Despite spending hundreds of billions during COVID, we seem to have little to show for it...

 

As the pandemic moves into 2021, it’s important to reflect on how Canada is dealing with its impact. After a summer that included a semblance of normality, the fall and winter have brought a resurgence that’s taxing our ability to cope. As the second wave unfolds, various new lockdowns (with substantial rates of non-compliance) have been imposed, testing international air travellers on their return has begun nearly 10 months after the start of the pandemic, the vaccine rollout appears to be unfolding in slow motion, hospitalizations are rising and death tolls are creeping upwards.

The current sentiment seems to be that while Canada may have made a few mistakes along the way, we’ve been doing relatively well and deserve a pat on the back. Yet despite spending hundreds of billions of dollars at the federal and provincial levels with combined budget deficits approaching $500 billion for 2020-21 and the largest deficit-to-GDP ratio of any developed IMF country, we seem to have little to show for it.

The virus is surging in our major cities, we lag behind in administering vaccines to the point where many spent a long time in freezers. And the virus still runs rampant through many long-term care homes.

One wonders if in the end, the disjointed, confused and slow response to the pandemic was partly the result of the current interpretation of Canada’s federal system by its leaders.

Federalism is a system of government where units are able to be both independent and coordinate and should accommodate regional preferences with the economies of scale and political direction of a larger country. The Canadian federation has been held up as a model for the world given our standard of living, the freedom of our population and the stability and diversity of our political system.

While Canada’s diversity has meant regional tensions between the federal and provincial governments and perpetual crises and tug of wars over jurisdiction, it’s managed to remarkably stay aloft for more than 150 years. Indeed, one pundit remarked how Canada is a “bumblebee nation” able to fly despite being aeronautically impossible. However, one wonders if the flight of the Canadian bumblebee is more attributable to luck than ability.

Given our high standard of living, we’ve come to think of ourselves as high-flyers, but it increasingly seems that we are mediocre flyers caught up in gusts of wind provided by the historic proximity to a relatively benign and wealthy southern neighbour and our abundant natural resources. Canada’s leaders seem increasingly unable to solve problems. Our governments are increasingly bureaucratic and adept at planning but not at implementation. While quite accomplished at spending large sums of money—especially at the federal level—our governments seem extraordinarily incapable of getting things done themselves or harnessing private initiative. Indeed, when it comes to the private sector, our governments are experts in imposing rules and regulations rather than incentives. When some private companies stepped up to produce masks and hand sanitizer early in the pandemic, their reward was to be bypassed by foreign suppliers when the real money was spent.

During COVID, governments across the country have issued inconsistent and contradictory statements about masks, the rules for gatherings and so on. Consequently, many Canadians increasingly don’t know what they’re supposed to do to stay safe and some may think they’re following the “rules” even when they’re not. We’re told these are unprecedented times—but obviously not unprecedented enough for politicians of all stripes who tell us to stay home while they gallop around the world demonstrating an appalling lack of leadership.

Our federal government intones that health is a provincial responsibility, but there are federal and provincial health ministries and public health agencies and federal health transfers. Health as a provincial responsibility should provide experimentation and flexibility in dealing with the pandemic. But there seems to be little learning going on given that the relative success of the Atlantic provinces has yet to rub off on other provinces.

While the discord of the U.S. experience has not marked Canadian intergovernmental relations, one cannot help but wonder how much “politics” has marked public exchanges. Take the premiers asking for more health transfers or the federal response to the provincial clamour for the federal government to provide vaccines, which was followed by the expression of federal “disappointment” over the lack of quick distribution by the provinces.

Finally, the federal government has used its spending power not to provide early testing and comprehensive quarantine facilities at international airports or ramp up domestic vaccine manufacturing and distribution, but to dispense poorly-targeted transfers. And again, Ottawa has chosen not to do more to tackle the pandemic directly by hiding behind a strict interpretation of provincial jurisdiction over health. This federal government seems to act is if health is a provincial responsibility when necessary, but not necessarily a provincial responsibility. Sadly, all Canadians will pay the price for the failure of our governments.

