President, Adam Smith Institute
The Economic Future of Canada
Chairman: Dr. John S. Niles
President, The Empire Club of CanadaHead Table Guests
John C. Koopman, Vice-President, Spencer Stuart, and Past President, The Empire Club of Canada; Paul Daniel Muller, President, Montreal Economic Institute; Tim O’Neill, H. Ian MacDonald Visiting Economist, Government of Ontario; Robin V. Sears, Principal, Navigator Limited, and Director, The Empire Club of Canada; Tim Murphy, Barrister and Solicitor, McMillan Binch Mendelsohn; Terence Corcoran, Editor, Financial Post; Peter Foster, Journalist and Author; Rev. Bill Middleton, Minister, Armour Heights Presbyterian Church; and James Gibbons, Senior Student, North Toronto Collegiate Institute.
Introduction by John Niles
Past Presidents, Directors, honoured guests, and members of the Empire Club of Canada:
On 16 July 1790, Adam Smith rose from a candle-lit table in Edinburgh where he had been enjoying the after-dinner conversation of friends, saying that he felt a little tired and would retire to bed. It had been the last conversation of his life.
So died a remarkable man. He was however not a boisterous man but a quiet, thoughtful and a modest man, one whose thoughts and actions still affect the lives of every one of us in this room.
Why have we been so affected by him? It is because he was one who saw the importance of privatization over 200 years earlier than the rest of the world and knew that the wealth of nations derives from what he called “the uniform, constant, and uninterrupted effort of every man to better his condition.”
Adam Smith stated in “The Wealth of Nations”:
“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.
“He… neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security….”
The basic principles of Smith’s approach–the importance of free trade, putting consumers before producers, allowing and encouraging competition, rolling back government regulation, and preventing politicians from trying to shape economic life in their own image–are present in some form today within our system of wealth creation and government regulations.
Adam Smith stated, “As one person pursues his own interest he frequently promotes that of society more effectually than when he really intends to promote it.”
Or as Mae West said, “I never loved another person the way I loved myself.”
Dr. Madsen Pirie is President of the Adam Smith Institute, and was one of three Scots graduates working in the U.S. who founded the institute in 1977. Prior to that, Dr. Pirie worked for the House of Representatives in Washington D.C., and was Distinguished Visiting Professor of Logic and Philosophy at Hillsdale College in Michigan.
At the institute, Dr. Pirie was part of the influential team, which pioneered privatization and the extension of market choices and incentives. His work in helping to develop the Citizen’s Charter led to his appointment to the Prime Minister’s Advisory Panel from 1991-1995.
A graduate of the universities of Edinburgh, St Andrews and Cambridge, Dr. Pirie is author of several books including “The Book of the Fallacy,” “Micropolitics,” “Privatization in Theory and Practice” and “Blueprint for a Revolution.” With his colleague Dr. Eamonn Butler, he has co-authored a series of books on IQ, including “The Sherlock Holmes IQ Book.”
The institute itself remains at the forefront of a worldwide movement towards competitive free markets and free trade.
Please welcome to the Empire Club of Canada–Dr. Madsen Pirie.
Madsen Pirie
Thank you very much.
I’m spending a day in Canada. I was asked at the airport the purpose of my visit and I said, “To save Canada from socialism and wickedness.” The man at the airport said, “How long are you staying?” I said, “Forty-eight hours.” I’m going to say, “Job done,” if I see him on the way out.
It was quite a day I have to tell you. I paid airport tax and I paid insurance tax and then I found myself paying something called PST tax and something called GST tax. Already I’m paying income tax, capital gains tax, council tax and value-added tax. I even pay stamp duty. The only one I have not yet paid is inheritance tax and I’m in no hurry to pay that one. Benjamin Franklin famously remarked, “There are only two certain things in life–death and taxes.” What he didn’t add was that they usually come the wrong way round.
The problem with the British tax system, and I’m sure this isn’t true in Canada, is it tends to be very complex. Our last budget added another 90 pages and the Treasury was told that this was getting to be ridiculous and could it work on a simplified version. It came up with a two-sided piece of paper. On one side it said, “How much do you earn?” The other side said, “Send it to us.” And we did have a case reported in the papers last week of a man who died and left instructions that he was to be cremated, and his ashes were to be put in a box and dumped on the steps of the Treasury with a note saying, “Now you crooks have got the lot.”
I’m going to speak very briefly–a little bit of the past, a little of the present and a little of the future.
A little bit of the past. Privatization–having done by private business what governments used to think they had to do themselves. Countries, which have done privatization, of course have had to spend less on state operations and therefore have had more available for public services. Now the really virtuous ones have cut taxes. We will come to that later.
Why was privatization so important? Why did suddenly, about 20 years ago, governments turned and said, “We have had enough. We are going to get private business to do this.” And the answer is in the single word–efficiency. Governments, I don’t know whether you know this, were running just about everything in Britain–coal, steel, cars, boats and planes, the state airline, the bus services, water, gas, electricity. It was an absolutely fantastic list of things that government felt it had to not only run but own.
