Promises you don't intend to keep...

When I was younger my family bought the big Disney summer blockbuster every year when it came out on video. We owned Aladdin, Beauty and the Beast, The Lion King, The Little Mermaid and several others and I could still quote many sections of the scripts by heart.

As I observe the last week or so in Canadian politics, one line in particular comes to mind. In Beauty and the Beast, when the title character is smitten with Belle and trying to impress her with some sort of gift, he consults Cogsworth, his butler-turned-clock companion who lists his suggestions ever so memorably, "Flowers, chocolates, promises you don't intend to keep...."

I have written on Jack Layton once before at the start of the election and very much hoped that his wrong-headed policy measures would go the way of the dodo, but alas that seems not to be the case. As it happens, to the surprise, amusement and possible chagrin of myself and a good portion of the media, the NDP polling numbers are steadily increasing with a few recent polls indicating the unlikely possibility that they might get more seats than the Liberals and form the opposition. While I am strongly in favour a vibrant democracy and formidable debate in the house of commons, I have to say that this trend it concerning to me, not so much because I truly believe there is much likelyhood of it happening, but rather because it speaks to a profound lack of understanding in the Canadian people regarding the basic functioning of our economy.

First of all let me say that there are a number of policy initiatives voiced by the NDP that I approve of, among them the defunding of the Conservative crime legislation and the increased spending on health care and education. The fundamental problem with the platform is not so much that any of their spending initiatives wouldn't be nice in a best case scenario, but rather the way they intend to pay for it. If you look at the costing document outlined here (http://xfer.ndp.ca/2011/2011-Platform/NDP2011PlatformSS_web_en.pdf) you will see that the two major sources of funding for their initiatives are undoing the corporate tax cuts that the Conservatives put into place and implementing a Cap and Trade initiative at a federal level to make polluting industries (read: oil companies) pay a fee for their pollution.

While there are a number of problems with these proposals I would like to briefly focus on three:

1)The revenue projections for the corporate tax hikes look optimistic to me and as the underlying assumptions are not stated, I have no way of determining how those numbers were arrived at. Basic economic theory and plenty of academic research show that all else being equal, as taxes go up the incentive to produce goes down. In the case of corporations in Canada, if they are mobile this might mean moving to another country or if not, it may simply mean passing along the costs of higher taxes in the form of higher prices to consumers, less generous benefits to employees and fewer dividends to shareholders, a substantial portion of whom are large pension plans that many Canadians are relying on in their retirement. Even if these things miraculously did not occur, the total corporate tax base would shrink as the rate increased meaning that each extra dollar of increase in tax would not mean an entire extra dollar of revenue.

2)The proposed cap and trade system that is worryingly devoid of concrete details and yet somehow is expected to deliver substantial revenue in its first budget year not to mention being fundamentally a usurpation of provincial rights and revenues. No proposed cap and trade system to date has been able to overcome the many political hurdles and special interest groups in Canada, much less be applied equitably across the country. Similarly to the reviled National Energy Policy, this initiative would serve to disenfranchise the predominantly western resource producing provinces while stuffing the coffers of Ottawa in a profoundly unconstitutional manner. If we were to suppose such a policy could be agreed upon and treated all industries and provinces equally, it would still amount to a tax grab by Ottawa against provincial resources.

3)Corporations in Canada are not somehow independent of the rest of the country and Layton's policy ultimately amounts to robbing Peter to pay Paul. Any increased tax burden on corporations, either through a higher rate or through having to purchase rights to pollute, ultimately affects the Canadian people in the ways I have already described (higher prices, lower benefits and less retirement income). I am not claiming that raising taxes is always a bad idea, but I do think that more thought needs to be put into it and the consequences must be properly considered.

In conclusion, these points are all moot when one considers that Layton's best case scenario is being in the opposition. Since he has no credible chance at forming a government short of a coalition, he can promise Canadians the world with only the most suspect of a plan to pay for it all. Let us hope that Cogsworth and Jack Layton are both wrong, I would like to believe that the electorate, much like Belle, are far too smart to fall for such impossible promises.

Things Jack Layton doesn't understand (a public service message)

For those of you who weren't paying attention or don't live in Canada, we are having an election in a little over a month after the government fell on a no confidence vote on the budget. Try as I may to be politically disengaged due to not being particularly compelled by any of the current stable of party leaders, occasionally a news item forces me to sit up and take notice. In this case, a campaign platform by Jack Layton, leader of the NDP, revealed an embarrassingly poor grasp of economics so while I encourage everyone to vote, I also encourage rational, policy-based decisions which it would appear are not part of his platform.

Things Jack Layton doesn't understand volume one: basic tenants of economics

In an effort to score some points from the populist vote, Jack Layton recently unveiled a way to combat the increasing debt load of Canadian families: legislate a cap on credit card rates of prime plus 5%. Currently, that would be an 8% maximum rate. Good idea?

No. Interest rates on a variety of products, from mortgages to lines of credit and credit cards are determined by a variety of factors, including among other things, whether the debt is secured (like it would be in the case of a mortgage by the property), what the borrowing history and credit score of the borrower is, and the propensity for fraud in the product. In the case of credit cards, which are unsecured, and have a significant loss to fraud, not to mention that the most credit worthy borrowers tend to be the ones that pay off their balances in full every month so that the banks don't make any money on them, the rates are based on the risk level and costs associated with providing credit cards along with a margin for profit. The average rate in Canada is generally in the neighborhood of 20%, in some cases higher or lower based on a number of factors.

If credit card rates were capped at 8%, a few things would happen in quick succession. Low credit borrowers would lose access to credit cards entirely, or have to pay a large annual fee for the privilege so that financial institutions could recoup costs and meet their required rates of return. A few high credit borrowers might still qualify, however very likely the rewards such as air miles and cash back that have typically encouraged people to get credit cards would be gone due to cost cuts. This would mean those who need credit most would lose access to credit cards and in some cases fall victim to payday lenders who charge even more interest that starts accumulating right away rather than after a 30 day grace period as in the case of credit cards. The very people the NDP wants to help would be harmed.

Rather than simply criticize I would like to offer Jack Layton an economically sensible alternative: develop legislation that encourages financial literacy in at risk groups and teaches about lower cost credit solutions that already exist, such as lines of credit, that often offer a lower rate than he was proposing for credit cards. Additionally, encourage stronger financial management skills that boost savings rates and lower reliance on borrowing to finance living costs. Until such rational platform changes occur, I will have no choice but to confront the crazy.