 

This was first published in the Fraser Institute Blog, January 8th, 2021.

Thunder Bay Municipal Budget 2021: Overview

 

It is budget time at Thunder Bay City Council and this year’s discussion should be quite interesting given the coming together of the pandemic, numerous water issues that have affected residents directly in their pocket-books as well as the long-term effects of rising municipal expenditures combined with a flat population profile and an essentially stagnant property tax base.

 

The proposed 2021 municipal tax levy, which represents the total amount of dollars that needs to be raised from property taxpayers to fund City services, local boards and agencies and contribute to capital infrastructure programs, is $203,682,300 - an increase of 2.15% or $4.3 million over the 2020 approved municipal tax levy of $199,398,000. By comparison, in 2020 the municipal levy increase was $5.3 million, representing a 2.73% increase over 2019. Not included in the increase are costs associated with the COVID-19 pandemic, which are proposed to be funded from the Stabilization Reserve Fund in 2021 and one expects the millions of dollars in federal and provincial funds that have been provided for the purpose.

 

As well, there are numerous user fee increases not least of which is for water which comes in at 3.5 percent.  The irony of a 3.5 percent increase for water given the epidemic of residential pinhole leaks affecting thousands of residents is notable. As well, the 2021 proposed capital budget is presented at $51,607,300 gross of which $16,525,700 is funded by the tax levy representing an increase of 8.6% compared to the 2020 budget.  In terms of employment, the number of fulltime equivalent positions (FTEs) rises from 1724 to 1758 which we are assured is temporary because it has to do with cleaning costs associated with COVID.  This increase of 34 FTEs in municipal employment comes on the heels of 9 FTEs in 2020 and 10.5 in 2019.

 

If one wants some comparisons, Figure 1 plots the total municipal tax levy from 1990 to the current forecast for 2021 with the trend readily apparent. As well, while we know that Thunder Bay in 2020 had the second highest property tax rate of 35 Ontario cities, Figure 2 looks at the per capita levy in 2020 for 27 Ontario cities.  It turns out, that at $1783 per capita, Thunder Bay is the fourth highest.  For those purists who say it is unfair to compare us with cities like Toronto, very well, let us just look at the five major northern Ontario ones.  Here, Thunder Bay is ranked first – primus inter pares – above North Bay, Timmins, Sudbury and the Sault.

 

If City Council is to be guided on what to do this year it may want to heed the results of its own budget survey which had nearly 500 respondents though one expects that the expert statisticians resident on City Council will simply discount the results as based on a small and biased sample of negatively minded people not representing the true mind of the City of which only City Councillors have the divine power to ascertain.  Still, the survey results were quite telling as the general tenor of the responses was to focus on core services. 

 

As the report reads: “While there was a wide variety of topics covered, the strongest message and overarching theme centred around not spending money on extras considered ‘wants’ and instead focusing on essential ‘needs’. For example, not spending money on new capital projects such as the Multi-use Indoor Turf Facility, a waterfront sign, roundabout, or art gallery, and instead investing in existing City infrastructure (roads, facilities, fixing water pipes), and social services such as crime prevention and supporting vulnerable populations. It was also conveyed that citizens have experienced financial hardship because of the pandemic and do not want to see their taxes raised at this time – especially not to support new capital projects. Citizens outlined they would like to see the City invest in what we currently have and support the core needs without increases taxes – understanding this means giving up those items which would be nice to have but are not essential services.”

 

Indeed, based on a ranking of what is considered “very important or important,” the top programs and services in the city should be: emergency services, winter maintenance, drinking water, road maintenance and construction, garbage and recycling.  Included at the bottom are transit, child-care, libraries, recreation programs and facilities, animal services, and economic development.  There certainly does not seem to be a groundswell of support in this survey for new capital projects that do not reflect a core services mandate.