And then something happened. That something was of course Margaret Thatcher but it was more than that. It was a movement, which questioned whether government could do things more efficiently than people seeking legitimate private returns, and efficiency was what we gained. The private sector when compared with the public sector seemed to use fewer people to do the same job. If the state ran something you could guarantee for some reason it would be over-manned, probably because the unions through their pressure over the years had been able to insist that jobs be retained. I remember vividly watching one of our city garbage collection trucks and noticing that it took five people to pick up the bins and drop them in the van. One of them didn’t do anything at all. I asked what was his function. He was the man who used to provide hay for the horses when the vehicles were horse-drawn and the unions had insisted that there must be no job losses when mechanization came in.
So in Britain we privatized hundreds of state activities and led a world movement. Indeed it’s affected things in Canada. Some of the things now done by private businesses were once in Canada done by government and I like to believe this worldwide movement continues to ripple in many countries around the world to advantage everywhere. Fundamentally they not only become more efficient, they become more responsive to consumers, they become more innovative. Where they used to cost money in subsidies and support, they start earning money. Where there used to be companies that barely puttered along doing their job, some of them are now world-beaters. They can compete on a global scale.
We made sure when we did this that everybody gained from it. There’s no point in letting a few rich businessmen make a lot of money and thinking you are going to succeed politically. We made sure that everybody gained from it–the people who managed the state operations, the workers, the customers, and even the general public were invited to buy the shares–and of course in doing so, and this is the point of telling the story, we turned the whole culture of the country around. It had been an anti-business country and now on the whole it’s a pro-business country.
Thirty years ago when asked what they would like to do, the students of Britain replied in a majority–public service–by which they meant civil servants working for the government. That figure is now down to about 8 per cent. Forty-eight per cent, the largest single group, say their highest aspiration in terms of employment is owning and running their own business. That is a big cultural shift in the course of a generation and it bodes well for our future. They are in for a shock when they discover the regulations and taxes they have to face when they try to start their own business, but again we are doing our best. Well that is the past, which brings us to the present.
I would say that globalization, which is sweeping the world, is probably one of the largest forces seen in human history. It is affecting more people, more intimately, more constantly, than almost anything that human beings have ever done. People are joining a worldwide trading community in which everybody is in contact with everybody else. In Adam Smith’s day most people in his country and in indeed other countries never went further than the next village. You were widely travelled if you had been to two villages. Now you interact with people from countries and cultures all across the world.
Some facts and figures about it: more people were lifted out of poverty on this planet last year than in any other year in human history and by human history I mean two million years; more people last year than ever before and it will be even more next year. A lot of this of course is happening in China and India but it is happening in other countries too.
More remarkable facts and figures: the average citizen of Canada will in 2050 live at the living standards of today’s millionaires; the average citizen of Canada–I’m not talking about funny money where it takes you $50 million to make a phone call–will live at the average living standard of today’s millionaires. It would be remarkable given the rate of growth if it didn’t happen.
And the third statistic, which again is remarkable when you think about it, is that by 2050 the average citizen of India and China ought to have a living standard roughly like ours today. The average living standard in Canada will be how Chinese and Indians are living in 44 years’ time. This is a remarkable thing–globalization–producing effects over the whole of the planet.
What about protectionism? Surely America is trying to protect its industries. Surely Europe is with its common agricultural policy. It is true but less than ever before. There is less protectionism in America and Europe than there was 10 years ago and much less than 20 years ago. There is a tide flowing, a cultural and economic tide, and it is flowing towards greater exchange, more free trade, and greater access to the markets of other countries.
In Europe, and I think in Canada and America, we talk about foreign aid and we give a few crumbs from the rich man’s table to poorer countries. Some people say, “Oh 1 per cent isn’t enough. It ought to be 2 per cent.” The answer is 2 per cent is not going to make any difference at all. We didn’t get our wealth by taking it from others and they are not going to get their wealth by getting it from us. We created wealth and that’s what Adam Smith realized 200-odd years ago. You can create wealth by trade, by specialization, and if we want to really help poorer countries “buy their stuff.” It is the way we got rich. By trade. Every other country in the world that has gone from poor to rich has done so through trade. How many of us have done it through foreign aid? Zero. Trade works. Aid doesn’t. Buy their stuff and they’ll become rich like we did and in the same way.
What about our jobs? What about jobs in Scotland, Italy, Canada? Faced with cheap imports from China and India, aren’t they at risk? Well yes they are. They have always been. What you are going to have to do is to move up-market into value-added goods. You won’t be able to compete with Chinese T-shirts, costing 30 cents a time, so you move up into value-added fashion goods–Burberry, Prada, things like this. You move into the upper end of the market. That’s been happening in Britain with our textile industry. We used to produce cheap textiles for the world. Now we produce fashion goods for the aspiring people who are newly getting rich in poor countries. British farmers used to produce mass-produced cheap food. We can’t compete with what poorer countries do now, so we moved into organic food, quality specialized added-value stuff, that people will pay premium prices for and in that way we keep our edge. But what happens when they start doing this? The economy never stops. You have got to keep moving and we will have to do something else adding even more value at the top. Well that’s the present. Past. Present. What about the future?
