12 January 2016

Pressure #nlpoli

A curious thing happens in societies where a huge amount of the collective income derives from outside the local economy and the local tax base.

They do not see a connection between the money they receive and the action of earning it.  The money that flows into the collective pot – the government treasury – seems to appear by magic.

That might sound a bit odd but if you think about it this way, you may get the idea.  Whatever you did for your first paying job, you could see a direct relationship between the labour you expended and the cash you received in exchange.  Painting a fence earned you an amount of money. 

Paint two fences and you could get twice as much money. Or paint another bigger fence and you could get a bit more, Depending on how big the fence was and how much more paint you needed and how much more time it took you to finish painting, as a result,  you could get more money for painting the fence.

And if everybody in your community painted fences or had the same basic connection between labour and reward,  you could all understand it when someone asked you to give a bit of your fence-painting money so that you could buy a fire-truck to fight fires in your town.  That extra bit of money for the community is a portion of your individual earnings from fence-painting or ditch-digging or tree cutting, or whatever it was that you did to make money. 

But what about a place where, in addition to that cash, you all shared in something like money that came from producing oil?

Even if you understand in your head how the oil gets pumped and sent to market, the money your community makes off it is different from your own experience of labour and reward.  Even if you happen to know one of the very small number of people in your community working in the oil industry,  there’s no straight relationship between how much labour anyone expends and what you get in exchange for selling the oil.

Pump 50 barrels of oil one day and you will get an amount of money.  Pump the same 50 barrels a few days later and you could get more or you could get less. Sometimes, though, you could get dramatically more.

Or what about a place where your friends and relatives in other communities all chip in and send you a bit of money so you can have, in total, as much as they do?  Sometimes you get more.  Sometimes you get less. The amount goes up and down by something other than a logical, practical influence that you can understand.

A curious thing would likely happen, as we noted in a 2013 series.  Governments in places where a significant chunk of cash is external to the state tend to be less democratic,  tend to have lower taxes, tend to be less developed economically than their neighbours, and tend to overspend.

When faced with changes in income – a drop in oil prices – the governments in these places tend not to hold back or even cut spending.  They tend to hold the line and try and find other sources of revenue to replace it. 
Governments come under enormous pressure from many sectors of society to spend the money they are collecting.  States with underdeveloped bureaucracies and a political history of patronage are particularly vulnerable to the influence of petrodollars.  In a country such as Venezuela, abundant cash from oil created pressure for the Venezuelan government to intervene heavily in the economy.  Periodic booming oil prices fuelled increased government spending that was sustained even during periods of low prices by relentless political pressure from across society and the political competition to be the one to control the flow of money.
Venezuela kept the oil flowing because it needed the money, even when prices dropped and they should have curbed production.  The government also increased its access to petro-cash by muscling into oil production. By controlling production, the state-owned oil company responded to political need not market forces.

There are plenty of stories of Venezuelan oil fields that ceased production prematurely because the government need the cash from the production levels, the geology of it be damned.  The company wound up collapsing wells and leaving oil in the ground that otherwise might have been recovered.

“Generally, oil rents produce a rentier state,” Terry Lynn Karl wrote in 2004,  “one that lives from the profits of oil rather than from the extraction of a surplus from its own population.  In rentier states, economic influence and political power are concentrated, the lines between public and private are very blurred, and rent-seeking as a wealth-creation strategy is rampant.”

Rent-seeking is a jargony term for things like going to the federal government for hand-outs when revenue from oil goes down. In other places, they’d cut spending.  In Newfoundland and Labrador,  the government looks for a way to get more cash.  The Premier in 2015 talks about doing precisely what his predecessors about a decade earlier.

As much as some people believe the long-history of exploitation was the truth behind Danny Williams 2004 crusade,  the exploitation was fictional, more alleged than real.  Take a look at the amount the provincial government spends per person to deliver services to people.  It’s hard to see the government of a hard-done-by bunch.

Back in 2004, Williams wasn’t looking for reparations, for compensation for past injuries.  He wanted precisely what he asked for:  a permanent federal transfer payment identical in virtually every respect to Equalization but just called something else.  He persisted in that fight desperately and long beyond the point where he could reasonably have expected screaming and verbal abuse might somehow wrestle more cash from Ottawa. 

And by the way,  Williams knew as early as May 2004 he could get precisely what he finally settled for the following January. He wanted as much cash as possible for as long as possible.

Dwight Ball is heading to Ottawa for a hand-out as his first choice in dealing with a government financial crisis, precisely as Williams did in 2003. In both cases, it wasn’t the last resort but the first one.  Williams went to Ottawa with his hand out, don’t forget,  before he had in hand the final report from the external accounting firm he asked to review the province’s finances. 

In both cases,  the premiers went looking for the supposedly easy cash before undertaking the hard job of coming to grips with the internal causes for the government’s financial woes.  In Williams case,  he found the windfall in oil, not Ottawa, although he got money from the federal government.   Williams abandoned any talk of restraint and financial prudence as soon as a bit of extra cash showed up. 

Political pressure was intense in 2004 to maintain spending. The same is true today.  Ball has not even bothered to talk of other measures.  He leaped immediately for the external cash.

The provincial government will announcement the latest in the annual political staple of budget consultations. What it is, as much as anything else, is an annual ritual in which special interests argue why they deserve more cash from government.  If there have to be any cuts, they will tell you that other people should be cut first and cut deeper than their interest.

It’s patronage,  a traditional feature of local politics.

It’s pressure to keep things going, just the way they always have been going.