 

What should the City of Thunder Bay do this budget season?  Well, that is the $203,682,300 question.  First, it probably is time for Thunder Bay to visit the concept of core services in a more substantial manner.  Given our tax base, running the expansive set of services that we have is increasingly difficult given the size of the tax base. If the province wants us to fund an expansive set of community and social services on a local and regional level perhaps, they should foot more of the bill. Second, the 2.15 percent proposed increase does represent a retreat from the 4 percent or more number that was being bandied about earlier in the year.  While it may seem that City Councillors and administration have seen the light, it is unfortunately an oncoming freight train in a dark tunnel and more needs to be done. 

 

While 2 percent does mirror the rule of keeping increases to the sum of the rate of inflation (approximately 2 percent) plus population growth (pretty much zero), it should represent an upper bound rather than a flexible target.  There is more to be done to get levy growth even lower. Third, given that approximately 70 percent of costs are often associated with employment levels, there really needs to be a program of reduction via attrition and redeployment and retraining of staff.  For the next three years, for every two municipal employees that retire or resign, there should only be one replaced.  That FTE footprint needs to start coming down to where it was a few years back – say 1700 as in 2017.  At 100,000 per employee – which is not an unreasonable estimate of what each municipal FTE costs when salaries and benefits are combined, that would eventually reduce spending by $5 million a year.

 

Of course, all this talk of numbers and reductions is probably a lot for more upbeat members of council and one certainly one would not wish to bore them to death as they are perfectly capable of doing that to themselves during their marathon five and six-hour meetings.  A better way of framing all of this is via a simple analogy from the world of nature.  Simple stories are often the best ones as they can reduce complicated issues to the essentials needed for understanding.

 

Picture if you will, our municipal government as a Physalia physalis – also known as a Portuguese Man O’ War – floating serenely in a large aquarium.  It is essentially a large jelly like inflated bladder that in the end is rather brainless and feeds instinctively on the small fish and creatures in the aquarium via the lethal stingers in its tentacles.  Along with being rather brainless, it also really has no anus so it is probably recycling its own waste matter which can eventually get monotonous and a little stale given the size of its environment. 

 

As it sits in its limited environment and exhausts its food supply, it really is not capable of doing what needs to be done.  The solution is either to expand the size of the aquarium and restock it with new prey or replace the current Physalia Phyalis with a new and much smaller one or perhaps even an entirely new creature.  The current creature of course behaves by instinct and really is not capable of altering its size or its environment.  It is not capable of expanding the size of its environment – economic growth and an expanded tax base – and it does not appear to be capable of shrinking on its own.  I suppose that a solution has to be done by forces external to the situation.  I guess that is where the voters will ultimately come into the picture. 

 

Why Vetting Political Candidates Properly Matters

 In the wake of the events at the US Capitol this week, what sprang to mind for me is a conversation I had nearly four years ago in a New York theatre of all places.  We were in New York in late April of 2017 and in the evening at the last minute decided to attend a Broadway musical.  It was a production of Bandstand at the Bernard B. Jacobs Theatre.  We had about four empty seats beside us but just before the production began a well dressed business person with a briefcase and his partner and their teenage children arrived and took up the seats.  We exchanged brief greetings and then the performance began.

When the intermission began, we got up and stretched our legs a bit.  As is the case with being in America, Americans are the most friendly, gregarious and open of people and always love to start up a conversation and this gentlemen beside me was no exception.  He was apparently a lawyer and when he found out I was an economist asked if I knew Arthur Laffer sparking further conversation.  This fellow was apparently on a board in New York with Arthur Laffer - as well as other interesting people it turns out - and he was on several boards and quite active on a number of fronts.  

He then discovered I was from Canada and as this was late April and President Trump had just announced trade tariffs on Canadian steel, in characteristic American fashion he came right out and asked what I thought of President Trump.  I of course responded with a rather vague  circuitous answer somewhat out of the Sir Humphrey Appleby playbook that essentially amounted to "well he is your president and we must respect the people's choice and I'm sure things will work out in the fullness of time..."

