Alberta Political Theory

Keystone XL

2012-01-22T21:11:00.000-07:00

The announcement this past week that the US State Department would not grant approval for the Keystone XL pipeline under the current application has produced some very interesting reactions.

The environmentalists have reacted with excitement over their perceived victory. This only reinforces my view that these people are completely clueless.

The decision to not approve the pipeline application will have exactly no impact on the construction of 95% of the pipeline. Montana negotiated tie-in provisions to the original project so the project can be constructed from Montana to Texas without State Department approval. The Canadian portion has been approved and construction has started. The only portion that is delayed by the decision is the portion from the Canada/US border to Billings Montana, or wherever the tie-in is to occur; 100 km or so.

The delay in the Keysone project also removes a hurdle that the environmental movement could have used to fight the Northern Gateway pipeline. Without Keystone it will not be difficult to establish that there is sufficient oil in Alberta to supply the Northern Gateway project. With Keystone it would have been much more difficult to establish that Northern Gateway was 'needed', and it is the national 'need' that provides the legal rationale for expropriating rights from individuals and groups.

Additionally it would appear that the environmentalists didn't even read the decision that was given out. How can they be thrilled when the decision all but announces that it will be reversed as soon as the next election is over. Getting played for suckers hardly sounds like a resounding victory.

The reaction from the Canadian oil sector has been amusing for someone in the Ag sector. The energy sector has always taken the view that they were special, that the Americans would never do anything to slow down the flow of oil and gas from Canada. The forestry, agriculture, and manufacturing sectors are kind of laughing at the oil guys now. Welcome to the boat. Canadians only get access to the US market at the convenience of the fickle US politicians.

The shock from the oil executives on both sides of the border that their industry is not the most politically influential force on the planet is almost palpable. Very amusing. They were never as influential as they thought. They, and everyone else, will be better off with a more rational perception of their true influence.

The reaction from the Canadian and Alberta governments are also enlightening.

The federal government is not as closely tied to the energy sector as the provincial government so the federal reaction was much more muted. It is also not bad timing for the federal government with the PM's trade mission to China coming up shortly. Additionally, it gives the government greater political leeway for interfering in the approval process for Northern Gateway.

The reaction of the Alberta government is the one that is most troubling. The disappointment and devastation in the body language of Allison Redford is disturbing. Primarily because it underlines the immense conflict of interest the government is in when dealing with the issue of property rights.

The disappointment of the government is perfectly rational when you consider that the government collects much of the royalties from oil and gas development through payments in kind. That is, the government of Alberta is the largest single seller of oil in Canada. Consequently, the provincial government has a vested interest in having pipeline projects proceed so that the government can achieve the highest possible price for that oil.

That raises the issue however, that if the government stands to benefit from oil and gas development, how can they establish and enforce the rules fairly when it comes to disputes over the use of the land surface. The government is not an independent arbiter when it comes to disputes about the routes of pipelines, the location of well sites or other infrastructure. The government has a financial interest in these matters, but it chooses to pretend that it can also arbitrate fair settlements between oil company's and land owners. Worse still, people buy the idea that the government and its' agents are independent.

Reality is that the provincial government is a beneficiay of the resource. That poses a serious problem when it comes to establishing fair regulations. The government is supposed to represent the interests of all citizens but this is difficult to do when the government has a vested interest in one particular outcome. The government pursues it's own self interest even though some and perhaps many citizens will not benefit from such a project. Government funds are spent to enrich a few corporations over the objections of citizens and other corporations.

My objection is not that this occurs, it is primarily that the government and industry does not acknowledge the inherent conflicts of interest that the government is in. There is no magical land where individuals and governments have absolutely no conflicts of interest. Therefore in an open and free society we must acknowledge these conflicts and ensure that the expenditure of government resources is appropriate to the interest that the government has in the project and that private interests are not being granted excessive benefits.

I think it is important to be clear on the ownership of the resource. It is common to hear people say that the resource belongs to the public. This is completely wrong in law and does not work even in practice.

The resource belongs to Her Majesty Queen Elizabeth II, who has seen fit to grant the management of that resource to the Government of Alberta. That the duly elected Government of Alberta chooses to manage that resource to optimize its' electoral interests is what creates the illusion that the public has some interest in the resource. This distinction of ownership is not merely a legal technicality, it is a very useful tool for understanding why the government spends money the way it does, particularly when it doesn't seem to be directly in the public's interest.

If the public wishes to take ownership of the resource that is a constitutional discussion that can be had. I personally see no inherent advantage to changing or keeping the current system of ownership. The outcome to the public under either system will be determined by nature of the people running the government and the engagement of the public in selecting those people. Good leaders will produce good outcomes from a lousy system, bad leaders will produce bad outcomes from a good system.

That the Alberta Government is reacting the way it is over Keystone, particularly troubles me at the moment because the government is undertaking a public consultation on surface rights. Alberta has had one of the most progressive property rights regimes in Canada, and possibly the world, and that is at the root of much of the surface rights problems that the energy industry and the government has been running in to over the past decade or so. That the government is so closely tie-ing its' interest to the energy sector does not bode well for the rights of individual surface rights holders.

In the end, I do not believe that the US State Department decision is particularly significant in economic terms. The pipeline will get built more or less on schedule and the oil will flow. Only the certainty that oil industry executives had about the US market is shaken.

The decision is very significant in terms of Canada/US relations however.

This decision essentially drives the last nail in the coffin for any industry to think of itself as 'North American'. There was a time when many industries and their participants north of the 49^th thought of themselves as part of a 'continental' industry. The energy sector was the last industry to think in these terms. They will no longer do so. They will see themselves as Canadian and US industries with subsidiaries and customers in the other country. Continentalism is dead.

(That the auto industry calls itself 'North American' is mere tokenism. If it wasn't for the legal treaties negotiated by the Canadian government, all auto and parts manufacturing would move out of Canada.)

This decision is like an underwater volcano finally breaching the surface. The dis-integration of the Canadian and US economies and industries has been occurring for a considerable period of time, but it is the moment of this decision that historians will use to mark the divergence of the economic interests of the two countries. We will remain close allies with mutual interests but the US will become increasingly irrelevant to Canadian policy decisions.

An example would be the unofficial policy within the Department of National Defence to not purchase from US suppliers. It is not that US defence products are not good products but rather that the intellectual property rights and national security covenants that the US government insists on attaching to any technology transfers make the products unattractive. When you can purchase similar quality products from other nations without restrictions, it makes US products look very unattractive. This trend will continue, not just within the DND and other government departments but it is likely to spread to other industry: US products will be avoided when there are comparable products from other nations.

The pressure from Canadian industry to harmonize and standardize with the US will continue to decline. The pressure in Canada will be increasingly for moving to global standards rather than US standards.

At the end of the day, the US decision on Keystone XL is symptomatic of an empire in decline: it is making decisions that ensures that its' relevance to the world declines even faster.

Northern Gateway

2012-01-15T21:54:00.000-07:00

The start of the hearings for the Northern Gateway pipeline (NGP) was this past week. People who understand how the regulatory process works, understand that the pipeline has already been approved and that the hearings are just to provide noise as a distraction for that which has already been decided.

In principle I support the opening up of a transportation route to the coast for all products from Alberta, including oil and gas. I do not agree that the government should be playing favourites by supporting one method of transport over another and I do not agree that the government should be subsidizing any form of transportation option, as it is doing with the pipelines.

Firstly. You know the process has been 'fixed' when the process allows a lot of people who can not prove a direct impact, to participate in the process. This is a rather standard procedure and is used because you can almost guarantee that the people with very little at stake will go all out to try to get their demands met. Been there, seen that.

The NGP hearings are going to allow just about any group with a dollar to spend on a lawyer to make written and verbal submissions. Most of these people have no direct connection to the area and consequently the outcome of the hearing is largely inconsequential to their lives. They are ideologues, fighters looking for a fight. Win or lose, when the hearings are over, they will just move on to the next fight. Most of them have never been to the route the pipeline will take, and never will, but they are greatly concerned about the environment on principle.

Why are they permitted to participate? Because they will take up most of the time, they will get all of the media attention, and the public will not be offended that the National Energy Board (NEB) ignores them. The people who have real issues that need addressing will be lost in the lights and whistles that these ideologues set off, and consequently the public will not notice that real people will suffer real hardships as the pipeline goes forward. The people with real issues will simply be lumped together by the public with the professional complainers. Been there, seen that.

Standard operating procedure when you want a project rubber stamped with no changes.

Knowing this, are you surprised then that the federal energy minister and the prime minister came out with comments to shape the public perception of the hearings? They want the public to be irritated by all the people who shouldn't be participating in the process.

It does not offend me that the prime minister spoke out. It is the job of the government to make policy determinations and to speak out on projects that are in the national interest. What bothers me is that the process has been set up to trample the rights of Canadians for the benefit of shareholders that live a long way away from any negative impacts from the project.

The process should have been set up to address the issues of the people who are going to be directly affected by the project. Ideologues should not be allowed to participate.

Yes, I know, an oil spill on the coast will affect a great many people and pollute a significant part of the environment for a number of years. But an oil spill is not a disaster for the environment, it is only a disaster for those individual organisms that are poisoned by it. The environment will do just fine.

There may be changes to the ecosystem, but there will be no long term damage. When I speak of long term, I mean time measured in decades if not centuries. Just because we demand instant gratification doesn't mean that nature is obliged to grant it. Nature adjusts at its' own pace, not ours. An oil spill is a change in the environment not a catastrophe.

Keeping tankers out of coastal waters? What kind of nonsense is that? Do people really believe that if a tanker goes down 12 miles out, the oil won't reach the shores?

What are the odds of a significant oil spill from a tanker anyways? Other than the Exxon Valdez, can any of the protestors identify another tanker that has caused a major spill? How many major oil spills from tankers have there been in the 20^th century? My point is that the risk is very small.

The protestors, however, are going to yell and scream like it will be a weekly occurrence if the project is allowed to proceed. What they won't try to deal with is the problem of ships pumping out contaminated waste water on a daily basis. The amount of oil pumped into the ocean this way is probably greater than a super tanker worth on a global basis per year. It's a difficult problem that the public can't really understand, so it's tough to get them to donate money for that cause.

To the issue of subsidies for the pipeline industry.

The argument for the pipeline includes the argument that it is the most cost effective way to move fluids. This is certainly true under the current regulatory framework, where the full costs of the pipeline are not paid by the beneficiaries of the pipeline. Since they do not have to pay the full costs, it is not possible to say if it is the most economical method to move fluids.

The biggest subsidy that pipeline company's receive is from private land owners. The pipeline company's do not have to pay the full cost of the depreciation of the land to the owner. The right of way is forced on the land owner because if the government failed to do so, the cost of purchasing the right of way in a 'free' market would make the project prohibitively expensive. The project is declared to be in the 'public interest', and the rights of the individual land owner are stolen.

The existence of the right of way restricts all future development of the property which nominally the land owner is compensated for. The social costs of those restrictions are not compensated. The restrictions may result in inefficient future development because the optimal development location is prohibited by the pipeline. These costs are not borne by the pipeline company.

Furthermore, the pipeline company's are not required to bare the costs of removing the pipelines when they are decommissioned. These costs are left up to future land owners and the governments of the future. Only fools believe that these pipelines will not have to be removed eventually. They can not be cleaned perfectly upon decommissioning and consequently there are contaminants that are released when the pipeline eventually corrodes. This problem is already occurring with the pipelines that were among the first laid in the ground. Modern manufacturing techniques can make the pipes last longer but they can't make them last forever.

The costs of the environemental clean up after a decommisioned pipeline leaks contaminants into the environment are also not factored into the cost of the pipeline. These costs will inevitably be borne by the government because industry is very clever about extracting money from a company and leaving the liabilities for others to deal with. There is a reason that the Alberta government has a back log of abandoned well sites to reclaim.

Additionally, once the right of way is removed and a land owner is no longer restricted in what he or she can do with the land, it is up to the land owner to remove the pipeline if they wish to erect a building over the site of the decommissioned line.

When you add all these factors together, I am not certain that pipelines are the most economic solution for moving fluids. They may be, but until the regulatory framework is adjusted to force the pipeline company's to pay the full cost, we will not know for certain.

The bigger question that I have is why the government is supporting the NGP but not offering support to the alternate options of rail? Personally, I believe that multi use infrastructure is inherently more efficient than single use infrastructure as it is not prone to sudden obsolescence when technology changes before the full capital costs have been recovered. That being said, if the full costs of the pipeline were being paid by the beneficiaries of the pipeline, and they felt it was still worth the cost, I would have no problem with the pipeline being built.

The governments should not be playing favourites. The government should be supporting the principle of getting the best price for products produced in Alberta. It should not be deciding how to go about getting that price. When governments do that they end up using hidden subsidies to try to fool the public into believing that the current government is extraordinarily competent. Create a level playing field and allow industry to decide what is the most economical way to achieve a profit.

What I really have problems with in regards to the hearing process is that the people who will suffer the most will not likely even be heard. The hunters and trappers who still live in the back country of BC might not even be aware that they are going to be affected. If they are, it is most likely because some of the professional complainers found them and want to use them as a human shield while they pursue their own objectives. I am concerned therefore that because of the way the process is set up, that many people will earn a very good living from the process but the people who might lose their living, will get nothing.

Ultimately this is the reason that the process was set up the way it was. The government does not want the public to know that there are people who will lose everything because of the project. What the public will see, is that a whole lot of people who will lose nothing from the project are furiously putting on a big theatrical performance for the entertainment of those who created the process. Been there, seen that.

Myths and Rationalizations

2012-01-08T22:11:00.000-07:00

The subject was raised by a friend this past week about how eastern Europeans have a different interpretation of how WWII played out. Nations, like individuals, tell themselves lies to avoid facing the harsh truths of their own failures. All of the victors developed myths to pass the blame for their own failures either to the brilliance of their enemies, or the ineptitude, or malevolence, of their allies.

Individuals do this all of the time. Everyone knows someone who never takes responsibility for their own shortcomings, and everyone does it on occasion. It is not the wisest way to live ones life, but most people manage to get by.

When nations do this however, there can be serious consequences for many people and the errors of a previous generation can be repeated by the next.

One of the myths that the Soviets propagated amongst the people of eastern Europe was that the western allies delayed invading France, so that the Soviets would have to bare the brunt of the casualties fighting the Nazis. This is a convenient myth that encourages the people to see themselves as victims of other countries actions rather than victims of their own government.

Being educated in the western tradition, I of course understand that the invasion of France was a militarily difficult operation and the timing was determined by the availability of resources.

The Soviets could get away with creating this myth because both the Russian and Soviet Empires were entirely land based empires. There were, and are, no large pools of people within eastern Europe who have first hand knowledge of the difficulties of supplying far flung empires by sea. The myth could thrive because it was not inconsistent with the knowledge the people had.

Interestingly enough, I had just been considering the problem the Nazis had faced in invading Britain in the fall of 1940. I came to the conclusion that given the naval superiority of the Royal Navy, there was no scenario under which the Nazis could successfully invade Britain. The industrial capacity of the British Empire would always surpass the industrial capacity of Germany and therefore the Nazis could never achieve absolute superiority of the air, sea, and land simultaneously.

The simultaneity of superiority in the air, on the sea, and on land is critical for a successful sea borne invasion, as was proved time after time during WWII. Even with complete air and naval superiority and the land forces facing a greatly weakened Nazi force, the allies had a great deal of difficulty making headway off of the Normandy beachheads. Even after they made that headway, they had a great deal of difficulty keeping the armies supplied so that they could continue pushing forward.

The idea that the allies delayed the invasion of France so that the Soviets could bare the brunt of the fighting against the Nazis also fails on the ground that it ignores the fighting in Africa and Italy. Operation Barbarossa was delayed because the Nazi forces had been bled away to help the Italians fight the British in Africa. The Kursk offensive in 1943 was also weakened by the need to transfer forces to stop the allied offensive in Italy.

Churchill would have been much happier if the British and American forces could have conquered all of Germany before a single Soviet soldier crossed the Oder.

Reality is that the people of eastern Europe suffered during the war because their leaders were butchers who didn't really care who was dying, whether it was German or Soviet. Stalin's orders to not evacuate cities such as Leningrad and Stalingrad, was as big of a contribution to the death of the civilians as was the German assaults. The Soviet decision to put the the 120mm artillery piece into the JS2 rather than the 100mm canon, led to the deaths of a great many T-34 tank crews who were forced to fight Panthers and Tigers with swarm tactics. Stalin and his cronies did not value the lives of the people they ruled, and they didn't really want the people to think about that.

The myth that the allies delayed the invasion of France was convenient to cover up the fact that Stalin and his cronies had objectives that did not correspond with the best interests of the people of eastern Europe.

It is not just the Soviets who created myths around the outcome of WWII.

The Americans and British both created myths about the fighting capabilities of the Imperial Japanese forces. The successes of the Japaneses in the first year of the war were attributed to the wonderful fighting machines and men of the Japanese. Reality is that the success of the Japanese was largely due to the unpreparedness of the American and British forces.

The British in Singapore and the Americans in the Philippines surrendered to Japanese commanders who commanded troops who were in worse shape with fewer supplies than the British and American forces who were surrendering. The commanders were not up to the tasks expected of them. Not unusual at the beginning of wars where peacetime commanders have not been tested by battle.

That the Imperial Japanese army was not a superb fighting force was demonstrated in 1939 at Khalkin Gol, where Georgiy Zhukov thoroughly destroyed a Japanese force. Taking on an army that was ready to fight showed the weaknesses of the IJA, which they did not fix over the intervening 2 years, they just found less ready enemies. When the British and Americans got their forces trained and ready to fight, they did just fine against the Japanese forces.

