, US$ ‏ ‏- Crowdsourced city-level surveys adjusted to World Drug Report 2017 of the United Nations Office on Drugs and Crime.‏

‏Taxes on Cigarettes, % of the most sold brand‏ ‏ – Taxes as a percentage of the retail price of the most sold brand (total tax). ‏ ‏Source‏ ‏: Appendix 2 of the WHO report on the global tobacco epidemic, 2015.‏

‏Annual possible tax collection is calculated in the following way: ‏

‏Total_Possible_Tax=Population_City*Prevalence*Avg_Consumption_year_gr*price*tax_level, where:‏

‏Population: latest available local population data sources.‏

‏Annual Prevalence (percentage of population, having used weed in the year). Source: World Drug Report 2017 of the United Nations Office on Drugs and Crime‏

‏Average Consumption of weed per year in grams (people who consumed weed at least once in the previous year). ‏

‏Estimation, with the assumption, that one use of weed on average means one joint. ‏

‏One joint is assumed to have 0.66 grams of weed as in the paper of Mariani, Brooks, Haney and Levin (2010). ‏

‏The distribution of use during the year is assumed to be the same as in Zhao and Harris (2004), where the yearly usage varies from once or twice a year to everyday.‏

‏Total Consumption in Tons‏

‏Consumption=Population*Prevalence*Consumption_year_gr‏

‏Population: latest available local population data sources.‏

‏Annual Prevalence (percentage of population, having used weed in the year). ‏ ‏Source‏ ‏: World Drug Report 2017 of the United Nations Office on Drugs and Crime‏

‏Average Consumption of weed per year in grams (people who consumed weed at least once in the previous year).‏

‏Estimation, with the assumption, that one use of weed on average means one joint. ‏

‏One joint is assumed to have 0.66 grams of weed as in the paper of Mariani, Brooks, Haney and Levin (2010). ‏

‏The distribution of use during the year is assumed to be the same as in Zhao and Harris (2004), where the yearly usage varies from once or twice a year to everyday. ‏

‏US tax level ‏ ‏- Average tax level in the states of US where weed is legal: Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon and Washington. Includes retail sales taxes, state taxes, local taxes and excise taxes.‏

‏Legality‏

‏Legal, if possession and selling for recreational and medical use is legal.‏

‏Illegal, if possession and selling for recreational and medical use is illegal.‏

‏Partial, if ‏

‏Possession of small amounts is decriminalised (criminal penalties lessened, fines and regulated permits may still apply)‏

‏OR medicinal use legal‏

‏OR possession is legal, selling illegal‏

‏OR scientific use legal‏

‏OR usage allowed in restricted areas (e.g. homes or coffee shops)‏

‏OR local laws may apply to legality (e.g. illegal at federal level, legal at state level)‏

‏First quote: Based on New York City Council’s free lunch initiative which began in September 2017, with 1.1 million public school children, at a cost of $1.75 per child per day.‏

Silo Reader Says All Products And Services Should Compete In A “Free Market”

Letters to the Silo

The [ image that is shown with Toby Barrett’s recent letter ] is certainly worth a thousand words. Government is consuming too much.

But why do we continue to feed government? Why would we participate in any political or economic system that is not serving our best interests?

Government is basically unproductive and can only give what it takes. Bigger government takes more and gives less.

The fruits of our labour are controlled, confiscated, and redistributed through taxation, inflation, interest, and government spending. There is also a systemic shortage of official currency, which leads to a shortage of paid employment, and the jobs that are available might be completely unproductive. We are forced to compete for currency that is systemically scarce, even though there are plenty of worthwhile activities that can be done and there are plenty of people who are willing and able to do productive work.

There seems to be an increasing level of dissatisfaction with government and the political process, but there certainly isn’t a consensus in defining the problem or offering a solution that will sufficiently address all of our concerns or satisfy everyone. This poses a challenge, but it also presents us with an opportunity to carefully examine the form and function of government, and explore a full range of possible alternatives.

If we have freedom of choice and a free market then we should be able to individually select the goods and services that we wish to purchase from a variety of producers and providers, who should be able to compete for customers based on the quality and price of their products and services. All products and services, including government programs and services, should be able to compete in a free market.

Trade and exchange should be voluntary and mutually beneficial. We should not be forced to pay for anything that we don’t want or don’t use, and we should not have to do business with anyone who consistently offers poor quality goods and services or who does not pay their legitimate debts.

If we have economic freedom then we should be able to negotiate agreeable prices, accept or refuse any form of payment, control the allocation of our credit, and use any method or medium of exchange. We should not be compelled to use a systemically scarce currency that is created as interest-bearing debt.

If the purpose of an economic system is to facilitate the production and exchange of goods and services then it should be possible to create numerous ways to serve this purpose, with various concurrent systems operating in any location. This would give us more control over our time, labour, skills, and resources.

If government is a provider of services then it should compete for customers based on the quality and price of any services that it is actually willing and able to provide, including education, health care, and defence. If government services were the best ones available then we would presumably choose to use them. Our wealth should not be confiscated and redistributed to pay for anything that we don’t want or don’t use.

We can already seek membership in various communities, organizations or other groups, based on our own political, religious, social, recreational, or business interests. If we have freedom of association and political freedom then we should even be able to choose a apolitical system and type of government, without having to move to a different place, and without imposing or choice on anyone else. This would give us the option to hire people to manage our affairs and make decisions on our behalf, but we would not be represented or lead without imposing our consent.

Crony Capitalism Warren Buffett

Any imposed political system or government is a method of control. Political freedom does not exist if an individual is forced to accept the decisions of any other individual or group, even if it calls itself a majority.

Imposed political systems and territorial governments with their restrictive geopolitical boundaries can be replaced with a variety of voluntary communities, mutual benefit associations, and autonomous protective groups, with overlapping membership in any location. Multiple communities can exist in any geographic region, without any imposed territorial monopolies for the provision of services.

Individual participation in any economic or political system should be entirely voluntary, based on choice and consent, rather than coercion and compulsion. No person is an island, but everyone should essentially be able to individually decide how he or she would like to organize and manage his or her economic and political activities.

Government is a human invention that has changed over time and will continue to change, but the direction of this change will be determined by the way we think and the choices we make.

Diverse methods and arrangements can co-exist simultaneously in any location to facilitate the production, provision, distribution, and exchange of goods and services, for the mutual benefit of all voluntary participants, at their own risk and expense. James Clayton

Note- boldfacing was not indicated in the original submitted letter to the Silo.

Wagon Wheel Corn Maze