He smiled and then basically said that well you know this was not supposed to happen.  It turns out this friendly, pleasant and articulate gentleman was also a member of the Republican party in New York and on the committee that was supposed to be vetting candidates. He essentially revealed that when Donald Trump announced he was running for President the establishment did not really take him seriously and he was never properly vetted as other candidates were.  While this is something that is pretty much common knowledge now, it was a surprise to me at the time.  

Still, the rest is now history.  Mr. Trump was a force of nature - the kind that creates natural disasters of course - and his environmental impact continues.  His presidency has been capped by the wildest lame duck period in American history and there are still almost two weeks to go.  America's role in the world has been much diminished by the Trump presidency and we are all going to pay the price.   Still, despite the damage, one cannot but hope that the resiliency of the United States will ultimately prevail and that this sad chapter will eventually be a sad footnote in American exceptionalism. 

There are two lessons I draw from this story. First, it is very important for all political parties wherever they may be to never take things for granted and always properly vet all their candidates. Second, New York is still the neatest place in the world because you just never know who you are going to meet at the theater or on the streets.  When all of this COVID business is over, it will be nice to go back.

Why Incentives Matter: An Example from Thunder Bay City Council

 

It is going to be a busy month at Thunder Bay City Council as the 2021 budget deliberations get underway.  The agenda for the meetings on the 19^th of January is quite lengthy with a raft of difficult to read budget documents.  However, there is also a meeting on the 11^th and that meeting also has a somewhat lengthy agenda with many items.  There is so much going on and little time to digest and comment so one has to be selective. 

 

An interesting item worth looking at for Monday’s meeting is a memorandum from the Manager – Central Support dated November 26^th “containing a motion recommending that City Council establish a loan envelope of up to $1,350,000 to support the Private Lead Water Service Replacement program.” This is a follow-up to the $50,000 in funding in 2020 that was supposed to be a grant program to help replace lead pipes but then transitioned to a loan program because it was deemed “not appropriate to continue to budget an annual contribution from the Stabilization Reserve Fund where the cost to administer the program is lost interest and administrative costs.”  Instead, the proposal is for an interest free loan program.

 

This is all part of Thunder Bay’s complicated 25-year ongoing water infrastructure saga which has seen the move to one source water supply in the wake of the giardia saga on the south side, the rapid increase in water rates to fund all the new infrastructure and maintain the old, the flooding of the new water treatment plant – and surrounding neighbours - the introduction of sodium hydroxide to reduce lead in pipes on the cheap, and the removal of sodium hydroxide in the wake of numerous reports of pinhole leaks and more flooding   All of this has also generated several major lawsuits – for flooding in 2012 and pinhole leaks in 2020.   

 

The City has remained tight-lipped on what it is going to do to address the epidemic of pinhole leaks but the connection to sodium hydroxide has not prevented it from once again embarking on the lead connection pipe problem.  The memorandum is an interesting example of policy making at Thunder Bay City Hall.  The $50,000 program has generated 24 applications which at $3000 per loan has generated a demand for loans totalling $72000.  So obviously, more loan money is needed, and the city has set $1,350,000 as the pool of loanable funds which at $3000 per loan means the city can issue 450 loans.  How clever.  The interest income foregone given current rates over the next ten years is low (apparently $100,000 in the estimate in the memo) and the City can even generate additional revenues by jacking up the fees from turning water on and off when the pipes are replaced.  Indeed, I am surprised the city has not yet thought of the latter.

 

So, here is the thing.  There are apparently upwards of 8,000 households in Thunder Bay that still have a lead connection pipe to the City water distribution system.  This means that the program is expected to “solve” the lead problem for approximately 6 percent of affected households. A program designed to completely solve the problem would require a much larger pool of funds – 8,000 multiplied by 3,000 – which would be $24 million.  And, there is no guarantee most households would take up the city’s offer. 

 

The incentive of a zero-interest loan of $3,000 for a project which based on the pinhole leak water service line replacement examples costs $5,000 to $10,000 is not terribly attractive.  Given the current loan program generated only 24 applications and not hundreds given the pool of 8,000 applicants suggests that this program will not be very successful. It is designed as a political solution to convey the impression that the City is doing something about the lead problem especially in the wake of the sodium hydroxide fiasco. 