The Americans built up great myths about the wonders of the Japanese Zero. It was not a great warplane. Even when flown by the superbly trained pilots early in the war, it had a rather poor record against American fighters that were considered obsolete or second rate. The Flying Tigers used the P-40 Warhawk to devastating effect against Zeros and Oscars in 1941. The US Navy F4F Wildcat outfought the cream of the Imperial Japanese Navys' Zeros in 1942, shooting down most of the highly skilled pilots of the IJN before the technologically superior Hellcats and Corsairs came into service.

It is forgivable for the American commanders of WWII to believe that the Japanese aircraft carriers were the primary threat in the Pacific theatre. It is not so forgivable for the historians.

For the American commanders, they understood that the rate limiting production step for the US Navy was the building of capital ships. Despite the immense manufacturing capacity of the United States, it still took the better part of 2 years to build an aircraft carrier or battleship. Protecting the ones you have becomes critical because they can't be replaced quickly. Pilots could be trained in 6 months and planes built in much shorter order. The American aircraft carriers were never short of trained pilots or aircraft.

What the American commanders could not appreciate however is that the limiting production step for the Japanese was the training of pilots, not the construction of ships. Consequently, the killing of the Japanese pilots should have been the priority for the US Navy, not the sinking of the aircraft carriers.

That this misunderstanding persists into the history books is seen in the emphasis that US history puts on the success of the Battle of Midway rather than the critical battles on and around Guadalcanal. The carrier battles in the seas around Guadalcanal cost the Americans dearly in terms of aircraft carriers. The toll on the Japanese pilots was far worse. By the time the battles were over, the Americans only had one aircraft carrier left operating in the theatre. But it was operating in the theatre. The Japanese carriers had retreated because they had no more planes or pilots to launch.

This was the critical point in the Pacific war. After Guadalcanal the Japanese naval air force was no longer a factor. Sure the Japanese made an attempt in 1944 in what has become colloquially known as the Marianas turkey shoot, but that drove home to the Japanese that their aircraft carriers were white elephants resulting in the situation that at Leyte Gulf, the Japanese only used them as floating decoys rather than as actual militarily useful ships.

Guadalcanal is also useful for pointing out my earlier point on the need for superiority in the air, on the seas, and on the land for an invasion to be successful. The Americans landed marines on Guadalcanal without having complete naval or air superiority. The marines suffered terrible deprivations because of this. The Japanese assaulting forces faced the same problem. Because neither side controlled the skies or seas, the land forces on both sides suffered severe supply problems that restricted their operational abilities. Until the air and naval battles had been fought to a conclusion, the outcome on land could not be resolved.

This leads back to the situation with the Nazis invading Britain. Even if the Nazis had gotten all 25 divisions onto the British shore as was envisioned in the first versions of Operation Sea Lion, the ability to supply those forces would have been negligible. The Royal Navy would have committed everything to destroying the Nazi capital ships and once those capital ships were destroyed there would be no supplies for the troops on shore. Tanks without fuel belong to the enemy.

The corvettes and destroyers coming out of British and Canadian shipyards by the dozens could have kept the transports and supply ships in port. Any air superiority the Germans enjoyed over the channel would not have been sufficient to stop the small and manoeuvrable corvettes, frigates and destroyers. This basic reality is ultimately what prevented the Nazis from trying.

There is one more myth that is prevalent amongst the western nations. It is not so much a myth as a deliberate avoidance of a harsh truth. That being that the people of Britain and France have no responsibility for the war being started or fought. This is wrong.

The pacifism that gripped both Britain and France after WWI was a direct cause of WWII as well as guaranteeing that it was long and bloody. The military weakness of Britain and France convinced Hitler that they would not go to war over Poland. The military weakness of Britain and France ensured that even though Hitler lost that bet, he did not have to pay the consequences immediately.

That France was so thoroughly disarmed during the inter war period that it did not even have enough munitions to supply every soldier with a gun when he was sent to the front in 1939 should be considered one of the greatest tragedies in the history of humanity. If France could have had even enough guns to arm all of its soldiers, the Nazis could not have stopped France and Britain from marching all the way to Berlin in the fall of 1939.

The German war machine was not invincible. Three weeks of fighting against the badly outclassed Poles had left the bulk of the Wehrmacht exhausted and its' machines worn out. They could not have turned west and met an advancing French and British force in good order, and it is naive to think that Stalin wouldn't have seen this as an opportunity to seize the rest of Poland.

But France had been thoroughly disarmed by its' own people. Britain with the exception of the Royal Navy had suffered the same fate. Fifty million people died before the fighting stopped and you never heard a single pacifist say 'oops'. In more modern times the same error has been repeated. With the fall of the Soviet Union, it was fashionable throughout the west to speak of a 'war dividend': stop spending money on military preparations and start handing out cash.

Myths and rationalizations have consequences we must be very careful in how we deal with them as nations because they can have consequences that shape our political environment for generations. We must also understand that the myths that are taught are often more about covering up the incompetence of decision makers and not about looking out for the best interests of the people they should serve.

A National Securities Regulator: Part II

2012-01-01T20:55:00.000-07:00

Last week I discussed the lack of a rationale for a national securities regulator in Canada but expressed the view that there was a role for the federal government in the enforcement of securities law.

It is to the benefit of everyone to have the enforcement of regulations handled by a different agency from that which writes the regulations. I am of the view that the dual, and sometimes triple, mandates given to regulatory agencies is the underlying cause of most, if not all, of the failings of regulatory agencies.

If you take the the Japanese Nuclear Power regulator as an example, you have an agency with a triple mandate: promote nuclear power development, regulate nuclear power development, and enforce the regulations. It did a reasonable job of the first mandate, you can form your own opinion about how well it managed the other two.

If you look within the Canadian context you find as the norm that regulatory agencies have dual mandates: write the regulations and enforce the regulations. You can't enforce regulations that don't exist so the first mandate tends to be the focus of the agency. Enforcement, when it occurs, tends to be limited and ineffectual at curbing abuses. Individuals and corporations quickly learn how to game the system and/or do a quick cost/benefit analysis to determine that non-compliance is the best option. A quick apology and a small fine 'if' they get caught, and then it's right back to business.

Consequently, separating the responsibility of enforcement from the people who are charged with writing the regulations has the effect of making it more likely that enforcement will be both more diligent and effective. This of course is dependent upon sufficient resources being allocated to competent people.

The apologists for the current system will argue that the current system allows the regulators to be more flexible in dealing with situations that were unforeseen. This is part of the problem. The regulators don't make the rules clear enough and this is part of how the system ends up being gamed: anything that isn't expressly forbidden is permissible, until it is not. Pleading that you didn't know it was against the rules is a standard argument for people called in front of regulators. The regulators doesn't punish them, they just tell the perpetrators to stop, but they can keep all their ill-gotten gains.

Removing enforcement responsibilities from the people writing the rules will force those people to write regulations that are clear and unambiguous so that the enforcement agency and everyone else knows where the line is. There should be no grey areas. The regulations should be fair, clear, and uniform for everyone. Too often in the regulatory fields, the rules aren't the same for everyone, the rules that are written are subject to broad interpretations, and there aren't many options available for people who have been wronged because of it.

The federal government then should undertake to establish an agency with the mandate to investigate accusations and allegations of breaches in securities law or regulations. If it requires amendments to the criminal code to criminalize offences that are dealt with through tribunals at this time, then the federal government can add them to the criminal code with appropriate penalties. The criminal code and criminal law in general is not static, it is constantly evolving. Criminalizing and de-criminalizing behaviour occurs on a regular basis. The criminal code evolves to somewhat meet the needs of the government.

Although there are good reasons to consider establishing a specialized agency for the investigation of securities offences, I do not think that this is the best choice.

Securities violations are not such a huge problem in Canada that an organization of thousands of people are needed to investigate and manage the problem. An agency of 100 to 150 investigators would seem to be the absolute maximum size necessary and more likely a number closer to 50 would be able to handle the work load.

Regardless of the number, they would be spread out across the country requiring separate offices and infrastructure. This sets up the need for a bureaucracy to manage those assets and before you know it you have a system where there are 2 or 3 support people for every investigator, which then requires an even bigger salary and bonus for the director to manage such a large bureaucracy. I am of course exaggerating the problem, but you will never find a senior bureaucratic saying that their agency needs fewer resources to do their job.

The responsibility for enforcing securities law should be infused into the RCMP after, and only after, the RCMP has been down-sized and restructured.

The necessity of down-sizing and restructuring the RCMP has become obvious to even the casual observer in Canada. The recent allegations of sexual harassment and sexual assault by female members of the force is added to the videotaped incidents of officers behaving violently against citizens that they are interacting with. Even the RCMP is now admitting that they are having problems of public confidence in the force.

The problems are due in large part to the size of the force. It is simply not possible to maintain proper discipline within the force when they have so many officers spread out over such a large area. It is too easy for a supervising officer to either over look wrong doing because he is short staffed, or to transfer a problem officer to the other side of the country without warning anybody that they are getting damaged goods. The solution is to down-size the force and make the western provinces responsible for their own front line policing.

The RCMP can be remodelled into a national, elite, law enforcement agency. The model for the RCMP should be the FBI in the US. I know the FBI is not perfect, they have their internal politics, they are subject to inter service rivalries with other agencies, and sometimes they just plain screw up just like any other people. The FBI however, is still a repository of highly skilled investigators with highly specialized talents. They have a set of proficiencies that are well respected around the world. It is not a bad model for the RCMP to emulate.

Front line policing is a business that should be removed from the RCMP's responsibility. Front line police work is valuable experience and I would think that a re-vamped service would recruit preferentially individuals with police experience. That is part of what helps build an 'elite' image.

I have no doubt that the RCMP have investigators who spend their time on securities fraud on a full time basis. These investigators are restricted to looking at criminal code violations and any transgressions of mere regulations are not necessarily passed on to the regulators in case it may compromise an investigation. Part of what I am suggesting is broadening the range of transgressions that are covered by the criminal code so that these investigators have more tools available to them when evidence of wrongdoing comes into their possession. Broaden the range of transgressions and you increase the need for investigators.

By having this task done within the confines of an agency that is investigating more than securities indiscretion, you solve the problems of the inefficiencies of scale when dealing with a specialized agency. You also have the ability of allowing seasoned investigators to broaden their experiences by transferring to other investigative disciplines rather than becoming burnt out.

The point of my discussion is not to define the limits of what the RCMP should do, but rather to suggest that adding securities enforcement to a set of responsibilities that they are demonstrating that they are unable to handle, is not appropriate. In the restructuring of the force, securities enforcement is something that should be added, however.

Even if someone puts forward a compelling argument that a national securities regulator is warranted, enforcement of those regulations should not be left in the hands of the people writing those regulations. The skill set that makes an individual good at writing regulations, is not a desirable skill set for an enforcer.

A National Securities Regulator: What's The Point?

2011-12-26T20:22:00.000-07:00

The release of the decision by the Supreme Court of Canada this past week, that the federal legislation to form a national securities regulator is unconstitutional, was met by a great deal of consternation and gnashing of teeth in the centre of the universe. What there was not, was a compelling argument put forth that Canada actually needs a national securities regulator.

Watching the news reports on the national news channels and particularly on Canada's Business News Network, there were no shortage of opinions offered on what a travesty the decision was. There were comments comparing Canada's lack of a 'national' regulator to a third world country. That it is an embarrassment that Canada does not have a national regulator. Everyone else has one so why shouldn't we!

These statements were coming from otherwise intelligent, well reasoned people.

They do not include a good reason for Canada to adopt a national securities regulator.

What problem will a national regulator solve? Businesses aren't complaining that they can't access the capital markets. Securities fraud is no more prevalent in Canada than it is in any other country. Why exactly do we need a national regulator?

This is the question that must be answered. When there is a compelling argument in favour of a national regulator, then the political pressure on the provinces to form one will be irresistible. This is why all the provinces except Ontario developed the passport system to facilitate the registration of securities across provinces. The pressure to reduce red tape was irresistible.

Where is the pressure from businesses and/or consumers for a national regulator?

There is no pressure because the needs of businesses and consumers are being met by the current system. Is it an ideal system? Probably not. Is it worse than a centralized system? Probably not.

The question one really must ask, is would Ontario be in favour of a 'national' regulator if the headquarters was planned for Vancouver? This is the real crux of the matter.

Would all the financial analysts, traders, brokers, and bankers want to deal with regulators that they can't socialize with on the weekends? Would they want to be overseen by someone that they don't see at the golf course in the evening? This would seem to me to be the real issue.

The Bay Street elites simply do not like having to deal with regulators who don't work on Bay Street. The current system forces them to deal with regulators in every province, and most of those regulators don't know the Bay Street power brokers from a hole in the wall. You can see why these people would be agitating for a 'national' regulator headquartered on Bay Street. It would enhance the power and influence of those who already have a great deal of it.

That this is the crux of the matter can be seen in the reaction of the same people to the proposed merger between the London Stock Exchange (LSE) and the Toronto Stock Exchange (TSE).

When the merger was proposed the Bay Street elites wrapped themselves in the flag and talked about the loss of national prestige and independence, and then turned around and orchestrated a rival bid that is questionable in terms of its' value to Canadians.

Outside of Toronto the proposed merger with the LSE was treated with interest. The business community looked at it in terms of having the potential to increase their access to pools of capital that would otherwise ignore Canada. They did not necessarily support it, but they did not oppose it either.

Lets' face it, outside of serious investors, Canada is ignored in the global investment community. I watch Bloomberg and CNBC all the time. Markets and economies much smaller than the TSE and Canada get much more attention from these global looking US networks. When global investors look to invest in North America they look first to the US markets and no further. A merger between the LSE and the TSE could have brought attention to Canada on the global scene.

The very serious global investors pay attention to Canada, but I'm talking about the casual, arms length investor whose money is in the hands of a 'don't take chances' manager. Investing in the US is safe because the client knows about the US, they don't know anything about the Canadian market.

What a merger between the LSE and TSE would have done however, is dilute the influence of the Bay Street elites. Hence we get the Maple Group bid which raises serious concerns about a loss of competition and competitiveness in the securities industry. Sure, control stays in Canada, but at what price, for what benefit?

Every deal must be analyzed from the perspective of what it brings to the market, either for industry or investors. The argument that businesses and investors would be better off with a national securities regulator has not been clearly articulated. The argument that investors and businesses are better off with the Maple Group taking over the TSE has not been made convincingly. Compelling arguments win debates. Wrapping oneself in the flag makes one look small and inadequate (except to others who are small and inadequate).

Let's consider the argument that a national regulator would do a better job of enforcing securities rules.

How well did the US Securities and Exchange Commission (SEC) do in enforcing its' rules with all the ponzi schemes that have come to light over the past 4 years? Some of these schemes were exposed to the SEC prior to their collapse. The SEC had specific details of what Bernie Madoff was doing years prior to his arrest. They didn't investigate.

If you look at all the insider trading cases that have been going through the US courts over the past year, how many of them were the result of SEC investigations? None. They were the result of FBI investigations, even though the SEC had much of the data that was necessary to start these investigations.

The SEC may be quite good at writing regulations (some people would argue with this), but its' track record for enforcing those regulations against the people they golf with on weekends, simply isn't very good. Having regulators and enforcers under the same roof is just not a very good governance structure.

How well did the Commodities Futures Trading Commission do in enforcing its' rules in the MF Global fiasco?

Wait, doesn't the existence of multiple regulators in the US, headquartered in different cities and states, undermine the argument that the US has a single national regulator for securities? There is more than the SEC and the CFTC regulating securities in the US. Several other agencies play a role in regulating securities as well.

The compartmentalization of the regulatory process can be viewed not just as a liability but also an asset. A fraudster has a much more difficult time pulling the wool over the eyes of multiple regulators. Having multiple independent bosses, ensures that no one person can protect a shady dealer from investigation. This might be partly to explain why the ponzi schemes exposed in Canada over the past 4 years have been much smaller and more localized than the ones elsewhere in the world. Getting the scam past regulators that you never meet, in other provincesm is much harder than smooth talking ones way past someone in your office.

Canada probably does need to improve coordination amongst the regulators. Much of this must come from the Toronto elites giving up their presumption of superiority and agreeing to participate as equals with their peers in other provinces to make the financial markets work better and reduce the amount of red tape even further. They can work with everyone else, or they can continue to demand that everyone plays by their rules without consultation.

The flip side of this is enforcement. There is no evidence to show that the regulators in any of the provinces are any better at enforcing securities laws than their counterparts in the US. Perhaps what Canada really needs is a national securities enforcement agency.

The federal government has the constitutional authority to enforce the criminal code and establish agencies to do so. Setting up an agency tasked to investigate securities fraud that is completely independent of the regulatory bodies would likely enhance the reputation of the Canadian markets. A national enforcement agency would also be the 'go to' agency for foreign investigators to go to when they are investigating trans border fraudsters.

The current securities issue can be dealt with through cooperation between the provinces to streamline the system without any province giving up authority. If everyone is working to protect investors while facilitating access to capital for businesses, then every province benefits from cooperation. This is why Quebec approved the takeover of the Montreal exchange by the TSE, and why Alberta and British Columbia merged the Alberta and Vancouver exchanges and then allowed them to be taken over by the TSE. It was good for investors and it was good for businesses. When those criteria are met, the politicians don't stand in the way.

There is a role for the federal government in the securities market. Until a need for a national regulator is properly and fully articulated, there is no role for a national securities regulator. The people who are pushing for that regulator now, are only doing so out of perceived self interest, or misguided nationalism. Neither are good for business or investors.

Next week I'll discuss the structure of a national enforcement agency.