Take a deep breath and listen to two words: flat tax. This is sweeping in from Eastern Europe and it is going to affect Canada, the United States, Britain and Western Europe. What is it? You introduce a single low flat rate of income tax. No exemptions. No premium rates if you earn more. No graduated tax rates. Just a single rate. What happens now?
The economy grows like nobody’s business. It suddenly shoots ahead. You take in far more tax revenues that you have before and the rich end up paying a higher share of the total. Wow. Those are three pretty good arguments. They introduced them into Eastern Europe. It started with Estonia in 1994, which suddenly said, “We are having a flat tax at 26 per cent.” I spoke to the Prime Minister and he said, “You see we were new. We didn’t realize it was impossible. Nobody had told us.” And so they just did it and it worked so well that very quickly Latvia, Lithuania, and others started to follow and there is now about half a dozen countries in the EU that have flat taxes and about another dozen are studying it. I was in Estonia last Sunday by the way. I’ve seen the transformation of that country from an impoverished ex-communist country to one of the most thriving and booming places. It is a joy to see people doing so well on basically such a simple formula.
How on earth can it work? How can you charge a lower rate and get more money? At the moment there are lots of people who are avoiding taxes. They set up companies in the Cayman Islands, but when you have a flat tax they don’t bother. It’s worth doing that if you are avoiding a 40-per-cent tax, but it’s not if you are avoiding a 20-per-cent tax. They don’t put all that investment and time and trouble into tax avoidance, so the tax base enlarges because the money that was previously denied to the taxman is taxed at 20 per cent.
I’m sure tax avoidance doesn’t happen in Canada, but in other countries people deal in cash so that they don’t have to pay PST or GST and income tax. The plumber will say, “That is $150 but $80 for cash.” Obviously it doesn’t happen here, but it is known in other countries and you do face certain risks, namely prosecution, imprisonment. But the 20-per-cent tax is not even worth evading. You might as well pay the money; get it over with. The risk is not worth a candle. Why should I work night and day building up the business, and starting up new stuff when the government is going to take most of the money. If it is only taking 20 per cent, then it is worth my while and I will go out and create extra wealth, extra jobs, extra business. The whole economy grows and so the Treasury has access to a larger taxable pool. So even though the rate is lower, the amount they collect is higher. And it has happened in every single country that has done flat tax. Not a single one has taken less revenue as a result. I call that pretty convincing.
Well, after flat tax has made us all prosperous, what do we do about public services? Now we are looking a little bit further into the future. Can we ever get things right like health and education? We have tried almost everything. Germany has tried social insurance in health and they have got real problems. France uses the principle that you pay upfront and then reclaim it to inhibit demand. In Britain of course we use waiting lists. Yes, it is free, but you have to wait two years. Everybody uses a different system. America has a great health service but unfortunately the poor don’t get it.
Can anyone ever get it right? Well, watch closely the moves that are being made. In the United Kingdom the Adam Smith Institute argued that the Bank of England should be made independent. It had been run by politicians for 50 years, but a distinguished economist should be put in charge and then at some distance from the government just left to get on with it. Then people would respect it, accept its decisions and it wouldn’t be a political battleground. Good heavens it took a Labour government to do it. But they finally did something we have advocated for 20-odd years and it worked. You see we learned and experiences come when we take a lesson. It worked for the Bank of England. Would it work for the schools? Could we have them run by boards of head teachers appointed by government and then at some distance make all the decisions? Would it work for the health service? Could we have it actually run by respected professionals without the interference of politicians deciding priorities on where they think the votes are? Oh yes, we were looking at that very closely when lo and behold like bloodhounds coming off a particularly juicy piece of meat both the Labour government and the Tory opposition are sniffing at this one.
I think after the flat tax the way of the future lies with the de-politicization of public services. The obvious question is, “Would it work in Canada?” I can’t think of any reason why it shouldn’t. I can’t think of any reason why flat tax wouldn’t work in Canada. But then I couldn’t think of any reason why globalization shouldn’t benefit Canada and 20 years ago I certainly couldn’t think of any reason why privatization shouldn’t benefit Canada.
So my concluding line is one of total optimism. I was asked at the airport what I was going to talk about. I said, “The economic future of Canada.” “Is there one?” said the immigration officer. “Oh, yes,” I said. ‘Is it good?” “Yes,” I said, “it could be if your politicians do the right thing.”
The appreciation of the meeting was expressed by Paul Daniel Muller, President, Montreal Economic Institute.