 

However, economic incentives matter.  If the City was serious about addressing the lead connector pipe problem, it would use a cost-sharing grant program.  That is, it should pay 50 percent of the costs of replacing the lead connector line up to a maximum grant of say $3,000.  It needs a cost-sharing grant because realistically the obstacle to replacing the pipe on the part of homeowners given low current market interest rates is not access to loans but the total cost of the project relative to their household savings or income.  It also needs to cap the grant because an open-ended grant creates the incentive to generate escalating cost estimates on the part of service providers.

 

And, in the process of implementing this pipe replacement program it should also extend the program to city residents who have experienced leaks in their connector pipes in the wake of the introduction of sodium hydroxide.  Based on the leaky pipe statistics publicly provided on the Leaky Pipe Club Facebook page, it can be estimated that upwards of 3,000 households have experienced leaks over the last 18 months. Of these, a substantial fraction experienced not only household leaks but the failure of their connector pipe.  However, we do not know the official number of leaky pipe households or how many connection pipes have been replaced because the City does not release those numbers.  So, using 3000 households as a potential estimate and at $3000 per grant, would result in an estimate of $9,000,000 as the cost of a connector pipe replacement support program for leaky pipe households. And of course, this would be on top of the $24,000,000 estimate for the lead pipe households.

 

So, a total cost estimate for resolving these water issues comes to $33,000,000.  Is it a lot of money?  Certainly.  However, if we can spend $40,000,000 for a new sports facility and over $50,000,000 for a new police station, obviously money is no object.  It is politics.  The Mayor and Council obviously do not find the incentive of ribbon-cutting ceremonies for a lead pipe replacement sufficiently attractive events to put on their campaign literature or to attract provincial and federal cabinet ministers to the photo-op.  Basic water infrastructure and maintenance is not glitzy enough compared to spanking new water treatment plants or a shiny new turf facility or even a bridge or traffic roundabout.

 

Thunder Bay is fiscally constrained you say?  City councilors and administrators have seen the “light” and are now advocating only 2 percent tax increases so we cannot afford to do all of this? Think again!  Along with incentives being important in economic decision making, there is also the concept of the trade-off.  The cost of dealing with the water issue – lead and leaky pipes – can be estimated at $33,000,000.  The cost of the turf facility and new police station amount to $90,000,000.  It is time to choose.  And, by the way all this has to be done with tax increases kept as close to zero as possible given the City’s economic situation.  Putting forth a 2 percent tax levy increase is only the beginning.  It needs to go down from there.

 

 

 

 

COVID-19 in Ontario and Thunder Bay: The Bad News and Some Slightly Better News

 It is the New Year but the old year lingers on in full force as today's COVID-19 numbers for Ontario again topped 3,000.  We are now in the second wave of COVID-19 and it shows no signs of reaching a peak yet.  Indeed, as Figure 1 illustrates, the second wave dwarfs the first by far and at day 344 of the start of the pandemic in Ontario (based on the date of the first case) is still on a steep upward incline.  

 

 The somewhat better news for Ontario (Figure 2)  is that while deaths are also on an upward incline, they are not increasing as quickly as during the first wave and have yet to surpass the peak reached during the first wave.  However, given the number of cases and the extent to which the virus appears to have become ingrained in the population combined with the stubborn inability of many members of the public to accept the need for taking protective measures and social distancing, we are probably at best a few weeks away from a daily death toll of over 80 - last reached in late April/early May.  

 

 

As for Thunder Bay, the good news may be that a peak in terms of daily cases may have finally been reached. As Figure 3 shows, the LOWESS smooth does appear to be on a downward trend with the peak occurring nearly three weeks ago.  However, the down slope is slow and at the current trend it will take about another three weeks to get the daily count back down to close to zero - barring another super-spreader type event that kicked off the last upswing. The current surge in daily cases largely starts from the pickle ball and teen challenge events in November.  

 

One hopes that appropriate lessons have been learned.  So, there you have it.  Happy New Year.