Attawapiskatt, Dependence and Cultural Suicide

2011-12-18T21:36:00.000-07:00

The situation playing itself out on the aboriginal reserve of Attawapiskatt and the national news is demonstrating how very little has changed on one hand, while everything has changed on the other.

The situation on the reserve is appalling, but it is not unique on aboriginal reserves in Canada and that hasn't really changed in my lifetime. I can remember the stories on the news about the terrible living conditions on reserves for as long as I've been watching the news. Nothing has changed on the reserves.

On the other hand, nearly everything has changed off the reserve in terms of the attitudes of other Canadians towards the problem. The media is no longer willing to blithely engage in a smear the government campaign. The media and the public won't buy the tragedy story being sold by the professional 'Indian' representatives. Aboriginals both as individuals and as groups are starting to ask themselves and their leaders the tough questions about what is going wrong and other Canadians want to know as well.

The NDP has tried to play the old game of photo op outrage, but it has not been treated with a lot of respect by the media and has gained no traction with the public. There was a time when this situation would have been political gold for opposition party's, but now that isn't true.

The physical reality on the reserves is not changing and likely won't change for many years. The social reality however has begun to change drastically, and it is this change in the social reality that ultimately will lead to a change in the physical reality and a significant improvement to the quality of life for the residents of the reserves.

Attawapiskatt is a difficult situation from every perspective: political, social and economic.

Politically, it is difficult for the government to deal with the issue because of historical issues of unnecessary paternalistic interference in band affairs. Added to that problem is a cabinet minister who has appeared entirely inadequate to the task appointed to him. Consequently, the government has come across very ineptly, but that hasn't translated into unconditional support for the band council. The public might see the federal minister as inept, but that doesn't mean that they believe the band council must be saints. The public is more than willing to believe that the band council took a bad hand dealt to them by the federal government, and made it worse.

Socially, it is now coming out that not only does the band suffer the social ills of substance abuse, but there are also allegations of widespread sexual abuse of children. When you consider this in the context of the over crowded living conditions, the social problems make the political problems look simple.

Underlying everything however, are the economic problems. There can be no solution to the social problems or the political problems without simultaneously solving the economic problems. The solution is not for the government to pour more money into the reserve, the solution is to find meaningful economic activities for the people to engage in.

This is the crux of the matter for many aboriginal reserves in Canada: they make no economic sense. Every other community in the country has an economic reason for existing. The communities that lose their economic reason begin to wither and die, those that continually add or adapt their economic reason for existing, grow and prosper. What economic activity does Attawapiskatt support?

Yes, I know, it is their ancestral homeland and they feel an attachment for it. So what. Their ancestors survived in a harsh and forbidding land. That feat is worthy of great respect and if all the people of Attawapiskatt want to do is survive like their ancestors, they don't need government support for that.

If they want to join the rest of the world however, they need to find some good, some product, some service, to trade with the rest of the world. They need to find an economic niche that they can fill. If they can't do that then they have to face the same reality that everyone else in the world faces, you have to move to find better economic opportunities.

Perhaps my point of view is biased because so many of my friends were born in other countries and chose to come to Alberta in search of better economic opportunities. The biological imperative dictates however that adults seek out the best opportunities for their children to survive and thrive. That means finding the best economic options available, getting skills and then marketing those skills where they can provide the best opportunity.

Some people have suggested that the future for Attawapiskatt is to be found in the mining industry. I disagree. Mining is a transient industry, particularly with modern mining techniques. A mine operates for 15 or 20 years at most, exhausts the ore supply and shuts down. The miners move on to the next mine. This is not an industry on which to build a sustainable community. It can add to it, but it can not be the foundation. Just look at all the abandoned mining towns that litter the country, the world.

The suggestion is never really about jobs, it is usually about royalties from exploiting the mineral. This is a fools proposition. Unearned money only makes social problems worse. The value of money is not inherent in what it can purchase, the value is in the labour required to acquire it. Rich people do not spend money frivolously because they have so much of it, the spend it frivolously because they put so little effort into acquiring it. This is why substance abuse problems are as rampant amongst the wealthy celebrities as they are on some of the aboriginal reserves, and why the euro-trash nobility who inherited fortunes built up over generations have been known to blow it up their nose within a few years.

Ultimately, if Attawapiskatt is going to survive as a community it is going to have to find industries that can provide its' citizens with meaningful work that can occupy their time and make them feel like they are contributing to the well being of their community, their country, their world.

If the people of Attawapiskatt wait for the federal and provincial governments to find industries for them, then it will never happen and their children and grandchildren will fall further behind their cohorts around the globe. This is the sickness of dependency, waiting for someone else to solve your problem.

The people of Attawapiskatt know the resources available to them, and therefore are in the best position to determine what they can do with what they have. They have to take the time to assess what resources and abilities they have, and then decide whether they have a future in their current location. It is a hard choice, but if it was easy, they wouldn't be facing their current situation.

Making the hard choice to abandon their current situation is not cultural suicide. Cultural suicide would be to try and stay in their current location without making significant changes.

This is the thing that I have been contemplating all summer: when I go into Edmonton, or any of the larger bedroom communities, I can find restaurants proclaiming themselves as serving food from all over the world, Chinese, Vietnamese, Greek, Ukrainian, Japanese, Mongolian, Somali, you name a country, there is a restaurant cooking foods in the traditions of that country. What you can not find is a restaurant featuring Canadian aboriginal cuisine.

I stop in at the River Cree Casino on the edge of Edmonton a couple times a year and not once have I seen an add featuring a unique Cree food item. I don't go there to eat so maybe they are on the menu's but looking at the names of the eating establishments, they look like the food is something you can find anywhere in the world. It can't be because Cree food would be too gimmicky; they've got the fake teepee outside. It just seems to me that if you are going to set yourself apart from the competition, that is a natural way to do it.

In the bigger picture every Albertan, every Canadian, is poorer because our aboriginals choose not to promote their cultural heritage. The opportunity to eat food of a type, prepared in a style, that is unique to a geographical region is what drives the tourism industry. Canada has so few things that makes us attractive to tourists. The opportunity to sample variations of foods that have been consumed in Alberta or Canada for centuries if not millenia is one of those things that can attract tourist dollars.

Canadians would adopt these foods as their own. Those of us who were born here would feel an affinity to those food from our regions, even if we are not aboriginal in heritage, because it is a connection to the land in which we live. The aboriginal community would expand to include the larger community.

Too often however, it seems that the leaders in the aboriginal communities do not wish to embrace the larger society, but rather they want to withdraw from it. They fight to make sure that laws don't apply to them. They try to set up special rules for their communities, special privileges, special rights. This only serves to build walls between people and prevent their members from taking full advantage of the opportunities provided to them of being members of a larger community.

Russia has just gained entrance to the WTO. It took a lot of hard work and changes to Russia's laws and systems of governing their economy. By joining the WTO, Russia is de facto conceding sovereignty over parts of its' economy. It is doing so because conforming to the rules that govern everyone else will help the Russian government make its' citizens better off. Being part of a greater community creates more opportunities for everyone.

Cultural suicide does not come from opening oneself up to the rest of the world and sharing the knowledge and experience learned from ones ancestors. Cultural suicide comes from trying to shelter ones people from the rest of the world so that generations of skills and knowledge are possessed by just a few and when those few pass on, the knowledge is lost forever.

Looking at the situation in Attawapiskatt, I can not say that I am optimistic that the problems can be solved without the community deciding that they have to move. Many communities and entire peoples have migrated without losing their identities and culture: that comes from a commitment to honour and respect ones heritage and traditions, or not. Not changing is a recipe to be destroyed by the social diseases already afflicting the community.

I am more optimistic that a sense of realism is beginning to permeate the debate about the role of aboriginal peoples in the larger Canadian community and more importantly that there is an acceptance amongst aboriginal leaders that they have to take personal responsibility for their future both as communities and individuals.

Change will take time, but I do wish that some enterprising young chefs would open a restaurant that openly promotes aboriginal cuisine, sooner rather than later.

The Meaninglessness of Binding International Treaties

2011-12-11T22:03:00.001-07:00

What a wonderful past week we've had. First the European leaders got together and agreed to a new treaty to bind themselves to fiscal discipline of their public accounts. Then we got the wonderful waste of hot air in Durban, South Africa, where the global environment ministers made some kind of agreement to definitively make a binding decision at some time in the not too near future to unequivocably bind every nation to more or less binding commitments to reduce greenhouse gases. What would the bureaucrats do if we didn't have these conferences to have major disagreements over?

For those of you who are too literal, I'm being sarcastic. If the old treaty's weren't being complied with, why would anyone expect the new treaty's to be any more 'binding' than the old.

Let's look at the European situation.

What was wrong with the Lisbon and Maastricht Treaty's? They had binding provisions within them that ensured that not only did governments have to not let their deficits and debts get out of control, but the treaty's also ensured that the other governments of the Euro-zone would not bail out any country that did not comply.

So what happened? Countries allowed their debt and deficits to get out of control so that the other Euro-zone countries had to provide them with bail-outs. The solution therefore to the infinitely wise bureaucracy is to create another treaty to do exactly what the previous one was supposed to do but didn't. Addressing the problem of why the previous treaty's failed to meet the fiscal discipline objectives is simply not to be discussed.

In the end, if the Europeans don't address the structural problems that allowed the fiscal problems to get out of control, the new treaty will be just as ineffectual as the old treaty's.

The problem of course is one of a lack of leadership.

Germany is being asked, and expected, to lead in this crisis. Where is the evidence that Germany has political leaders who are capable of leading their own country never mind all of Europe. Germany’s public accounts and banking sector are a mess. They only look good when compared to some of their neighbours. Reality is however, that in many ways Italy is in a much better fiscal situation than Germany is. Italy isn't being asked to lead however, Germany is.

Not only are the the national accounts of Germany in less than optimal order, but Germany’s banks are hardly a shining example of financial prudence. If Germany is forced to nationalize as much of its' banking sector as some analysts have speculated, then Germany may find itself in no better fiscal shape than Ireland.

The problem with the banks, not just in Germany but across the Euro-zone, is that they have bad leaders. Instead of taking the bail-out money that they were given in 2008 and investing it safely and wisely to ensure that they have a good base of tier 1 capital, these brilliant leaders invested it in high yielding Euro government debt so that they could receive their over sized bonuses. It was high yielding because it was already viewed as risky in 2008. Now that this government debt is going bad because of economic recession, the banks find themselves in the same situation that they were in when they needed bailing out three years ago. And this is why even though the Euro treaty's explicitly say there will be no bail outs of weak governments, the strong governments are ignoring the treaty and bailing out the weak governments.

The solution of course was for the strong governments to intervene before the weak governments got into trouble. Which they very well may have if the strong governments hadn't undermined the enforcement mechanism within the treaty's when it wasn't convenient for them. It was Germany after all that broke the deficit limits first. If Germany could break the rules when it was inconvenient to follow them, then nobody else was going to feel bound to follow the rules.

Why would you expect Germany to not break the rules in the new treaty? Their economy and public accounts aren't in that good of shape that a structural shift in the global economy couldn't put Germany onto an economic down path. Ten years ago Germany was one of the weaker economic partners in the union. It is not hard to believe that with the cyclic nature of economics, Germany can not find itself in a weak position ten years from now.

How is a fiscal union supposed to help the situation in Europe? If you leave the same systems in place and just change the names, why would you expect anything to change? The US federal government is not responsible for the debts of individual states, nor does the US federal government make rules about how much states can borrow or how big their deficits can be. Why do European governments need a big sugar daddy to make the rules for them and bail them out when they break them?

Within a different constitutional framework, the federal Canadian government is not responsible for the debts of the provinces. Although some media people have floated the idea that if Quebec can't get its' affairs in order the federal government would have to bail them out. This is non-sense. It would be politically impossible for the federal government to bail out the Quebec provincial government, either directly or indirectly. There would be open revolt in the western provinces if such a situation occurred.

Which leads back to Europe. Why do the Europeans need a fiscal union to make the Euro-zone work? If each individual government had been looking after its' own financial situation and regulating its' banks properly, there would be no problem with letting Greece default within the Euro framework. Since the 'stronger' members of the Euro-zone weren't doing there own jobs, they want to create another level of government to force them to do their job. The problem with that of course is that the people who will be enforcing it are the same people who are writing it, meaning that it will be as effective as a mosquito in destroying a windshield.

The hot air coming out of Durban, isn't a lot different. Partisans of all types are spinning the situation this way and that but in the end it is just meaningless political gamesmanship.

Canada, and every other country, ignored Kyoto or only paid lip service to it, based on political expediency. It did not, and will not, matter what the philosophical orientation of future governments are, they will only meet climate change goals if those goals are politically expedient. Politically expedient is just a euphemism for 'job creating'.

The NDP is trying to pander to their base by throwing all kinds of labels at the Conservative government. Reality is, if the NDP was the government the only thing they would do differently is that they would change the rhetoric around the foot dragging to endorse a binding treaty. In the end, the NDP would choose jobs (particularly union jobs) over environmental principles, but they would try to ensure that their environmentalist supporters at least received heart warming speeches to keep them warm.

The first and ultimately only purpose of any government is to ensure its' own survival. To do so means that it must provide the populace with a reasonable standard of living and a reasonable expectation that things can, or will, get better.

It is the failure to meet these two conditions that created the environment to sustain the uprisings occurring across the Arab world. In the countries where there aren't uprisings, the economic conditions are not sufficiently bad that people feel they don't have more to lose than they have to gain by rising up.

The recent election results in Russia, with the protests over the fairness of the process, are largely a result of the Putin/Medvedev team failing to maintain a rising standard of living. As long as wage growth was increasing rapidly, Russians were more than content to have the Putin/Medvedev team in place. Wages have stagnated in Russia, and so has hope: protesters are in the street.

Europeans support for the Euro, and its' supporting institutions, is also strongly correlated to their perceptions of its' benefits. As long as Europeans thought that the Euro was bringing them benefits at no cost, they were highly supportive of it. Now that the price of membership is government austerity, many Europeans are not so sure that the Euro is a good idea.

The new treaty's planned for Europe, the fancy new agreement out of South Africa, are all in the end meaningless if they do not recognize and make provisions for the domestic needs of each individual government. The ability of each individual government to meet the objectives of the treaty/agreement will depend on the skill and vision of the individual leader.

The treaty/agreements do not address the subject of ensuring that each individual participating country must be lead by strong and competent leaders, and therefore these agreements are doomed to failure just as the previous agreements failed. Each country will pursue domestically expedient policies and dare the rest of the world to do anything about it.

Polygamy

2011-12-04T20:12:00.001-07:00

The recent British Columbia Supreme Court decision upholding the Canadian Criminal Code prohibitions against polygamy demonstrates the intellectual straight jacket that political correctness has placed upon our legal and political system. The government lawyer's who argued the case were so constrained in their thinking about the problem, that they risked losing the case.

Lawyer's are tremendously useful to society. Their training however, is to be perfectly logical, to restrict themselves to what can be proved with the facts available to them. Consequently, they are prone to staring at the trees in front of them rather than viewing the forest and seeing the trees that are missing.

The case that was argued before the BC Supreme Court was one that polygamy was a violation of womens' rights. The court agreed that it was. The case that would have been much easier to prove is that polygamy is a violation of mens' rights.

The polygamist community at Bountiful has been allowed to exist for so many decades because too many prosecutors and lawyers felt the case was too hard to prove with the facts available to them. The women observed a code of silence and would not file complaints or co-operate with police in any manner. This makes it difficult to investigate or prosecute. That may be frustrating but those are the facts.

Seeing the bigger picture of the forest however tells you much more about the nature of the trees than looking at one with a microscope. It is not that young girls are being forced to marry much older men who already have several wives that should raise alarms. It is that the boys that should be courting those girls and then marrying them, are missing. It is the fate of these boys that seals the case against polygamy.

Basic biology is that slightly more male children are born than female children. Due to various causes the death rate for males is slightly higher so that the ratio eventually equalizes and then tips so that there are more women than men amongst the elderly.

For a polygamist society to remain stable, the society must find a way to accelerate the attritional losses of young males. If you have a large number of young adult males with no hope of marrying, the society becomes socially and politically unstable. China, due to a cultural bias against girls, has had three rebellions/revolutions in the past 200 years which have been attributed to a gender skew towards males. Males with no hope of marrying and raising a family within the current socio/political system have nothing to lose by trying to overthrow the system.

Stable polygamist society's therefore find a method to ensure that the death rate for young males is sufficiently high that there is no risk of having a large pool of males not invested in the social system. The traditional method has been family/clan/tribe feuds or warfare.

The nomadic tribes of central Asia, such as the Mongols, existed in a constant state of warfare. This ensured that there was a constant shortage of males and therefore allowed polygamist traditions to remain stable for a very long period of time.

You can see the same thing in some of the countries of central Asia today. Afghanistan is still crippled by family and clan feuds. Sending teenage boys out to avenge the family honour is a good way to thin the male population. Historians have documented for millennia that the first fighters to die in a war are the young and inexperienced and that is doubly true when they are given an inexperienced leader.

Before anyone concludes that I am being culturally or religiously insensitive, let me say that every religion will at least tolerate some forms of polygamy. Christianity has not tolerated polygamy officially for a very long time. Christians and churches have always been willing to look the other way however, when a man of means had a second family or two on the side. Even secular western society will look the other way.

In the end a form of polygamy will always be at least unofficially tolerated if there is a shortage of men due to war or other causes. Men will rise up in rebellion and kill each other to reduce their numbers if there aren't enough women. Women will be more rational and adjust their expectations of their husbands if there aren't enough men. They'll tolerate less than faithful behaviour rather than risk losing a scarce commodity. Not romantic, but it is rational.

This might explain how polygamy started in the first place. Women made a rational choice to share a temporarily scarce resource. Men, finding the situation pleasing, found a violent way to perpetuate the situation.

