A Letter on Economics Inspired by Mark Twain

james tannerEssays

Dear Friends:

In economic discussions brevity is a blessing. In his characteristic wit, Mark Twain summed it up by apologizing, saying he would have liked to write his friend a shorter letter but he didn’t have the time. Here is my attempt at a shorter letter.

Now (2015) in Alberta we finally have an opportunity to modernize government finance. A more advanced public administration system would provide unprecedented benefits to the public interest. Governments would become more efficient and productive, public resources would be managed better, public goods would be valued and optimal levels of infrastructure would support economic growth. Why has this not been done before? Because the development of public sector administration has been tied up in a straitjacket of irrational attitudes towards the role of government in our society. Starting before Brian Mulroney as PM and Ronald Reagan’s Presidency, ideological supply–side libertarianism spread rapidly in the west, advocated by the wealthy and right-wing funded ideologues. They conveniently blamed economic imbalances on government ‘over’ spending, unions and Keynesian fiscal policies. These “supply siders” claimed that any government deficit was bad because it led to government debt which was also all bad. They claimed that governments were inherently inefficient, that unions killed economic success and the only solution was to free the amazing power of the private sector by lowering taxes and eliminating regulations. In short, government was inherently bad and rather than improving it, the solution was to try and make governments as small as possible. Recently (2008) this blind faith in efficient private capital markets was exposed as a fraud and mainstream opinion has switched back to the Keynesian solution.[1]

As a result of these dark ages the development of public administration has not progressed much over the last 40 years or so. Now what can we do?

Despite entrenched and unrealistic libertarian illusions, identification of rational public sector objectives is possible. The first step in implementing a rational approach to government finance is fairly simple. We must identify what it is that we are administering or managing? For example, most Albertans would agree that the Provincial Government should manage our oil and gas resources in the public interest. There is not, however, general public knowledge of what our oil and gas resources really are. That means we need to do more than just the proposed royalty review – it means we need to first understand the nature of our oil and gas assets as well as we can before we decide how they should be managed.[2] Up to this point it has been assumed that the private sector, often dominated by non-Canadian interests, knows best how to determine the future of our assets. This is far from administering our publically owned assets in the public interest.

The first step in establishing policies in the public interest: accounting for and assessing public assets – this process is absolutely essential and really has not been supported by previous administrations. Asset management is hardly in the public administration vocabulary. The change in attitude that must take place is that managing an asset in the public interest is not simply opening up public resources for private exploitation or sharing the resource with private enterprise but rather managing the resources in the full public interest for the benefit of current and future generations of Albertans.

This involves identifying the services that public resources provide to both public and private interests over time. Roads, buildings, oil reserves, the boreal forest, air and water are a few of the public capital resources which should be properly managed. They must be assessed simultaneously so that trade-offs and costs and benefits of different choices of our resource management are measured. So one of the first innovations is to implement a capital resources accounting and assessment process. Of course this is what all well run businesses do. So why doesn’t our Government do this for us too? An efficient well- run government would.

Once we know what we are managing, we need well designed management criteria. For example, low interest rates is not an adequate criterion for infrastructure spending – it is only one of the input variables. We need to analyze how valuable new infrastructure will be for the public and compare that with all the costs and challenges of that infrastructure (which cannot only be based on market measurements or interest rates). This is something the department of highways actually does to a certain extent. When should you spend on infrastructure and when do you not? The neo-classical investment model proposes that you can invest until the return (services) from investment falls enough so that it equals the investment cost (interest rates). The problems with the neo-classical method are: 1) how do you measure the monetary value of a range of non-market services, and even if you could, 2) Is the government borrowing rate the best or only representation of cost?

The answer to these questions is:

  • do not use only a monetary value
  • do not use the neo-classical paradigm
  • there are more costs and more benefits than just the g-bond interest rate.

But one should use a similar but expanded type of marginal analysis to assess infrastructure opportunities and temper that optimal level of spending by period based government spending constraints and incentives. The key to infrastructure planning is defining the services of infrastructure assets based on the public interest. More criteria must be developed to determine how infrastructure meets the public interest. One process used in highways, for example, is to rank projects based on projected utilization rates or other service oriented criteria. The road utilization rate becomes the measurement tool. So roads are built based on how much they will be used. However, if during a period of economic strength and there is a large shortfall in infrastructure, (a large need for additional roads) the economy may not be able to build roads or sewers fast enough. This occurred in Fort McMurray and northern Alberta during the oil sands boom. On the other hand, if the economy is dragging, building infrastructure may be viewed as the solution to unemployment.

So in summary, all potential costs and benefits (monetary and non-monetary) must be included in the analysis of infrastructure development. These costs and benefits include what has become the classical justification of building infrastructure to stimulate economic activity. However, a fulsome analysis based on an on-going accounting of infrastructure assets included in the provincial and national accounts is the proper approach. This will force Governments to take the classical matching principle taught in basic accounting seriously.[3]

The government asset management process will initially take instructions on the public interest from the political arena but as the system develops it will mature into its own discipline. This approach is consistent with the Liberal and NDP philosophy and will have important implications, for managing resources such as oil and gas and other mineral resources, the environment and environmental benefits and costs, investment in education and of course, infrastructure among many other areas.

If the public interest role of government is finally taken seriously we can provide good public administration and management. When the Wild Rose Party demands more efficient government, instead of dismantling government because it is so inefficient, we can make it govern properly by installing a public interest management system. Then the people of Alberta will get a far, far more sophisticated and efficient government process than anyone could ever imagine.

Short enough essay?

Jim Tanner

[1] I just checked the bookstands and there are several books out summarizing these exact developments.

[2] The capital investment in the oil sands provided by the Province under Premier Lougheed was fundamentally essential to make the oil sands economically viable. Is the government obtaining an appropriate return for that investment or did Lougheed’s successors give the assets away to the private sector?

[3] When the government invests in assets (such as investment in infrastructure) the use of the asset is spread over time, several years. The measurement of the actual yearly expenditure must be based upon the matching principles used in conventional financial accounting which identifies the amount of the asset consumed or used during that period. Why should we include the entire asset cost in the measurement of the deficit for the year it was spent? Private accounting amortizes the asset over its appropriate lifetime. The amount included in the government deficit or surplus should reflect when the services are consumed – in which year. In this way debt financing of infrastructure becomes a natural and appropriate mechanism and should be accounted for differently in both the expenditure calculations and in debt categories. This is one major reason the government needs good asset accounting and finance systems. This issue has been addressed by recent studies of infrastructure spending analysis discussed nationally but the recommendations were not nearly as aggressive as they could have been.