14 March 2013

The Wrong Tool #nlpoli

About two thirds of the people in the province who file tax returns earn less than $35,000 a year before taxes.

It’s the kind of detail that you cannot banish from your mind when you read about the politically popular economist Wade Locke.  The guy who directly and indirectly helped the provincial government create the current financial mess is on a leave from his university job to help with the new budget.

As the Telegram reported on Wednesday, Locke’s “contract with the government stipulates that he'll be paid $250 per hour for his consulting work to a maximum of $75,000.”  That would be on top of the 80% or more of his university salary that he is entitled to for being on what the faculty contract calls a “sabbatical” leave.

The Telegram also reported that Locke said he would only bill taxpayers one dollar at the end of his contract.  Let’s take him at his word.

Still, you have to wonder why he would sign a contract in the first place for more than twice what most people in the province make in a year.  Don’t misunderstand.  A consultant should get what he can earn and if Locke can get someone to pay $250 an hour for his services, then more power to him.  Given the context, though,  the contract is still rather distasteful.

Locke’s supporters will defend any amount of money because they value his advice. And that’s really where we can peel back the cover on this little can and see what is inside.

The Telegram story describes Locke as the province’s most recognizable economist.  He’s earned a high profile in the news media as a result of his close relationship with the current government, with its energy corporation and with a raft of local companies and groups.

He’s a popular fellow, alright.  Locke is popular because he tells the politicians what they want to hear.  That doesn’t mean he distorts his analysis to fit their prejudices. Rather, Locke is popular because he believes the same things they do. He gives their wishes and their beliefs a veneer of academic credibility.

Back in the 1990s, the provincial government was heavily in debt.  The fishery, forestry and mining industries were all tanking at the same time.  The federal government was strapped for cash  so it wasn’t about to start pushing money to the provinces.

The provincial government’s plan was to deal with the problem in a planned way.  They set about to tackle the fundamental economic problems in the province with a long-term plan because they recognized any drastic moves would damage the economy and, more importantly, the society. If memory serves, Locke’s advice wasn’t anything like that at all. It had more to do with spending and then spending some more.

Fast forward a couple of decades and the government is staring at annual deficits on the order of $1.6 billion for at least the next two years.  According to the Telegram, Locke thinks that the government should look to balance the books “on average” over the next decade.

"There's going to be some of those years, like the next couple of years, we're going to be running deficits. After that, because of the nature of the oil revenues that are here, we're going to be running surpluses, and if we don't do something, we'll go back into deficit again."

Locke’s belief that surpluses are a couple of years away is based on what he thinks will happen with oil prices. This is basically nothing more than his 2011 presentation. 

Back then he though we had a decade to sort things out to prevent deficits of $1.6 billion or more showed up.  Locke came to this conclusion – apparently – because he assumed oil prices would only go one way:  up.  As it turns out, they went down as they have done a few times in the past four years.  Those big decades turned out to be 10 months away, not 10 years out.

Locke was wrong. 

Very badly wrong.

And yet Locke carries on.  His advice to the politicians is familiar:  keep spending.  They do not need to take any “drastic action” as the problem can be fixed little bit by little bit over time, long after most of them have left politics.  What’s more they cannot afford to take serious action since it would  - supposedly - cause more harm than good.

Locke notes that the provincial government’s problem is a “structural deficit”.  He is right.  The budget is structured to spend more than the government takes in.  The political system is structured to deliver budgets that spend more than the public treasury can afford.

This is not new, as Locke notes. But Locke is wrong when he says that before 2005 “we were poor, without doubt.”  His comments sound more like partisan bullshit than serious analysis. While the punters might be fooled, people familiar with the provincial economy will recognise Locke’s crap for what it is.

The truth is that since 1949, the provincial government has had lots of money every year.  By the 1980s, the provincial was spending more money per person than any other province in the country, bar none, in some areas.  In others, it was in the top three. 

After 2005, the provincial government Locke has been advising just went to hell, as the chart below shows.

Thus, we wound up in the mess we are in.

The mess is structural, to use Locke’s term. 

The problem for the provincial government is that they have retained a fellow to advise them on structural problems who doesn’t do structural.  He does petroleum economics. Not surprisingly, his advice is about the price of oil.  That isn’t “structural”.  They are likely going to keep making the same mistakes they have been making.

In Friday Monday morning’s post, we’ll look at the political and economic factors that contributed to the current mess. Then we’ll look at why Locke’s advice is wrong.