Which leads us back to the question of where are all the boys who grew up in the compound at Bountiful?

The answer that is given by the leadership at Bountiful is that they are expelled from the compound into the greater Canadian society. The question is: has anyone gone to the effort to verify this? Logic dictates this is unlikely.

To just expel these boys is not a sociologically stable solution. Some of these boys are a threat to the community just by their simple existence. It is difficult to believe that such threats would be tolerated and that they would add to them every year or two.

History is filled with great leaders who only became great through the efforts of their mothers. Alexander the Great would never have conquered so much of the world without the guidance, machinations, and efforts of his mother to get him onto the throne.

There are no shortage of women in today’s society who are absolutely frustrated by the amount of influence their mother-in-law has over their husband.

Many women form very deep bonds to their sons. It is not reasonable to believe that the women of Bountiful or any other polygamist sect do not.

They form deep bonds to their sons. They want them to succeed. They want to see them excel. They believe they are divinely chosen to do so. Do you really believe that a woman who felt that way about her son would not be grieved when he was expelled from the community? Do you think she wouldn't be resentful to the other women who's son was allowed to stay?

With the very low number of boys who are allowed to stay, most of the women can expect that none of their sons will be chosen.

So what happens to these boys who are not chosen to stay? That is the question that must be answered.

Given that the commune at Bountiful maintained a logging operation in the foothills of Alberta and that most of the boys were required to work in that camp as teenagers, it would seem that much of the investigating must start in Alberta.

If any of these boys had a mother who had ambitions for her son, that boy would be a threat to the community if he was just dumped in small town Alberta. Sooner or later he might try to get in touch with his mother. You have to be pretty naive to think that they children of Bountiful don't know the holes in the security at the community. Logic and biology says that such a boy should not be dumped in a small Alberta town, such a boy should be dumped in a shallow grave out in the bush. If nobody talks, there is no investigation and he never shows up to agitate his mother.

Aside from the issue of whether polygamist communities are engaging in the murder of their sons in order to maintain social stability, is the issue of the rights of the boys who actually are expelled from the community.

These boys do not have the issue of loyalty to overcome when it comes to testifying about what was done to them. In most cases these boys were denied a proper education and then worked without compensation before being expelled. They were expelled without the basic skills to survive. It would seem like a much easier case to prove against polygamy that the rights of the boys have been violated, if you have a line up of men to testify about the abuse they endured in their final years and months at the compound.

Which begs the question of why the lawyers didn't go to great effort to track down at least some of these boys to testify about the mistreatment of the women?

If you want to break the code of silence of the women at the compound, it is the topic of the fate of their sons that will cause some of them to break ranks. They will not be particularly sympathetic to their daughters as they are not expecting their daughters to endure anything more than they themselves endured. Their sons will be faced with challenges that the women can not even imagine.

Asking the women about what happened to one of their sons that can't be found. Asking them about one of their favourite brothers who can't be accounted for. These are the questions that will make the women question their loyalty to the community. Present them with evidence that their son was not just abandoned to make his own way in the world may be the straw that breaks the camels' back.

Polygamy is a socially destructive system and should not be openly tolerated in a modern, peaceful society. That the lawyers who have been hired to pursue this matter are constrained by their training and political correctness means that we could be hearing about these problems for a very long time.

The Concentration of Power and the Loss of Accountability

2011-11-30T22:29:00.001-07:00

There was an interesting article on The Moscow Times English language website this past weekend.

At a forum or discussion of some type, an individual asked President Medvedev about when the tariff on the personal possessions of foreign nationals would be removed. The removal of this tariff was agreed to by Russia, Kazakhstan, and Belarus as part of their formation of a customs union two years ago. Mr. Medvedev angrily responded to the effect that he could not say when it would be removed because it was supposed to be removed a long time ago.

This tariff has been the subject of decrees by both Mr. Medvedev and Mr. Putin that it should be removed immediately. Yet, the bureaucracy still has not managed to accomplish this simple task.

What I find so interesting about this situation is that the perception in the western democracies is that the government of Russia is at best a pseudo-democracy, and perhaps just a dictatorship masquerading as a democracy.

Most people would believe that in a dictatorship the head of state would be able to get whatever needs to be done quickly. Most people also have a very low opinion of the honesty of politicians and therefore would choose to believe that Mr. Medvedev and Mr. Putin are merely putting on a show for the benefit of the public and not actually trying to solve the problem. I do not believe this to be the case. I believe that Mr. Putin and Mr. Medvedev are reaping the rewards of collecting all of the democratic power in Russia into just a very few hands.

The same problem has evolved within Canada over the past half century.

In a vain effort to gain control of the government bureaucracies, Prime Minister's and Premier's have increasingly removed authority from the legislative branch and concentrated it within the executive branch. This was always viewed as necessary so as to stop the bureaucrats from undermining or embarrassing the government on policy issues. It was also a way of allowing weak cabinet minister's to appear competent by removing any scrutiny by the legislators.

The bureaucracy has tremendous power to embarrass the government. The anonymous brown envelope containing documents showing a minister over ruling the professionals within a department has always been a favourite way of dealing with a minister who does not show sufficient respect to his/her bureaucrats.

My point being that the elected government has always had legitimate reasons for wishing to gain tighter control over the professional bureaucrats.

The problem is that the technique that has been chosen does not work. It does not work because it does not provide the government with better control over the bureaucrats, but rather it works by reaching an understanding with the bureaucrats that in exchange for the bureaucracy not embarrassing the government, the government will remove most scrutiny and accountability.

The cabinet minister's that I know will vehemently disagree that any such arrangement of this type has been made and they are technically correct. That being said, the effect is the same.

It is simply illogical to believe that you can concentrate authority in the hands of fewer and fewer elected individuals without some parts of the bureaucracy being freed from oversight. You simply can not add authority, responsibility or power to an individual and expect that individual to maintain the same level of scrutiny over the people they are over seeing. They will have to delegate, and the people they delegate to are the same bureaucrats that they are supposedly scrutinizing.

A person's IQ does not go up by 40 points because you add responsibility to their plate. They don't suddenly gain the ability to put in 48 hrs of work in every 24 hr day. The human limitations of the individual remains the same. On top of that, when you add responsibility to an individual cabinet minister, the number of people who want to meet with that minister will increase proportionately. When you consider the time they must allocate to constituency work, when do they have time to scrutinize the employee's working under them?

Added responsibility means, that much of that responsibility must be delegated to deputy minister's and directors: the very people the minister is supposed to be scrutinizing most closely. You can not give people responsibility and then micro-manage their work, so to a large extent as the work of the minister increases, the more reliant they become on the bureaucracy that they are expected to scrutinize.

This is the error that every government in Canada has made and has done so with the aid of every opposition party. There is no opposition party which can honestly claim that they are in favour of democratic reform and will therefore change this system, because there is not one opposition party that is outraged that a bureaucrat would have the nerve to undermine a government duly elected by the voters.

The opposition party's should be appalled when they receive an anonymous brown envelope containing sensitive or embarrassing government documents. Instead, the opposition party's gleefully jump all over the information and use it to try to gain a political advantage. Whether they think that somehow the bureaucrats will be more loyal to their party, that they will be more effective in controlling the bureaucrats, or more likely they are just mindless twits caught up in the thrill of hunt. Whatever the reason, it contributes to the decline in the effectiveness of government and the functioning of the democratic system.

The effects of the little brown envelopes parallels the effect Louis XIV created amongst the French nobility at Versailles. By engaging the nobility in pointless trivial intrigues, Louis XIV was able to keep them from interfering in the affairs of state or fomenting rebellions that had plagued his ancestors. By getting the elected politicians to focus an embarrassing situation, the bureaucrats ensure that the politicians have no time to scrutinize the performance of the bureaucracy.

Ultimately the solution to bringing the bureaucracy under control is to enhance the power of the committees of the legislative branch of government. Providing back bench MP's and MLA's with meaningful and important work in scrutinizing the performance and budget requirements of the bureaucracy is the only way the bureaucracy will be controlled.

Far too many departments have their budgets padded at levels far too low to ever be scrutinized by a single minister and far too many bureaucrats make decisions that affect the lives of people and the blame is ascribed to the political level which knows nothing about what is going on at the front lines of service. The public blames the elected officials and perhaps they should. It is up to the elected officials to ensure a system is in place to provide scrutiny to all ranks of the bureaucracy.

Do I think the system will change?

No, I do not see anyone with the ability to change things expressing any interest in doing so. For far too many politicians the arrangement with the bureaucracy has become comfortable and convenient. For many of the rest, they are simply incapable of understanding what is going on in front of their eyes. And the public doesn't really care, as long as the government cheques are getting mailed on time and the lines in the hospitals aren't too long.

In the end, government has become far too big and too complex for the political system we use in Canada to effectively manage the bureaucratic machinery; to hold it accountable and transparent. The solution is to delegate power to the legislative branch, not to the bureaucracy. To do this though would require that opposition party's put the well being of the country ahead of their own political ambition, and how many politicians would actually do that?

The Euro Zone: Marching Backward Towards That Which Must Be Done First

2011-11-20T20:34:00.001-07:00

The situation in Europe has continued on its' inexorable march to economic misery for so many of the globe's inhabitants. Consequently, even though I live in a corner of the world that is relatively well insulated from the economic train wreck, I am compelled to write about Europe yet again.

The replacement of the government in Spain is a wonderful example of the absurdity of democracy. The socialists took the blame for the bursting of the real estate bubble in Spain that perhaps was not caused by the right wing Peoples Party, but their policies certainly made it worse before they were replaced by the socialists. That is not to say I think the socialists were ideal candidates for dealing with the fiscal problem in Spain, I just find it ironic that they were blamed for a problem that they did not create, and the people who were supposed to prevent it and didn't, are rewarded by being voted into office to fix the problem that they didn't prevent. Voters are emotional, not rational. They are angry now, so it is the fault of the current government.

Democracy may produce ridiculous results from time to time, but I am sure that there are very few Spaniards who are envious of the opportunity the Syrians have for replacing their government.

It remains to be seen if the Technocratic government in Italy can survive its' first political obstacles. If it does, the longer it is able to do so does not speak well for the future of Italy as a democracy. Given that Italy's economic situation is not grave, an efficient government should be able to quite quickly address Italy's shortcomings and get the economy growing (barring another global recession). Emotional voters having a competent government for a change, may not be anxious to return to the antics of a Berlusconi-esque democracy.

The new government in Greece does not have as many political obstacles to overcome because Greece's situation is so grim that the politicians dare not revolt against the bureaucrats. Whether the people will revolt remains to be seen.

Back to the title of the post. So what is it that must be done first?

That is what I addressed last spring. The first thing the Europeans must do is come up with a political/social narrative for why the Euro should exist. Without this narrative, it is impossible to consistently achieve the political and social consensus that is necessary to solve the problems facing the Union.

Fortunately, I have begun to see that some of the work is being done to construct the narrative. It is not being done quickly however, because the people doing the work are viewing it as a tangential task rather than a primary task. They are sort of understanding that it needs to be done, but they have not yet come to the understanding that this narrative is the very foundation on which the European Union will stand, or fall.

The talk about shrinking the size of the Union seems to be source from where the narrative is springing up. Which when you think of it is sensible. If you are creating a rationale for shrinking the Union, you are de facto creating the rationale, the narrative, for who is going to belong to the Union and why.

The European Union grew beyond the rationale for why it was originally created and no new rationale was created to support that growth. That is at the heart of why the Euro is in crisis now.

If a reasonable rationale had existed for the Euro at the time that Greece was admitted to the currency union, Greece would not have been admitted. At the time however, the bureaucratic machinery of the Union was still operating under the original narrative that required that as many nations be admitted as possible in order to ensure peace and security.

This was of course absurd by the time the Euro actually went into circulation, but it was still the narrative under which the bureaucracy operated so they consequently looked the other way on Greece's fiscal fudging.

The political narrative, the justification for the Euro zone, will and must infuse the treaties, agreements, and if it comes down to it the constitution for the entity that eventually emerges from the current crisis. If the narrative hasn't been created, it can not infuse those documents, it can not guide the political leaders in their search for a solution.

In the absence of a unifying narrative, Ms. Merkel and Mr. Sarkozy have great difficulty agreeing on a unified plan of action because they are working from different playbooks, with different objectives. Perhaps there is no narrative that can unify the objectives and national aspirations of both Germany and France. But if that is true, then ultimately they can not remain in the same currency union. To try will lead to failure. Failure not unlike that which we are currently witnessing.

I do not believe that it is impossible for Germany, France and the other nations of the Euro Zone to find a narrative that they can all agree upon. Every nation of the Euro has a benefit to be gained from participation (I have argued in the past that that benefit is not necessarily great and my views have not changed on that subject, but the people of Europe seem to think it is, and that is what is important) and consequently if they believe there is a benefit, there is also a motivation for compromise.

It may be that events over the next 3 or 4 weeks will conspire to force the European peoples and leaders to define who they are and where they want to go.

The new Spanish government will not take office until mid December and the financial situation could spiral out of control before then.

The Greek government needs their next tranche of funds from the IMF by mid December or they will be forced into a hard default. The IMF seems to be a little reluctant because of delays within the Greek government about meeting their benchmarks.

The Technocracy in Italy has to demonstrate that it has brought the elected politicians in the Italian Parliament to heel by receiving a vote of confidence from parliament. Some of the parliamentarians seem to be a little bit offended by being reduced to rubber stamps.

There are many obstacles that Europe must overcome in the next few weeks that are likely to distract the political classes from the most important work of developing a political and social narrative for the Euro Zone. Ultimately, the work will be done because it has to be done. No building can survive without a foundation.

Rise of the Technocrats: Democracy in Retreat

2011-11-14T22:04:00.001-07:00

The new prime minister's in Greece and Italy mark the start of the middle game in the great contest for civilization in Europe and much like the middle game in chess it will be marked by confusion, uncertainty, and moves the objectives of which only becomes apparent later.

I have no intent to cast aspersion on the character or intentions of either Mr. Papademos or Mr. Monti. I believe they are both highly intelligent, highly skilled economists. I also believe that they are motivated to bring sane management to their respective nation's fiscal situation.

That being said, their appointments to the highest executive positions in their nations' government raises a lot of troubling questions about the nature and fate of democracy. Fortunately, the media does seem to finally be understanding that democracy itself is at threat as a consequence of the European debt crisis.

Firstly, the issue has to be raised that if these individuals are the best people to be running the government of their nations, why was the democratic process not able to reach this conclusion. Either they are not the most qualified people to be running the government or is there something fundamentally wrong with the democratic system. I think the answer is a lot of both.

Mr. Papademos and Mr. Monti are both well educated economists. That does not mean that they have the skills necessary to run a government. It doesn't mean that those skills haven't been sitting nascent in the back of their brains, but it is unlikely.

The skills necessary to run a democratic government are not the skills one learns in academia. They are more like the skills that are learned on the playground. They are the skills that allows an individual to convince their fellow citizens of the wisdom of a proposed action. Whether that action is actually wise or not, is not the point, it is the ability to convince others that is necessary to be an effective leader. They are the skills that allow a single individual to mold a group of peers into a smoothly functioning group, revolving around their leader. In all the talk about Mr. Papademos and Mr. Monti's accomplishments, I have yet to hear how they have convinced sceptical colleagues of anything. This is the skill that they need the most.

As I wrote in my previous post about Greece, the problem is that the Greek people must 'buy in' to the solution, whatever that solution may be. Mr. Papademos may lay out an elegantly beautiful plan to solve Greece's fiscal problems, but if he can not convince the people to follow, then his plan will be consigned to the trash bin as soon as it is published. Greece's and Italy's fiscal problems are a problem of their society's, they are not a simple problem of bad government management. Bad management is what the people asked for.

That leads to the other aspect I raised, that of whether there is something wrong with the democratic system. It is difficult to expect good government in nations where the people are demanding bad government, but at the same time good leaders can articulate and make their people understand that good government makes everyone better off. That good government gives everyone an opportunity to do well not just a lucky few.

The question becomes then of why the Greek and Italian political systems have been unable to allow true leaders to emerge. There are no shortage of individuals born in every generation with the natural skill sets to emerge as leaders of their peers. Why then, has the Greek and Italian democratic systems not allowed these people to prosper within the public realm. The political and social problems of these countries have been well known for decades and even better known by their own citizens. Why then have true leaders not emerged? I don't know enough about the social dynamics of these countries to understand why this has happened, but that these individuals have not emerged is deeply troubling and suggests a problem within the political system.

So Greece and Italy now have Technocratic governments. This raises the question of when they will return to democratic governments? This is the question that has really been troubling me this past week as I have watched events unfold.

As I wrote in my last post, the United States of Europe was designed to be a Noocracy. The imposition of technocratic governments in Greece and Italy can be viewed as a progression towards that ideal. Both Mr. Papademos and Mr. Monti are unquestionably members of the educated elite that are distinctly qualified to make superior decisions.

The question then becomes one of, if Mr. Papademos and Mr. Monti are successful in solving their nations fiscal problems, will their be riots in the streets demanding a return to democracy? In the face of competent government for the first time in living memory, will the people of Greece and Italy become content with the new status quo?

For the reasons outlined above, I do not believe that Mr. Papademos and Mr. Monti have the skills to succeed, but that does not automatically mean that the control of the government will automatically be returned to a democratically elected individual. It is entirely possible that the continuation of the crisis will provide an excuse to appoint a technocrat with a different skill set.

