05 March 2013

Just when we needed new ideas… #nlpoli

There’s no small laugh to be had listening to Wade Locke, the government’s favourite economist.

He was all over the media on Monday talking about fiscal responsibility, cutting spending and all that sort of stuff.  You can find a tidy summary from the Telegram.

A couple of decades ago, Locke was advising the public sector unions.  Back then he was all in favour of borrowing and spending and spending and borrowing despite the crushing public debt and the most severe economic downturn since the Great Depression. Fast forward and Wade’s singing a different tune.

The laughs Locke can generate get much bigger when you look at the rest of what he had to say to reporters.

Now before we get too far into this let us remember that while Locke has a title from the provincial government this year, he’s been an unofficial financial advisor to the provincial Conservatives since he endorsed their 2003 campaign platform.

The only change this year is that Locke is acknowledging that he is advising the provincial government.
Now let’s look at what he said.  His comments are government talking points right down the line:
  • We must make our expenditures match our revenues.
  • Don’t talk about how we got into this mess.
  • We spent when we had to spend.
  • The future is bright.
  • Look!  Mines and Oil.
  • Rinse.
  • Repeat.
NTV’s Glenn Carter asked Locke Monday evening if any of this was foreseeable. Locke brushed the question aside. He doesn’t want to talk about these things because all the factors that make the current mess were entirely foreseeable and entirely avoidable.

We got into this mess because the philosophy Locke brings to the current mess is the same one that created it in the first place: spending must match income.  The philosophy Locke and his associates have followed is the same basic philosophy that drove the country into bankruptcy in the 1920s and that drove the provincial government thinking for most of time after Confederation.

What’s more, the factors Locke now cites as causing problems in the future – aging population, changes to the workforce – have been know for past couple of decades.  Locke should be thoroughly familiar with them.  They didn’t just suddenly happen.

Add to that a feature of economies built on commodity exports.  Commodity prices go up and down.  As a result, it is something between folly and stupidity to spend because you have money today.  Odds are you won’t have money tomorrow.  Anyone even vaguely familiar with economics should recognize the pattern.

Those are the three major features of the Conservative policy for the past decade that created the current provincial government financial crisis:
  • They spent as much as they could and put nothing aside.
  • They ignored long-standing factors that would definitely affect the future.
  • They tossed aside prudence born of long history in Newfoundland and Labrador’s resource-based economy.
The Telegram mentioned Wade Locke’s 2011 presentation at the Harris Centre on the supposed need for a prosperity plan in the province. It’s useful to go back, look at the slides Locke used in his presentation, and see just exactly how far off Locke was.  This is important because the provincial government relied – implicitly or not – on exactly this sort of analysis to justify their 2011 and 2012 budgets.

Locke’s forecast for the future is for a small problem in the near term and a potentially big problem later on.  Slide 27, for example, shows potential deficits as big as the one forecast for this year.  But in Locke’s analysis this wouldn’t happen until sometime after 2018. 

His conclusion included the comment that  he was expecting “2.4 B[illion] per year in royalties in the next five years.

Slide 30 and subsequent slides show the result for a higher assumed price per barrel of oil.  The trend is the same but the drop would be delayed for five years.  In either one of the scenarios he uses, Locke views the problems as being a decade or more away.

The reason Locke got it wrong is that he used a faulty assumption:  things are always getting better. Oil prices only go up, it’s just a matter of how high. Even if the government has a problem, everything else will be humming along.

Locke’s done the same thing before, incidentally, even during the 2008 downturn.  High oil prices and a big project in Labrador.  Definitely. From Wade’s lips to Hisself’s ears.

It doesn’t matter that Locke took the future oil price projections from an international analysis company.

The point is that the assumption was predictably, knowably flawed.  As it turned out,  his forecast for mining development was also flawed.  And, while Locke hinted at Muskrat Falls, we would discover a few months after this presentation that Locke unreservedly endorsed Muskrat Falls based on an equally flawed assessment of that project as proposed by Nalcor.

Had Locke used a lower price for oil, he would have seen the same trend, but one that occurred much earlier.  The shale oil and gas revolution was well underway and yet Locke failed to consider the possibility that oil prices might drop. 

The result of this sort of flawed analysis is that people in government will tend to make policy mistakes.  Big mistakes.  They conclude, as Locke did, that the problem is so far off into the future that we can afford to talk about what we might theoretically do about this potential problem at some point in the distant future.

The provincial government has a big financial problem.  Just when we needed some new thinking to fix the problem, the Conservatives decided to stick with more of the same sort of thinking that created the mess in the first place.