The downfall of Mr. Berlusconi in Italy is what causes me to ask the question. Italy's fiscal situation was not, and still is not, particularly dire. It is concerning, and needs to be addressed, but it was never unmanageable. Suddenly, and perhaps conveniently, the financial markets sent financial torpedoes into the hull of the Italian ship of state. Mr. Berlusconi is quickly forced to step aside, and an unelected technocrat, favoured by the financial markets is suddenly appointed to manage the country. I just find this very difficult to understand without being tempted to reach for a conspiratorial theory.

Mr. Berlusconi's government was not doing a particularly good job of dealing with the problem, but it wasn't any worse at it than the US government. Italy's deficit was not particularly onerous and could have been dealt without a lot of suffering. The only real problem Italy faced was the institutionalized ineffieciencies its' economy which were preventing it from growing. But again, those problems are actually best dealt with by a leader with democratic legitimacy.

I do not think I am alone in this confusion. I think even the mainstream media are finding this sudden change in Italy a little difficult to accept, which is why they are raising questions about the fate of democracy in these countries.

Plato postulated that a Noocracy was an evolutionary progression from democracy. I will respectfully disagree. The problem with any system that is based on an elite, is that it will inevitably become corrupted.

Membership to that elite will become restricted. Not all citizens will be allowed to aspire to become members of the educated elite. Only the children of members will be allowed entrance and they will be allowed entrance even if they do not meet the academic standards achieved by their parents. The children of non-member may be allowed to become educated but they will not readily be allowed to enter the elite.

Additionally, even in the early stages, not all educated individuals will be admitted into the elite. Only those educated individuals who espouse views accepted by their colleagues will be granted admission.

Theoretically, the hive mind of well educated people should lead to wise decisions. Reality is, the hive will quickly become polluted with inferior and group thinkers and there will be no way to cleanse it.

The strength of democracy is not that it elects good governments but that it has a way to purge itself of bad governments. There is no mechanism within the concept of a noocracy for a government to purge itself and/or rejuvenate itself.

In my last post I was optimistic that the Greeks would have their referendum and start the process of dealing with their problems. The referendum will not happen, but Mr. Papandreous's announcement undoubtedly marked an inflection point in history. Two governments have fallen in response to his announcement, and democracy has been swept aside, at least temporarily, in those countries. Like the start of the middle game in chess, the start of the middle game in Europe is full of possibilities that make the future very uncertain.

The Greek Referendum: The End of the Beginning

2011-11-02T21:54:00.000-06:00

Georgios Papandreou's decision to go to the Greek people for a decision on how the country will move forward marks the point in history around which global affairs will be decided for the next several years. Assuming that he is allowed to hold it of course.

The great consternation of the Eurocrats and the Europhiles stems from the fact that the United States of Europe was never intended to be a democracy. The architects of the European Union intended the Eurozone to be the first Noocracy, where the well educated, well trained, and well connected Eurocrats would make the decisions for everyone. The unwashed masses simply did not and do not know what is in their own best interest.

Noocracy, like communism, is a pipe dream doomed to fail because it fails to account for human nature. Citizens will not be content to be told that they have rights, they will actually expect to exercise those rights.

So the Greek decision to go to the people is an appalling gamble to the Eurocrats. The truth is, like I said months ago, it is a necessary step that must be taken before a resolution to the problem can be reached.

Greece does not have a budget problem. This is why the EU throwing money at the Greeks for the past 2 years has not had any effect on the problem.

What Greece has is a social problem, that creates a political problem, that manifests itself as a fiscal problem. None of the bailouts offered to Greece have ever addressed the issue of the social problem in Greece.

What is the social problem in Greece? It is the sense of entitlement. It is the acceptance of cheating on ones taxes. It is the belief that the state is a bottomless fountain of economic well being. The social problem in Greece is that the people of Greece have never really changed their way of thinking when they transitioned from a military dictatorship to a democracy. The Greek people still view their government as a separate entity from themselves, not as a manifestation of their collective will.

The social problem that must be addressed is that the Greek people must accept that they, not their government, not the other countries of the EU, but the Greek people themselves are responsible for the situation they find themselves in. The referendum, however it turn out, will force the people of Greece to start accepting responsibility for their situation.

The political problem that the Greek social problem has created is a culture of corruption, cronyism, and incompetence. The Greek government even prior to its' subsumation to the European Commission was ineffective. The Greek people didn't care because they didn't feel responsible for the government, they were just hoping to get their cut of the pie.

Once the Greek people start seeing the Greek government as belonging to them, then the foundation can be laid to fix the political problems inside the government. The Greek people will no longer look at their fellow countryman in envy because he got a government job that does not require him, or her, to do any work, or even show up for work. In the new Greece this will become an insult to the people and they will demand accountability from their law makers.

This will not happen overnight. You do not change a cultural mentality on a dime. But the referendum, whatever the results, will force the Greek people to accept the consequences of their decision and that responsibility will weigh heavily on their consciousness. The responsibility will change who they are as a people. This is not a bad thing, it is a necessary step to resolve the fiscal problem.

If through byzantine political manipulation, from inside and/or outside Greece, the referendum is derailed, then the current mess of never ending crises will continue. The underlying cause for why the first 10 bailout plans have failed is because they all anticipated an economic growth rate for the Greek economy that could only be achieved with 'buy in' from the Greek people. The Greek people have never bought in to the crisis plans and consequently the Greek economy has continuously shrunk. Without economic growth, there is no prospect for Greece being able to meet its' obligations.

Last weeks rescue plan, with 'voluntary' 50% haircuts for bond holders, envisioned Greece having modest economic growth for the rest of the decade and therefore being able to stabilize its' debt at 120% of GDP. What part of debt at 120% of GDP is sustainable? How was Greece going to achieve modest economic growth when the austerity already introduced was producing negative 5% growth and the plan called for even greater austerity? The numbers simply don't make sense for Greece. They do make sense for Germany however.

What do I think the outcome will be?

If the leaders of the EU are respectful of the right of the Greeks to decide, I think the Greeks will decisively choose to stay in the Euro. If the EU leaders continue to act threatening and petulantly towards the Greeks, I think all bets are off.

The best choice, or perhaps more correctly the least bad choice, for the Greeks is to leave the Euro and go through a hard default. This would be an extremely painful adjustment for Greece and the Greek people. Most people would lose their life savings in the transition, pensioners would suffer the most perhaps because they have constrained ability to continue working or to find work. Generally, the first year or eighteen months after the default would be a gut wrenching experience. Then it would be over, and if the Greek people take responsibility for their government, things will get better quickly from there.

Greece leaving the Euro is the worst possible choice for the more prosperous countries of the Eurozone. Hence the vitriolic response of EU leaders to the Greek referendum. Germany, France, and the other EU countries want to continue muddling through until they can fix their banking systems (which they still haven't started doing, three years into the financial crisis). The EU leaders hope that if they can just keep kicking the can down the road long enough, then global economic growth will solve their problems for them. Unfortunately, the failure of the EU leaders to solve their own problems is threatening to take the global economy down with them.

If the Greeks choose to stay in the Euro, then you still have to deal with the problem of how the Greek economy is going to manage modest economic growth. Although I believe that the Greeks taking responsibility for their fate will ultimately lead to better government and economic growth, it will not happen within the time frame mandated by the European Commission. Consequently, I see no prospect for the Greek economy to achieve modest economic growth in order to stabilize its' debt within the framework of the Euro.

Voting to stay in the Euro would be the least bad choice for the Germans, but I do not see it being very helpful for the Greeks. Ultimately, staying in the Euro will require an endless stream of bailouts with no hope for the economic growth that is actually needed to solve the problem. Staying in the Euro is probably a vote for 10 years of economic hard times and political humiliation, followed by a decision to leave the Euro and default. I doubt that the Germans would take the 10 years to fix their banking system, meaning the result will be the same, we're really only talking about when.

The Greek referendum, if it is held, will mark the point at which the Euro changes forever. Whether it is for the better or for the worse will depend upon your point of view. The good news is that it will be decisive. It will provide clarity for everyone. The bad news is that those governments who have been whistling past the graveyard won't be able to stay in the shadows anymore. The search lights of the capital markets will be seeking them out and we will find out which of them are actually naked and unarmed.

The Economics of Sports Arena's

2011-10-29T22:15:00.000-06:00

The recent decision by the City of Edmonton to proceed with a new downtown arena for the the Edmonton Oilers of the National Hockey League has been surrounded by economic arguments about whether or not, or how well the new arena will pay for itself with increased taxes. The real decision is not one of economics as the arena has zero chance of paying for itself with increased taxes from increases in economic activity, the real decision is whether or not the social contribution of the arena to the cultural makeup of the city is worth the price being paid.

A quick review of economic theory is relevant here.

The primary drivers of economic growth are population growth and income growth from increases in productivity and employment. All other contributors are tiny compared to these two.

Will the new arena cause a large increase in population in Edmonton and area? That is, an increase that is strictly attributable to the new arena. In order to make the argument that the new arena will increase economic activity and therefore increase the tax revenue to the city, you must be able to make the argument that several 10's of thousands of people will move to Edmonton just because the city built a new arena. I do not think this argument can be believably made.

The second pillar of economic growth is income growth from increased productivity. I have yet to hear the argument that the employees of the new arena will be paid double or triple of what the current employees at Rexall Place are being paid. I have yet to hear the argument that any other workers will be able to earn additional income because the new arena will make them more productive or that it will create net increase in high paying jobs.

So if you are going to have the same number of people with the same amount of disposable income, you are not going to generate new economic activity, you are only going to be cannibalizing economic activity from other locations within the city.

What can mask that this is what is actually happening is that most or all the money for the project is being borrowed. It is not borrowed from other people, it is borrowed from the future. So what the project can do is pull economic growth out of the future and insert it into the present. As long as that borrowed money continues to flow, there is the illusion of economic activity. Once that flow stops, then you find out what the project is actually capable of generating, and in this case it is likely to be not much more than the existing facility.

Let's consider some of the minor drivers of economic activity.

Will the new arena create new synergies that are not currently possible with the existing facility? That is, will the businesses that surround the new arena be able to operate at lower costs than the businesses operating around the current facility or around a facility built at any other site? The only way this may be possible is if ownership of these businesses was unified so that bulk purchasing of goods and services was possible. It is more likely that the cost structure for new businesses around a new arena will be higher because they will be using undepreciated equipment.

The one possible advantage that the downtown location may possess for new businesses is that the population density may create opportunities that would not exist at other sites. This presupposes that there is a large unserviced demand for highrise apartment/condo living. I do not believe that this is the case but one must acknowledge the possibility.

If there was a large number of people who wanted to live in downtown Edmonton but could not find a place to live, developers would be only too happy to provide them with the opportunities. People are telling the developers with their wallets however, that current supply/demand functions are staying fairly well balanced. Dollars, not surveys, count. People would pay big rent or pay hefty premiums for downtown condos, if demand greatly exceeded supply. This does not suggest that any great increase in residential development will occur around the new arena quickly, and to the extent that it does occur, it will be at the expense of building elsewhere in the downtown.

Will the new arena increase the efficiency of leisure activity? That is will the new arena complex make it easier/less expensive for people to enjoy the entertainment activity of their choice. I think in this measure not only is the chosen site not better than the existing site, it may very well be the worst possible site.

As I have written in previous posts, commuting is just about the economically worst possible activity that we engage in. It costs people money (gas, depreciation), elevates frustration (road rage), and no productive work is accomplished during the commuting time.

The downtown site chosen for the new arena is a terrible choice in this regard. The transportation infrastructure to efficiently move people to the site simply is not adequate for the demands that are going to be placed upon it. This means that people are going to get frustrated and become reluctant to attend events at the site, reducing the revenue potential of the new arena and new businesses servicing event patrons.

The social engineers will tell you that people will just have to adjust to how they think and act. Which is why social engineers work for the government and not business. Customers aren't being forced to show up, and if they don't like the service, they aren't going to show up a second time.

Making it difficult for people from the outlying communities to get to the site will only ensure that the taxpayers of Edmonton pay the entire cost of the facility. Residents of the surrounding communities are the tourists who spend the most money in the city, but are often treated as a liability by many city administrators and residents.

If the City of Edmonton wants to make the downtown site accessible to as many potential customers as possible, then it is going to need to make a lot of expensive upgrades to its' transportation infrastructure which has to be included in the cost of the project. It would have been far wiser to consider infrastructure availability as paramount in site selection. Instead social engineering considerations seemed to be much more important. By choosing a site that is difficult for many residents of Edmonton, and most of the residents of the region, to access the site, the city is limiting the potential of the arena to be anything but a white elephant.

I understand that many members of Edmonton city council would like the downtown core to be a thriving bustling place. It isn't an urban planning problem, it is a cultural choice. Albertan's are fond of their wide open spaces, even if it is just their little yard in the suburbs. Choice is a good thing, it should be embraced because ultimately the consumer is always right, which is why the developers are supplying what they are supplying.

So what is my opinion of the arena proposal? On an economic basis it is going to inevitably be a white elephant bedevilling the taxpayers of Edmonton for years to come unless there is a compelling social argument that can be made for the facility.

What would be a compelling social argument? I have yet to hear one, but perhaps the architect will make it. A compelling social argument would be a reason for people to want to go back to the facility over and over again regardless of the inconvenience. Much like Steve Jobs created a social demand for 'i' products that had little to do with the technical feature of those products, especially when compared to competing products.

Does that mean that it needs to be a world class facility? Nothing says second rate quite like having to describe something as 'world class'. Nothing says third rate quite like aspiring to be 'world class'. The facility does not need to be 'world class', the facility needs to offer its' users an unforgettable, irresistible experience. Offer the consumer an experience they can't forget and they will keep coming back regardless the inconvenience. If the experience is so mediocre that it has to be described as 'world class', then the facility is going to be a white elephant.

The issue of the social value of the Edmonton Oilers to the community must also be considered. I have no doubt that the presence of the team contributes a social benefit to the community. Is that benefit really worth the money being talked about? Even when you consider that people found other ways to entertain themselves during the lockout?

On an economic basis they are almost certainly an economic drain to the community. This is difficult to quantify but I am confident that if one were to trace the final resting place of all the dollars that flow through the team from the community, the vast majority of those dollars leave the community. Players salaries are the biggest expense for the team, and even for the few players who choose to make the city their permanent home, much of their wealth will be invested outside the city or province (this is their right and it should not be held against them).

You must consider that the new arena is needed so that the hockey team can more efficiently collect revenue from the community so that it can pay higher player salaries in order to remain competitive in the league, and that the money that is more efficiently collected is then funnelled outside the city. Is the taxpayer backed borrowing of money to finance this project really a wise decision to take?

Although I am a fan of the team and thoroughly enjoy watching the newest version of the team, I can not support the current project as it is currently envisioned. It is a white elephant that will drain the wallets of the taxpayers of Edmonton in so many ways that there are no rose coloured glasses dark enough to allow me to see this project in a favourable light.

Idle Hands Mistaking Motion for Action

2011-10-23T20:34:00.000-06:00

These 'occupy' protesters are starting to become really annoying to me. Maybe it's because I've been under the weather for awhile now, but I just have a tough time accepting people who claim to be well educated, acting stupidly and being uninformed.

I have no love for the Wall Street financial types, I don't make a million dollars a year, but I'm starting to think that these protesters need to become productive members of society by signing their organ donor cards and stepping in front of a bus.

Let's get some facts straight, the problems on Wall Street aren't a product of capitalism they are a product of a lack of capitalism. Three bailouts of the banks in the last 30 years does not sound like capitalism. When Ronald Reagan bailed the banks out in the early 1980's he promised it would be the last time. But both President Bush's had to come up with bailout money as well. Capitalism would have demanded the banks fail.

The business model followed on Wall Street far more closely resembles the 'privateering' model employed by the British in the 17^th and 18^th centuries to cripple the trade of the other seafaring nations. The Wall Street banks go out and pillage and plunder the global financial markets and then run back to Washington the moment things get dicey.

But you won't hear this from the 'occupiers' because in the end they don't want to stop this activity they just want a cut of the action.

Where are the occupiers when it comes to naming names and demanding accountability for those bankers who behaved badly and perhaps illegally to cause the crisis. They don't even have to do their own homework, this information has already been collected, the bad behaviour documented, and the bankers named in numerous books. The occupiers if they actually wanted to accomplish something should be demanding these people be held to account. They would be daily naming names and misdeeds and demanding an accounting.

The other day here, watching a European business show, the interviewer was talking with a fund manager who was basically managing his fund to increase volatility in the market and then making extra money by betting on increased volatility in the market. When the host asked him if he didn't see anything wrong with this assessment he replied to the affect 'well it sounds bad when you put it that way but' and then went on to rationalize how he was actually benefiting the market. Where are the occupiers pointing out this type of corruption in the system (it has nothing to do with investing and everything to do with gambling).

Where are the 'occupiers' in demanding that the system be made safe for individuals and firms who actually need these markets. I'm in the agricultural sector and I see all kinds of misuse of the 'soft' commodity markets by traders who don't really care about ensuring that the market is acting as a price discovery mechanism. They are just looking for a quick buck and if a few people starve because of it, oh well.

Blame the politicians as well. There is no shortage of documentation showing which Washington politicians were goading on and coaxing the bankers to write these bad loans, it is a matter of public record in the Library of Congress since they did it from the floor of Congress. Stand up and demand that voters hold these people to account.

The occupiers claim that they are democracy in action. They are anything but democratic, they are one step away from being terrorists, using violence to subjugate their fellow citizens.

Democracy in action would be organizing a new political party to kick out the bums in Washington who helped create the problem. Democracy in action would be donating their time and energy to the campaign of someone who is looking to replace one of those politicians who created the problem. Doing the hard work required of running a winning election campaign is beneath these people however, it is so much easier to go camping instead.

Oh and then there are the lunatic artists who went to protest at the museums and art galleries in New York. Their beef seemed to be that the 'system' prevented them from doing 'pure' art, from exploring 'pure' ideas, from doing the art that they wanted to do. What a pathetic group of losers.

Nobody cares what an artist thinks, if they did then a celebrity endorsement would be pure gold in politics. Reality is that in politics a celebrity endorsement is only marginally better than the endorsement of a sex trade worker. Even people who work in the janitorial services feel intellectually superior to artists, partly because janitors are critically important to the functioning of society while most artists could stop working and nobody would notice.

The purpose of artists is not to express their own thoughts or feelings, the purpose of artists is to eloquently put into words the thoughts of others. The purpose of artists is to express the feelings, dreams, desires, and ambitions of those who can not articulate for themselves. To paint on canvas, to sculpt in metal or stone, or to capture on film the things that inspire others. When an artist grasps the concept that they are an interpreter not a leader, a voice for others not a thinker, then they have a chance to be successful. As long as they think their own ideas matter then people will look at them like they do a piece of doggie duty that they accidentally stepped on.

People do not buy a piece of art to display in their home because they think the artist is a brilliant thinker (I will ignore the pretentious asses for now). People display a piece of art in their home because it makes a statement on behalf of the owner (not the artist, even if the owner is a pretentious ass, and that might be the statement it makes). This is the key to success for an artist. Unfortunately, most of them are fools who would rather starve thinking other people just don't 'get them' rather than face the fact that people 'get them' they just don't care what they have to say.

These 'occupiers' want to claim to represent the vast majority of the population (sounds like the Bolsheviks to me). Reality is that the vast majority of people can't relate to people who can spend weeks of months camping in a park. Real people have lives and jobs and commitments and will vote for change at the ballot boxes and with their wallets when they think it is time. These people don't want to change the system, they just want to change who benefits from it.

In the end these 'occupiers' are just people with too much time on their hands who believe holding hands and singing in the park is a means for changing things. As the idiom goes: They are a tempest in a teapot, full of sound and fury, signifying nothing.

The European Fiscal Fiasco

2011-10-10T21:37:00.001-06:00

You can hardly turn on the news these days without hearing about the Euro crisis, the European sovereign debt crisis, or the Greek crisis, or the looming financial crisis (or how it has been averted by the latest pronouncement). What you do not hear about is the real problem: the crisis of leadership in Europe..

As I have written before, the strength of democracy is not that it is a good system for choosing governments, it is that democracy has a built in system for replacing bad governments. The people of Europe will not have to go through the trials and tribulations that the Libyans, the Syrians, or the Yemeni are going through. At the next elections the people of Europe will be able to replace their ineffective leaders through a peaceful, lawful manner that allows a smooth transition to a new regime.

That Europe has a crisis of leadership is evidenced by the fact that after nearly a year of writing about the Greek situation, I am still writing about the Greek situation. The problem has only gotten worse, because nothing has been done.

The argument that keeps coming out of the eurocrats mouths is that the political system can not move as fast as the markets can move, and that the markets are just going to have to learn to be patient. This is absurd. Once Chancellor Merkel and President Sarkozy reach an agreement on how to deal with the problem, the situation will be resolved in days. The problem is that neither of them is ready to put their foot down and start telling everybody the way it's going to work, no ifs, ands, or buts.

The markets do not need the Greek debt to be paid back tomorrow, or next month. What the financial markets need is a plan for dealing with the problem. The markets need certainty. The markets need to know exactly how much of the Greek debt they are going to have to write off so that they can start calculating how much bank debt they are going to write off and how much other government debt they are going to have to write off. All they are getting from the eurocrats and politicians however, are platitudes.

Boldly pronouncing that Greece will not be allowed to default is not a plan. A plan is a detailed breakdown of how all the Greek debt payments are going to be made, including where the money is coming from. The markets will then decide whether the politicians are blowing smoke or have really solved the problem.

The idea of ring fencing Greece to prevent the contagion from spreading is also a stupid idea. The ring fence is like the smell of decay to a carrion eater. You could not send a stronger signal to the parasites of the financial markets to attack the debt of the other vulnerable nations, than by setting up a ring fence around Greece. The ring fence will ensure that the contagion spreads.

Ultimately, Greece will default. The sooner an orderly default occurs, the better for everyone. This is what the market needs to know. The market needs to know how much to discount the future value of the bonds. Without certainty that can not be done, not only for Greece but for the other countries as well.

This is how the market is supposed to work. When lenders lend money to people that obviously have no ability to pay the money back, the lenders must share in the pain. This is market discipline.

It is now painfully clear to everyone that the reason the Euro governments are propping up Greece is that they are afraid that it will collapse the banking system. The failure of Dexia this past week demonstrates the absolute vulnerability of the European banking system to a Greek default.

The question that needs to be asked is why it is still vulnerable three years after the start of the global financial crisis?

The answer of course is that the political leadership would not make the tough choices back then, so they are now presented with tougher choices. If they manage to muddle through this situation without making the difficult choices, then they will be faced with even tougher choices a couple of years down the line. This will persist until the only options available are excruciatingly painful. Ultimately, the pain can only be deferred, and deferring it allows interest to accrue.

Dexia is a fine example of the failure to make the right choice. Dexia was bailed out during the first wave of the financial crisis. And like so many of the banks that were bailed out, they invested the bailout money in 'safe' government bonds that were a great bargain: Greek debt, Portuguese debt, Spanish debt, you get the picture.

The problem is that these banks needed to be bailed out the first time because their management teams were inadequate. They were not required to change their management teams as a condition of the bailout. You had bad managers who were bailed out by the governments and three years later, is anyone surprised that they are back begging for more government money to prevent the system from collapsing?

Market discipline would have eliminated these bad managers from the financial system if governments had not interfered with the market. However, the consequence of the government allowing the market to execute its' ruthless discipline would have been worse than what the government did. That doesn't mean that there wasn't, and aren't, better policy choices that can be made.

Civilized society and the governments who manage its' affairs have a strong interest in maintaining a functioning financial system. What they don't have, is an interest in saving individual banks or other financial institutions.

Badly run banks must be allowed to fail. Badly managed countries must be allowed to default.

The policy solution to bailouts is not to recapitalize the existing weak banks but to put the money into new banks with management teams untainted by the failure of the existing banks.

The government money can be leveraged on the market by allowing shares to be sold to investors. The mandate (written into its' expedited banking licence) of the new banks is to buy up the useful assets of the failing banks, buy up the local branches of the failing banks so that citizens continue to have a place to conduct their financial transactions. The market disciplines the bad managers, but society maintains a functioning financial system.

Once the crisis is past the government can sell off its' shares in the banks and restrict itself to being an effective regulator. The mandate can be removed from the banks licence and the system can operate effectively.

Greece is going to default. The question is whether Angela Merkel is going to bring Germany to the brink of default before she cuts loose the influential individuals running the insolvent banks in Germany. The sooner Ms. Merkel realizes these people are her problem, the sooner Europe and the rest of the world will put this sovereign debt problem behind us.

Allison Redford: PC Alberta Returns to its' Roots

2011-10-02T22:46:00.000-06:00

Allison Redfords' election as leader of the Progressive Conservative Association of Alberta demonstrates that the sociological dynamic that drove the progressive movement remains the dominant political force in Alberta.

The pundits over the course of the leadership campaign labelled her as 'left wing' and attached the label 'progressive' to her. Reality is that she occupies the same ideological ground as Peter Lougheed. Danielle Smith and the Wildrose Alliance may claim to want to accomplish what Mr. Lougheed did, but they are doing it from a political space that he rejected. Allison Redford on the other hand is in a position to rebuild the foundation of the PC party for a long time to come.

Whether she actually lays the foundation for a new legacy will only be determined in time, but of the three candidates on the final ballot, she was the one with the best chance of succeeding in the next election.

Gary Mar was not chosen because of the political dynamic that surrounded him. Whether he was, or is, an elitist, the public perception of him became that he was the representative of the political elite to the masses. The endorsement of Mr. Mar by the three failed candidates immediately after they were eliminated fuelled this perception. Mr. Mar became the epitome of conservatism, someone who was seeking to institutionalize the political and economic status quo. Progressivism as a political philosophy rejects this notion and consequently its' adherents began looking for an alternative to prevent the conservative candidate from ascending to the Premiers chair.

The question became one of who would be the beneficiary of that political revulsion.

I suggested in my previous post that Doug Horner may be the beneficiary of that anti-establishment sentiment. My rationale was that that sentiment may rise strongly in the rural constituencies. Looking at the vote totals it again became obvious that most party supporters in the rural riding’s chose to stay home.

It is likely the case that those individuals simply could not bring themselves to see Mr. Horner as an anti-establishment candidate. The repeated mentions by the media of his family history in politics made him look like a political blue-blood not a revolutionary reformer. Mr. Horners' background as an ag-industry CEO also would not resonate with rural Albertans as there is a long history on the Canadian prairies of industry exploitation of farmers and other resource industry employees in remote locations.

That left Ms. Redford as the default choice for those who wished to ensure that Mr. Mar did not win.

Ms. Redfords' biography and policy platform made it very easy for those who wished to defeat the conservatives an easy choice. I do not believe Ms. Redfords policies are particularly left wing, they just do not preferentially favour one group over another.

Personally, I am not particularly fond of Ms. Redfords energy policies or her use of the phrase 'energy superpower'. I believe the focus on the energy industry in Alberta is equivalent to deciding to speed down a dead end road. However, Ms. Redford was chosen in a democratic process and it remains to be seen how she tries to implement her ideas.

Is Ms. Redfords victory good for the PC Party?

I think Ms. Redfords success was the best possible outcome for the PC Party.

Ms. Redford has claimed a political territory that makes it very difficult for Mr. Sherman and the Liberal Party to make inroads into the PC base on the most important issues of healthcare and education. Both Mr. Mar and to a lesser extent Mr. Horner would have been vulnerable to attacks on these issues from the left. These are the issues that matter to the majority of people who vote. Ms. Redford has not alienated these voters.

On the right wing Ms. Smith should be cringing at the prospect of having to debate Ms. Redford. Ms. Redford is more intelligent, better educated, and a skilled debater. Ms. Redford also doesn't have to pull any punches with Ms. Smith to avoid looking like a bully.

It is unfortunate in this day and age, but reality is that there is a significant pool of voters who would have a visceral response to a man verbally dominating a woman in a debate. Ms. Smith is very skilled at avoiding situations where her opponents or the media can ask her tough questions. During an election debate, this is not an option.

The question has been raised whether or not Ms. Redfords' success will alienate the conservatives within the PC Party. That depends on what you mean by conservative.

As I define conservative, someone who is in favour of preserving or institutionalizing the political, social, and economic status quo, I think Ms. Redford will completely alienate them. That is what her supporters wanted. They wanted change. Ms. Redford acquires the Premiers' chair owing nothing to the political establishment.

Will Ms. Redford alienate those who are conventionally called conservatives? (Generally speaking people who take a hard line individualistic view.) Ms. Redford is an intelligent individual with a persona that can sometimes be perceived of as cold or aloof. Many of the people on the right are 'blowhards', and there is nothing a blowhard likes better than an intelligent, ruthless leader to stand behind while they win.

Having spent a lot of time selling PC memberships at the polling stations, I had an opportunity to observe the types of individuals that the various campaigns attracted to the party. Although who each person voted for remained a secret, most people are not embarrassed or afraid to let others know their views and consequently it is possible to make a reasonable guess about how they were voting.

Mr. Mar seemed to attract a much older and wealthier group of supporters. Mr. Horner seemed to attract a middle aged, middle class group of supporters. Ms. Redford had significant support from older voters, but she also seemed to attract a group of younger voters who often said they had never purchased a membership before (for any party).

It is this group of people who have never gotten involved before who lead me to believe that Ms. Redford has the potential to lay a foundation for the party for another generation. This group was predominantly women and although most of them are unlikely to become involved again, some of them will be emboldened by Ms. Redfords success to become more involved.

It is popular wisdom that politics is an old boys club and that the PC Party is a bastion of male domination. My experience within the party is that if there is any critical job, and in particular that there is critical job that is being done well, then it is probably being done by a woman. The PC Party could not survive, never mind thrive, without the hard work and effort of the women who volunteer their time to keep the party going. For this reason, if Ms. Redford has, or is going to, inspire a whole new generation of women to get politically involved, that is very good for the PC Party.

As I have stated repeatedly, progressivism is not a left wing philosophy, it is an anti-elitist philosophy that encompasses both left and right wing ideas. This is the social ideology that is deeply embedded in the culture of Alberta. Allison Redford was elected because she could make the best claim to not being a member of the establishment. Five years from now she and her supporters will be the establishment, but for now, the window is open for Ms. Redford to make radical changes to the way the system works, changes without which voting will become increasingly irrelevant.

The PC Leadership Race: Excuses, Excuses, Excuses

2011-09-19T07:56:00.000-06:00

Clearly my handicapping of the leadership vote was not up to the task. I am somewhat shocked, but not discouraged by my analysis. I am pleased with my assessment of the support for all the candidates except Doug Horner and Ted Morton.

Like so many people last evening, watching the results come in, I was shocked by the low vote count. I expected the total count to be up between 90 000 and 100 000 votes.

The distribution of the votes was also not within expectations and could presage some very troubling possibilities down the road. The turnout in Calgary was probably a little higher than I would have expected. The turn out in Edmonton was about what I expected, with only a few constituencies exceeding what I would consider normal. It is the low turn out in most of the rural riding’s that came as a shock.

This distribution of turn out changed the dynamics of the vote completely. Doug Horner and Ted Morton, who both should have been strong in the rural riding’s, suffered badly because of it. So many of the rural riding’s had only 400 to 600 ballots cast. Most of these constituencies were in the 1200 to 1500 ballot range on the first ballot for the last vote. This is where the 30 000 to 40 000 votes were lost.

The Wildrose Alliance is going to make a great deal of noise over the next few months that the PC's, and in particular Ted Morton, were not able to reclaim these voters from the Wildrose. I am not so sure that this is true. Based on my discussions with a few people, the biggest reason that these voters did not show up is that they had better things to do. The candidates failed to inspire them sufficiently to put their lives on hold for half an hour so that they could go vote. These are people who had memberships and are eligible to vote. They are not in the Wildrose camp, but they were likely to vote for Ted Morton if they could have been bothered to make it down to the polls.

This is not a criticism of the voters, this is a criticism of the candidates. It is the candidates job to turn well wishers into supporters. The minimum standard for being called a supporter is that they show up to vote on election day. If they can't make that level of commitment, then they are just well wishers.

This is where Ted Morton especially failed. In my community, it was a strong area for Ted Morton 5 year ago. This time around, almost nobody showed up to vote. Ted Morton had no events even close by in eight months, and failed to respond to an invitation to show up at a time of his convenience. Gary Mar on the other hand had 2 public events in the area, and as a result, did better than I would have expected on a percentage basis.

Organization and effort matter.

On a base of 100 000 votes, the votes that Gary Mar and Allison Redford received would put them into the percentage range I expected for them. I expected Allison to do very well in Calgary and okay in Edmonton and she did. Her 11 000 votes is what I expected her to get from those two centres. Gary Mar's 25 000 votes is about what I expected him to get. What I didn't expect was for so many people to be apathetic in the rural areas. It is up to the candidates to inspire the people, easier said than done, I know, but that doesn't change anything.

The question then becomes: can any of the 3 remaining candidates convince these apathetic people to show up for the next vote? I am not so sure. There is no philosophical question to be decided. There is no radically different choice of visions. There is no compelling personality clash. If the vote count for the second ballot is lower than the count for the first ballot, I would not be shocked. I would not predict it, but I wouldn't be surprised if it happened.

The most troubling phenomena to show up in the results however, is the tribal rift that seems to be getting deeper rather than resolving itself. In particular the Calgary versus everyone else rift.

There is an element within Calgary that seems to feel that they are 'entitled' to have one of their own in the Premiers chair. It is this sense of entitlement that doomed Jim Dinning last time around, and if it comes out into the open, like it is threatening to do again, then it could sweep Doug Horner into the Premiers office. Either way, it is not a stable political situation and that is troubling because it interferes with the work needed to resolve important issues.

One of the most pressing issues that whoever earns the leadership must address is the balance of rights issue that underlies the tribal rift. This is the issue that has caused the government and the PC party the most grief over the past decade. It generally gets referred to as 'property rights' but in reality it is much bigger and more complex than that name implies. The fundamental problem is that peoples perception of the property rights that they have, and the actual property rights that they have, do not correspond very well. This is true not just for surface rights holders but mineral rights holders as well.

I often find that it is urban property owners who have the poorest understanding about what rights they have with the title of their property. They think it will never be an issue for them so they don't really worry about it.

This incongruity is the foundation of the problem that the government has experienced over the various laws that were brought into effect over the past few years such as Bills 36 and 50.

It is the conflict between the mineral rights holders, who have their offices primarily in Calgary, and the surface rights holders, who live in the rural areas, which must be resolved. The government in effect has sold mutually exclusive rights to parcels of land and then tells the owners of the rights to figure things out for themselves. Both party's have legitimate claims, but usually only one party has deep pockets. Then the government wonders why so many rural land owners are mad at the government.

Ultimately, the government must do a better job of informing people of their actual rights, so that perception comes into line with legality, or the laws must be changed to match citizens perceptions.

If the new leader fails to deal with this major structural flaw, then the problems over 'property rights' will continue to haunt the government for a long time to come. Whenever a socio-political flaw is just patched over, it ends up causing far more serious problems than if it was fixed properly in the first place. Failure to fix the problem soon has the potential to cause the geo-political rifts in the province to become entrenched and permanent. That kind of entrenchment tends to cause social problems to add to the mix.

The element to watch for over the next two weeks, is whether or not a sense of elitist entitlement starts flowing out of Calgary. If that happens then Doug Horner could be the recipient of a ground swell of rural anger. Nobody outside of Calgary is content to be treated as a colonial subject of the Calgary corporate elite and they will not stand idle if they think the government is going to become an agent of subjugation for corporate masters.

The question then would be: what would a Doug Horner win do for not just the unity of the party, but the unity of the province. That kind of rejection was hard for the Calgary political elite to tolerate once (it is questionable if they ever really accepted the result the last time), to have it happen a second time would cause them to have fits, it is unlikely to cause them to do serious introspection.

The Alberta PC Leadership Contest: Predictions

2011-09-14T21:28:00.000-06:00

I could be like the pundits in the media and wait until after the results for the Alberta leadership vote are in, and then write about how the results were predictable, but that just isn't very sporting. So I'll go through some of the relevant variables and make my prediction in advance of the voting.

The Edmonton Journal/Calgary Herald published the results of a poll of PC party members yesterday. The publishers are either fools or they are trying to manipulate the outcome of the vote.

The voting list obtained by the Journal/Herald was not a complete list but rather a biased list. The stated size of the list was about 22 000. Given that normal PC membership is about 12 000, that means that the list used by Environics had about 10 000 additional names added to it. That number of additional members leads me to believe that the list provided to the Journal/Herald was supplied by the Allison Redford campaign. I have no evidence for this, it is just speculation.

That Allison Redford did so well in the poll supports my view that her campaign leaked the list.

Whichever campaign leaked the list, the sample would have been biased towards supporters of that candidate. Which really only leaves the Gary Mar and Allison Redford campaigns.

Regardless of which campaign provided the list, it was statistically invalid list from which to do a poll and Environics and the Journal/Herald should be embarrassed to have their names attached to such a mockery of a poll.

A better indicator of how the campaigns are doing is their fund raising results.

In this measure Ted Morton is the clear winner, with Doug Horner a clear second. The big difference between the two is that Doug Horner was not able to get the large corporate donations. This is not a political liability in Alberta.

That Gary Mar and Allison Redford trailed well behind Doug Horner, and relied significantly on corporate donations strongly suggests that their campaigns do not have the momentum that their spin teams are suggesting.

Another significant indicator is MLA support. Doug Horner, Ted Morton, and Gar Mar are all fairly close in terms of the number of MLA's supporting them.

Not all MLA's are equal however. Some MLA's have a lot of influence in their constituencies, with large teams of volunteers available to get people out to vote.

Other MLA's on the other hand have no organization to speak of, their constituency organization is little more than their immediate family members, and consequently bring no more than a handful of votes with them. They are looking to ride the coat tails of the victor into cabinet.

When I look down the list of which MLA's are supporting which candidates, their is a clear difference in the quality of the campaign teams that the MLA's bring with them. On this measure Doug Horner is far in the lead. Most of the MLA's supporting him have large well organized constituency organizations that are well funded with motivated volunteers. This is a big advantage for Doug Horner.

Ted Morton also has a significant number of MLA's who bring a lot to the effort but I am a little bit surprised that he did not attract more of them to his campaign. I will discuss a possible reason for this later.

Too many of the MLA's backing Gary Mar do not bring a lot of people with them. They are hoping that Mr. Mar will win the election for them next time around.

The other variable is rural vs. urban constituencies. The urban based media frequently alludes to the fact that the PC party is a 'rural' party, while the province is primarily an urban one. This assumes that all citizens are equally likely to be voters. This is a false assumption. Rural citizens are more likely to vote than urban citizens and are also more likely to be politically active. The PC's win because they do not ignore rural votes in an effort to cater to citizens who aren't going to vote no matter what is done for them.

When you look at the rural/urban split for MLA's, Doug Horner has the clear lead with Ted Morton a distant second. Ted Morton is stronger in the cities, but many of those areas will produce well wishers, not supporters.

So when I do my calculations it appears that Ted Morton and Doug Horner are going neck and neck with Gary Mar following. Allison Redford is a clear fourth with Rick Orman and Doug Griffiths are bringing up the rear. The three candidates emerging from the first vote therefore will be Doug Horner, Ted Morton and Gary Mar.

Having watched the candidates I will review their weaknesses and what could cause them to lose a step at the worst possible time. Everyone knows the good points about the candidates: they've been selling everyone on their strengths all summer.

Ted Morton has a difficult time overcoming his 'smartest guy in the room' disease. This is one of the things that repeatedly comes up with everyone who has concerns about Mr. Morton. People who have had the pleasure, or misfortune, of being involved in group discussion with him feel that he is not willing to take the time to convince people that he is the smartest guy at the table, he just gets annoyed, tells people they are wrong and leaves them stewing. This is okay for a university professor, but a political leader must spend the time to 'convince' people. Issuing orders and expecting the peons to follow them is not leading, it is ruling. This may be why he did not get more support from the MLA's. The people who had the opportunity to work with him were not thrilled by the idea of working for him.

Doug Horner has been criticized for being bland. I know Mr. Horner a little bit, I don't think this is true. The bigger issue for Doug is whether or not he has the 'edge' for the top job. This is that little bit of ruthlessness that a leader needs to succeed. That willingness to look someone in the eye, stick the knife in and twist (metaphorically speaking). Ed Stelmach was criticized for not having this 'edge' either but this is untrue. Mr. Stelmach very much had an edge but it did not come out unless he was just a little bit angry: think the last week of the last provincial election when he 'took the gloves off”.

Gary Mar suffers seems like a very charming individual and he seems to have the necessary 'edge' as well. The problem with Mr. Mar is that he is an 'establishment' candidate. Mr. Mar is funded by corporations, supported by long time party organizers, and is running a slick, professional campaign. These are all liabilities in Alberta, not advantages. For all Mr. Mar's talk about listening to Albertans, many Albertans are wondering if they can even relate to the life that Mr. Mar has lived or worse, if Mr. Mar can relate to the life that working class Albertans live.

So let's be brave here and make some numerical predictions. Doug Horner will emerge on top by less than half a percentage point over Ted Morton. Both of them will poll around 31%. Gary Mar will poll just under 25%. Allison Redford will be in the 10-12% range. The others will be left on the outside looking in. We will have to wait until the weekend to see if I am psychic or just psycho for putting my prediction up where everyone can read it and remind me about it later.

Clash of the Dinosaurs: Al Qaeda v. the CIA

2011-09-11T20:42:00.000-06:00

The ten year anniversary of the terrorist attacks on the USA have brought out a lot of retrospection and analysis about what impact the attacks have had on our world. Over the past couple of weeks I have heard far too many security consultants engaging in fear mongering as a method of keeping the government paycheques coming and an excessive amount of discussion about the significance of the attacks. One hundred years from now, when the historians look back at the first decade of the twenty first century, the 9/11 attack and the ensuing hunt for Osama Bin Laden will just be back ground noise to the main event: the “i” revolution and the social upheaval unleashed by the emergence of the social networks.

The threat posed by Al Qaeda today, contrary to what the security consultants proclaim, is not great. I read one proclaiming recently that Al Qaeda is an even greater threat today, as evidenced by their shift in tactics away from attacking people and instead attacking infrastructure. The guy is either an idiot or a con-artist.

When a terrorist organization shifts from terror attacks to infrastructure attacks, that can indeed signal a major increase in the threat level. It is an indication that the organization is transitioning from a terrorism to guerrilla warfare. The attacks on infrastructure are an attempt by the nascent guerrilla army to cripple its' opponents ability to wage war. There is no evidence to suggest that Al Qaeda is attempting to do this anywhere in the world.

The other reason a terrorist organization shifts from terror attacks to infrastructure attacks is that the organization is so crippled that it no longer has the human or material resources to mount terror attacks. Vandalism rather than terrorism is all the organization is capable of engaging in.

Terror attacks inevitably lead to either the death or imprisonment of operatives. If an organization is having difficulty recruiting committed members, it can not risk exposing those members to death or capture by engaging in terror attacks. Attacking a pipeline or a power line in a remote location allows the operative to do their work and escape undetected. Additionally, the amount of explosives necessary to sabotage a pipeline or bring down a electrical power line is far less than that required for an effective terror attack.

Vandalizing strategic infrastructure is a sign that the terrorist organization has been seriously degraded to the point where they are almost incapable of taking action.

Al Qaeda will continue on for some time into the future, but like the dinosaurs, the world has changed and Al Qaeda has not adapted to the new social realities. The question is whether the security and intelligence communities are going to adapt to new prey, or are they going to foolishly continue to spend their time hunting dinosaurs until the new dynamic species of threats have become so prevalent that they threaten the very structure of society.

The media fails to appreciate just how much the world has changed over the past decade in ways that have absolutely nothing to do with security or religion. The change has been driven by technology and commerce.

A decade ago, Microsoft was considered a monolithic monster and many governments were looking at forcing the company to break up so that there would be competition in the software space. Apple was viewed as just a sidekick that Bill Gates kept around to help fend off government interference. Today, Microsoft is still a large profitable company, but not too many people consider it a dangerous behemoth. It has a market capitalization far less than that of Apple.

A decade ago, Facebook, MySpace, Twitter, and the other social networking systems had not yet been invented. Today they are powerful networks that have helped fuel the Arab revolutions of 2011.

A decade ago, Blackberry’s were a tool that was largely used only by the business community and governments. Today, Blackberry’s are a consumer device and have been eclipsed in the smart phone space by the i Phone and Android phones.

One should not underestimate the insidious influence of the smart phone revolution on destroying the power of the Arab dictators. One should not underestimate the power of the smart phone in destroying the authority of the Mosques and Imams. The new phones put the power of the internet into the hands of young people in a manner that can't be supervised. They can store all their 'forbidden' music on their phones. They can watch or upload videos to YouTube. They have access to the world in their hands.

One of the things that I find very interesting is that when I choose to play poker on Facebook, there are never any shortage of players named Mohammed to play against. The Islamic prohibition against gambling does not seem to hold much weight to the young modern Muslim. Given that they are no better players than anyone else, I do not think all of them are just using 'play' money on the site, some of them are having to buy chips to get back into the game.

These are the events of the past decade that will have lasting effects for generations to come. Steve Jobs destroying the hold of the Mosques over the lives of young Muslims is the seminal event of the first decade of the twenty first century. Osama Bin Laden knocking down the Twin Towers will be forgotten within a generation (not literally, but its' position of importance in society will be diminished to the point that it will not be mentioned).

When you look at the events in Egypt for example, you see the importance of technology and social media in the revolution. You also see it in the approach of organizations such as the Muslim Brotherhood in their approach to power. I have no doubt that within the Muslim Brotherhood that there are a great many people with sympathies to extreme Islam. As an organization however, it appears to be more pragmatic, realizing that to wield real power the Brotherhood must be willing to make compromises. The Muslim Brotherhood in it relation to extreme Islam, at this point in time, appears to be travelling down the same road as Sinn Fein travelled in their relationship to the IRA in Ireland.

The youth having overthrown one dictator is not likely to tolerate the imposition of an Islamic dictatorship, especially one that wants to take away their social media. The Muslim Brotherhood can either learn to live with the will of the people or they will be swept aside sooner or later as well.

The new threats to civilization is the 'Black Guard' of the anarchist movement. These individuals are adapted to the new technological world and use it to wreak their havoc with near total impunity because they are not considered a major threat by the intelligence community. You will not find people who are put on 'no-fly' lists because they are members of the Black Guard. They are free to travel the world to wherever they think there is will be a crowd to incite.

The recent riots in London. The Stanley Cup riot in Vancouver. These are perfect examples of members of the Black Guard materializing in a crowd and provoking otherwise decent people into rioting. It was not the members of the Guard who were photographed, it was the people they provoked, the Guard remained masked.

The Black Guard uses the social networking sites to link with each other and spread word about where they should materialize. They are abetted and protected in their actions by the cyber space counter parts, who organize cyber attacks against governments and institutions, as well as providing cyber security to hide the communications of the guard from detection.

These are the people who deserve the attention of the security community for the simple reason that they are not just attacking property, they are attacking the foundation of what constitutes a civil society. Civilized people do not riot. The Black Guard is an ephemeral threat that is difficult to define or understand. They exist much like the electronic cloud, able to materialize and disappear seemingly at will. Anarchism is a much more serious threat than Al Qaeda ever was or ever will be.

The attack on September 11, 2001, was a tremendous tragedy for so many people. But in the big picture did it really change very much in the world? The governments of Afghanistan and Iraq were overthrown as a result but how does that compare to the Arab revolutions of 2011? The government of Afghanistan is unlikely to survive the withdrawal of US and NATO troops. The government of Iraq may be no different.

The Arab revolts on the other hand will continue to reverberate for generations and will likely eventually consume Iraq and Afghanistan and it is the advance of technology and commerce that made those revolts possible, not the action of western governments or agencies. The “i” revolution, the empowering of the individual, is the event that will define this past decade for the future.

Libya Revisited

2011-09-03T22:49:00.000-06:00

With the fall of Tripoli to the revolutionary forces in Libya, it is time for me to revisit the situation.

The results over the past month or so strongly suggest that I over-estimated the social cohesion of the forces supporting Moammar Ghadhafi. That these forces dissipated so rapidly in the face of poorly organized revolutionary militias strongly suggests that their training as fighting units was far less than I gave them credit for back in the spring.

The news reports coming out of Libya do not support the idea that the revolutionaries became a well organized, cohesive fighting force. On the contrary, the reports coming out of Tripoli strongly suggest that the revolutionaries were no better trained this fall than they were in the spring. The news report of the Libyan-Canadian killed in the fighting in Tripoli indicated that he had picked up a rifle for the first time the day before he was killed. This is the general pattern being reported for the revolutionary militias; they spontaneously form from civilians as soon as arms become available. There is no concerted recruitment and training program.

That the regime forces crumbled in the face of this kind of an opponent does not speak highly for their discipline as a fighting force. It actually implies that the Libyan 'army' under Ghadhafi was little more than bands of armed thugs whose sole purpose was to subdue the population. Absent their superior armaments their fighting capability was no better than the untrained militias that they faced, and their motivation was much lower. Hence, when things got dicey, most of them cut and run.

This does not change my opinion on the advisability of the air campaign. Yes, it did the job it was intended to do. My issue is that that is a function of luck not planning and relying on luck to win a war is a very bad strategy. I am not convinced that any of the Coalition partners had good intelligence on the social structure of the Libyan military before they engaged in the campaign.

Learning afterwards from defectors that training and morale were low does not mean that the strategy was wise. If they knew that the fighting capability of the Ghadhafi forces were nearly zero, then the risk of a quagmire for introducing ground forces would have been low, and the Ghadhafi forces would have crumbled rapidly in the face of a very small NATO ground force.

Which leads to the question of just how many people are on the ground from NATO and which countries do they come from?

Firstly, NATO did not give sophisticated military communications equipment to the untrained revolutionary militia's so that they could co-ordinate ground strikes with the militias. Directing ground strikes is a job for highly skilled professional soldiers because it is not easy. Additionally, NATO would not want air strikes being used to settle personal scores, which could not be ruled out if the militia's were being allowed to direct the strikes.

That means that there had to be NATO personnel on the ground in Libya.

It always struck me as a little odd that command of the NATO forces was turned over to a Canadian General especially when Canada's contribution to the effort was significant but not large. It also struck me as a little odd that Stephen Harper was present at all the major discussions about Libya right from the start.

Given that Canada is probably the most secretive democratic country on the planet. Deployments of Canadian special forces are highly classified. Canadian forces have large numbers of bilingual soldiers. Canadian forces have a high degree of inter-operability with French, British, American and other NATO countries. That the Canadian government was supplying the revolutionary forces with sophisticated civilian drones (supposedly). It is not a great leap to put everything together and suspect that the bulk of the NATO forces on the ground were in fact Canada's JTF2.

If that is the case, there is no reason to believe that it will ever be made public in our lifetimes. Since deployments of JTF2 are state secrets and they don't discourage the people they are working with from believing that they are Americans, only our grand children will know how many were deployed, if the records survive and they care enough to look.

Although the fighting has not concluded, it is safe to say that Moammar Ghadhafi will not come back to power. It is not safe to say that one of his sons or clansman will not conquer the country.

Ghadhafi lost the confidence of his own troops. They will not fight for him anymore. They will not put him back on his throne.

That being said, many of his loyalists still have nowhere to go. His sons have nowhere to go. Fighting to victory or death remains their only options.

The ephemeral nature of the revolutionary militias, the tribal rivalries that are already expressing themselves, do not bode well for the National Transitional Council (NTC) being able to conquer and subdue the last cities supporting the old regime.

One can look at the unwillingness of the revolutionary militias to enter the last strongholds of the old regime as being one of offering an olive branch to the people who supported Ghadhafi. One can also look at it as a sign that the militias were willing to take up arms to liberate their own towns, cities, and tribal areas, but are not willing to risk life and limb to hunt down members of the regime. The unwillingness to enter Sirte could be an inability to find volunteers to do the job.

This raises the potential that if the remnants of the old regime can hold out, they can wait for the tribal rivalries to start asserting themselves during the constitutional discussions. The old regime can then start trying to divide tribes and provinces away from the democratic process.

Is this likely? I would think not. The NTC seems to be doing a very good job of balancing the competing political forces within the country. That could simply be the illusion created by fighting a common enemy, but I get the impression it is also the result of considerable skill.

Let's assume that the revolutionary forces are able to get control of the country and bring an end to the armed rebellion.

The talk in the media is that priority for the NTC is to get an interim government up and running and set up a constitutional process that will eventually lead to elections.

I would disagree somewhat. Yes the interim government must be set up to deal with the needs of the people, both for the necessities of life as well as getting the economy on track and creating jobs. After that it is far more important that the NTC creates a national narrative, a story for uniting all Libyans. In the absence of that narrative the constitutional talks run the risk of breaking down along internal rivalries.

Every nation, every union, needs a narrative to unite the people. Without the narrative the project will fail. Despite all the racial, regional, and other social strife in the United States, there is never any talk of dividing the country. A 'united' United States is an integral part of the mythology of the US. Myths don't have to be based in facts or reason, people just have to believe in them.

As I have discussed repeatedly over the past year, this is the problem with the European Union. The European elites have not enunciated a clear story about why the various peoples of Europe should sacrifice so much for the union. The union is suffering as politicians pander to their political bases. If they do not believe there is a good reason for the union to exist, then it is not really pandering, it is standing up for what they believe in, which is more than you can say for those who are promoting the union since they can not even define what it is or what it represents.

Libya has the potential to go down the same road that Afghanistan went down after the withdrawal of Soviet forces in the 1980's. Warlords emerge who use tribal allegiances to carve out a large piece of pie for themselves at the expense of the civilian population.

The one thing that Libya has going for it that Afghanistan did not, is that the young adults who are necessary to do the dieing are not all that loyal to their tribes. They are educated and have been exposed to the world through technology and therefore know that there is more to life than just serving the whims of tribal elders. This to a large extent is what doomed the Ghadhafi regime, he could not inspire the young educated multitudes.

This is also the danger for Libya. If the NTC fails to provide hope to this young ambitious demographic, the most skilled people of Libya may choose to vote with their feet at the first chance they get. The oil fields of Libya if properly used will prevent this mass exodus of skills. “If properly used” being the operative words.

There is no question that my prediction concerning the Ghadhafi regime, back in the spring, was wrong. It remains to be seen whether it mattered who won the war, in terms of the experiences of every day Libyans.

The Economic Inefficiency Of Large Cities

2011-08-31T17:18:00.000-06:00

The release last week of a report on average commuting times for Canadians by Statistics Canada should lead to some very serious questions among urban planners and politicians. That average commuting times are increasing and Canadians are growing increasingly frustrated with those commute times should not come as a surprise to anyone. Increasing commute times are a logical consequence of current government policies (at all levels) and urban planning concepts.

In any society, regardless of the political structure, it is very difficult to keep people from moving to the cities in search of opportunities. Even in highly regulated societies people will go to great lengths to find jobs in a city even if they are forbidden from doing so by law. In the less developed world, so many of the large cities are surrounded by illegal squatters camps. Preventing a city from growing is not a small task.

It is an issue that must be studied however as so many of the cities around the world are swelling into large cities and mega cities and there are serious environmental and economic consequences associated with this level of density. I will primarily focus on the economic issues.

People commuting to and from work is probably the single largest drain on any economy. Commuting is a large personal, economic, and public expense with very little economic benefit either to the citizen, society or the firms that employ them.

A person, while they are commuting, is neither a productive worker, nor are they a consumer. Additionally, they are not engaging in a leisure activity that may make them a more productive worker later. For practical purposes, commuting time is economic lost time.

That people spend a considerable amount of money purchasing vehicles, fuel, or public transportation passes, does not mean that commuting is contributing to the economy. That money would be spent on other items that would productively contribute to the economy if it wasn't being spent on commuting. People use cars for other activities rather than commuting, so that economic activity would remain. Additional expenditure on leisure activities is likely. My point is that there is no economic cost to cutting commuting times.

The most obvious expenditure involved in commuting is the public infrastructure that facilitates the activity. Roads are a horrendous expense, as is public transit infrastructure. This is where government policy and urban planning are subsumed to the self interest of property owners within the cities.

Real estate values are almost a pure function of population. Whether real estate values are rising or falling are nearly purely a function of population growth, over the long run. (In the short term externalities can cause euphoric buying or fear of purchasing, but in the long run the demand for shelter must approximate the number of households and the supply of residences will equal the demand for shelter).

Consequently, if you are a property owner in a city, your self interest is for the population of the city to grow. The growing population increases the value of your property and you become wealthier through little effort on your own part. Therefore it should be of no surprise to anyone that the biggest lobbyists for urban growth are real estate developers.

Politicians seek growth for their communities in an effort to keep the population happy. It is hoped that the utility gained from the increase in population density will more than offset the loss of utility from the increase in population density. That is the wealth effect makes people more happy than the frustrations of commuting makes them unhappy. I do not believe the academics have really looked into the matter too closely. It has just been assumed that people continue to flock to high density locations therefore as individuals the utility gained from doing so must more than offset the utility lost. A reasonable argument if people have reasonable alternatives. If they don't believe they have reasonable alternatives then the argument does not hold.

There are economic and social benefits to high population density locations other than those that accrue to property owners. Every type of business requires a certain population density in order to be viable. The density required will vary according to the nature of the business and the disposable income of the population in question. Some business require very high population sizes and densities in order to be viable. Sport franchises are the obvious ones, not so obvious will be businesses servicing the arts. Culture related events can not be supported without a large population to draw support from. This is the social benefit of high density cities.

The question however, is whether that benefit justifies the enormous costs imposed by lengthy commutes, the enormous costs of the public infrastructure to manage those commutes, and the immense burden placed on the natural resources of the environment (air and water) of trying to facilitate an extremely large number of humans living in a confined area?

My guess is that when all the variables and options are taken into consideration, that within the Alberta situation, the optimal city size is significantly below the current size of either Edmonton or Calgary.

This of course will be upsetting to those who buy into the bigger is better philosophy of cities. This will be upsetting to those who like to wrap themselves in their civic flag and engage in some patriotic chest thumping of 'we are bigger than you', as a means of covering up for the fact that they as individuals are not really a big net contributor to society. Adopting a group identity is a way of covering up for personal inadequacies.

At one time there was an economic argument that there was a benefit to having industries congregate together. That there were economic synergies to be gained by having alot of head offices located close together. In the new technological, global world this is no longer the case. You can run a business from anywhere on the planet and being able to offer employees a high quality of life can be a valuable tool in recruiting talented people to work for a company.

The relevant issue is what is the optimal city size to provide the highest quality of life to the most citizens? How do you maintain all the cultural advantages of large high density cities, while ensuring that the daily commute for most citizens is under 15 minutes per day without spending a horrendous amount of money on roads and transit? It is the failure to ask these questions that leads to the necessity of building $250M highway interchanges that are overwhelmed with traffic as soon as they are opened.

Is it possible to spread out the population into interconnected population nodes to gain the cultural advantages of large, high density population centers while reducing the economic, social, personal, and environmental costs associated with large, high density population centers? Can we create urban societies by doing so, that are more resilient to sudden environmental changes?

Archaeology has taught us that there have been very large cities and societies that have failed because they either over consumed the resources available to them or the environment changed and reduced their available resources. Yes, we have the technology to transport energy, water, and food long distances to supply our cities, but that does not mean that that is the most economical or efficient use of our resources.

As the expression goes 'failing to plan is planning to fail'. We do not have plans in place anywhere in the world for dealing with sudden environmental changes. We just assume that we will be able to adapt, our technology will be able to provide an answer, just as our ancestor have done for a thousand generations. We should have learnt from them that the solution they always ended up using was the one where they evacuated and eventually abandoned their cities.

The more imminent question we must answer however, is whether there is a more cost effective use of our public infrastructure money than building massive highway interchanges to facilitate large volumes of traffic into high density population nodes? Are there more cost effective methods of delivering public transit than building billion dollar subways? If there are, how do we accomplish them within a society where everyone is free to choose where they live and work?

I believe these are largely academic questions, for the simple reason that the self interest of property owners and real estate developers in the large urban centers will win out. You will be hard pressed to find a politician willing to tell a large number of their constituents that the house they just bought will be worthless by the time the mortgage is paid off because the government is going to adopt policies to reduce the demand for housing in the immediate area.

The more I look at the problem the stronger I believe that our cities today are no more permanent than the ones that our archaeologists are digging up. Our cities will be abandoned at some point in the future for the exact same reason that our ancestors abandoned theirs: we just kept building without considering the economic or environmental sustainability of our designs.

Jack Layton: Image Without Substance

2011-08-28T00:16:00.000-06:00

Watching the events this past week surrounding the death and funeral of Jack Layton, I have been disappointed, but unfortunately not surprised, to see and hear the socialist myth making machinery trying to turn him into a demi-god. What disappoints me the most is that the people he betrayed are the biggest promoters of his myth.

Let's be clear, Jack Layton and his party leadership have been lying about his health for at least the last eight months. There was a reason that the only questions that reporters wanted to ask him during the election campaign were about his health: it was obvious to anyone who spent time around him that he wasn't in good health. Both Mr. Layton and his party repeatedly assured Canadians that he was perfectly fine and capable of carrying out what ever duties the election would decide. This was clearly not true and I believe Mr. Layton knew so at the time.

Mr. Layton further misled the public when he 'temporarily' stepped aside by saying that he had a 'new' cancer. His gaunt appearance was attributed to the effects of the treatment that he was undergoing. Hindsight suggests that his appearance was the result of the cancer that was beyond the stage of treat-ability, ravaging his body. At the point he told the Canadian public that he had a 'new' cancer, his doctors had already told him that he was beyond treatment; he was terminal.

It should be a matter of urgency that the media begin asking tough question about what the party leadership new about Mr. Layton's health, and when did they know it? Will these questions be asked? Based on the adulation's Mr. Layton has been receiving this week from the media, it does not appear so.

That Mr. Layton only stepped aside 'temporarily', clearly was just an attempt to stage manage his death for partisan gain. If he had resigned, the party could not have obtained the state funeral for him that they have been managing so well to get their message out.

That Mr. Layton ostensibly wrote, or 'co-wrote', a passionate letter articulating his hope and vision for the future just further reinforces the whole 'stage-managed' affair. Does anyone who has watched a relative die of cancer really believe that Mr. Layton was that lucid two days before his death? If he was that lucid why did he not submit his letter of resignation so that the party could begin the desperately needed work of selecting a new leader?

I have always stood by the maxim that you can judge a person by the people that they choose to associate themselves with. Two days before his death, Mr. Layton surrounded himself with ruthless partisans who saw his death as an opportunity to further the cause, facts be damned.

It is all the volunteers and voters who took Mr. Layton at his word, who should feel betrayed that they put their faith in a man who was lying to them. They prove that Karl Marx was right: religion is the opiate of the masses. Present your ideology like a religion and people will treat the leader like a god, or at least a saint who can do no wrong, facts be damned.

That the NDP and Mr. Layton engaged in wholesale partisan lying bothers me, but not nearly as much as the moralizing that they are somehow superior to the crass partisan politicking that Mr. Harper and the Conservatives unfortunately engage in from time to time. The myth being spun this week is that Mr. Layton did so well in the last election because he was a 'different', 'gentler', type of politician. No, he was the superficial, cynical, calculating type of politician that everyone loves to hate, but he did it with a smile, so that made it okay.

This post will undoubtedly offend anyone who has bought into the NDP religion, but to a certain extent that is the point. Not everyone thought Mr. Layton was a great Canadian, even though that is the message that has been oft repeated this past week. Mr. Layton was certainly charming. I have no doubt that he would have been an interesting fellow to have dinner with. That does not qualify him as a great Canadian.

His record of accomplishments is not particularly overwhelming if you leave out the accomplishments of bringing media attention to an issue, which I do, because that is a substitute for doing the difficult work of actually solving a problem or dealing with an issue.

Mr. Layton's true legacy will not be any of the issues or objectives that the party and his family have worked so hard this past week to put in front of the media. Mr. Layton's enduring legacy will be in the loss of privacy and trust that the media afford to party leaders during an election. From this point on, it will not be good enough for party leaders to assure the media and the public that they are in good health, the media are going to demand proof. Given the way Mr. Layton and the NDP lied to Canadians through the media in the last election, Canadians and the media are going to demand facts. Accepting a politicians word on anything will simply not be acceptable anymore.

Sorry folks, Jack Layton was not a special type of politician, he was the epitome of what is wrong with politics today. He was a self aggrandizing, personally ambitious, ladder climber. His belief in the ideology he promoted was no deeper than its' ability to further his personal ambition. The causes he championed, a source of votes and hence power to stroke his ego.

When I was in junior high school, one of the teachers had a quote up on the wall above the black board: “The secret to success is sincerity. Once you can fake that, you've got it made”. That quote epitomizes Jack Layton, a master of faking sincerity.

Managing Statistics Rather Than The Economy

2011-08-22T21:46:00.000-06:00

With the turmoil in the equity markets of the last couple of weeks, there has been a great deal of talk about whether or not the global economy is heading into another recession this fall. Those of you who read my posts on the federal election will remember that I shook my head at the foolishness of the opposition parties for not waiting until this fall to force the election because I said that it was likely that there would be another recession. It is time for me to clarify why even if another recession occurs, my prognostication is only illusory.

Firstly, I am firmly in the camp that believes that the recession precipitated by the global financial crisis has never really ended in the US and Europe. Consequently, I think it is only a point of trivia if another recession is 'declared' or not.

The most widely accepted definition of a recession is two consecutive quarters of negative GDP growth. This is just a statistic however, and as such it is subject to manipulation.

One of the easiest ways to manipulate GDP is for the central banks to engage in accommodative monetary policy. Accommodative monetary policy will 'juice' the GDP statistics, but the effect on the real economy will depend on the structural strength of the national economy.

Monetary policy around the globe has been very accommodative ever since the global financial crisis. If the recession had really ended, monetary policy would have normalized already. That central banks have felt it necessary to maintain easy money, tells you that the central bankers do not believe that there really has been a substantive economic recovery.

The increases in GDP over the past couple of years are merely the logical consequence of the monetary policy being pursued by central banks, it is not a result of growth in the real economy. I am not criticizing the central bankers, I believe they have been following their mandates diligently. The criticism is towards the politicians and business leaders that are resisting the economic reforms necessary to make the efforts of the central bankers effective.

If there was real growth in an economy then there is job growth in an economy. Yes, employment is a lagging indicator, but it does not lag two years. There is not significant job growth in the US economy because there has been no significant economic growth for the past couple of years. The nominal growth in GDP is merely reflecting the monetary policy of the US Fed.

This contrasts to the Canadian economy which has generated significant job growth over the past couple of years. Nominal Canadian GDP growth has not been as exuberant as nominal US GDP growth, but then the Bank of Canada has not maintained an as accommodative monetary policy as the US Fed.

This is not nationalistic chest thumping but rather a useful comparison for what type of economic policy the leading economies of the world must embrace if they wish to move their economies forward.

Canada is not unique in the world in terms of generating real economic growth. If you look around the world, those countries that were forced to undergo painful fiscal restructuring during the 1990's, are fairing much better than those who did not.

A European example is Sweden. Sweden had their banking crisis a decade ago. They had to make painful choices about which banks had to be shut down or consolidated. Sweden did not even enter technical recession during the global financial crisis of 2008, if my memory serves me correctly, and their economy has kept on growing ever since.

This is the point: there is no easy way to fix an economy. Easy monetary policy can mask problems for a while, but if there are fundamental problems in the economy, the printing presses at the central bank will wear out before enough money is printed to solve the problem.

Japan has been in an economic malaise for 20 years because they have refused to take the tough medicine necessary to fix their economy. They were too big and too important for anyone to be able to force them to make the tough choices. The US and Europe are in the same boat now. They refuse to make the tough choices and no one can force them to. Until they do however, real economic growth will be difficult to achieve.

Will the US or the global economy enter recession this fall? I don't know what the statistics will show, but I do know that no progress has been made on fixing the economies of the US or Europe, so even if the statistics say the economies are growing, citizens in those countries will not feel like their lives are getting better.

Another statistic that directly affects citizens perceptions of their well being is the inflation rate, generally expressed as the Consumer Price Index (CPI). This is a statistic that is really misleading when applied to individuals or even communities. It has some validity at the macro level, but even there, it has limited usefulness.

The biggest problem with the CPI is the irrelevance of so many items in the basket. The inclusion of durable goods with perishable goods distorts the experience of the consumer. Does it really matter to you if the price of cars has fallen if you aren't in the market for cars? Does it really affect you if there is a better cell phone or computer available six months after you just replaced yours? No, it doesn't. Does it affect you if the price of bread or the price of gas went up, or down, this week?

Peoples perception of inflation is driven by the items they purchase frequently (at least every couple of months). Peoples perception of inflation is not affected by changes in prices of durable goods. Consequently, people will perceive inflation to be much differently than what is reported by the CPI and will adjust their behaviour based on their perception, not on the official statistics. Unfortunately, governments will base their decision on the CPI and then wonder why the public is mad at them when they try to tell the public that the 'facts' don't match the publics' perception.

If a new technical recession begins this fall then we can expect chants for more fiscal stimulus to start coming from the political left. Those countries that have allowed their fiscal affairs to get out of hand will not be in a position to supply more 'stimulus'. They might be the lucky ones. Those countries that do have the means to increase government spending are likely to increase government spending without stimulating their economies, which of course will get them into fiscal distress.

The example of effective fiscal stimulus that I prefer is the example of the Hoover Dam in the US. The stimulus did not come from the construction jobs, it came from the inexpensive electricity that was available after the dam was complete. Bridges and roads only stimulate an economy if the create business and consumer opportunities that did not exist previously. But when talk of stimulating the economy crops up, the only talk is about increasing government spending on infrastructure, there is no discrimination between fixing old roads and building new ones.

To come back to the volatility in the equity markets, there is another prime example of where reform is badly needed but is being stymied by those who exist as parasites in the system.

There is probably little room for the nominal value of the markets to decline further. The price to earnings ratios for most stocks is below the long term average. This is to be expected given the accomodative monetary policies of the central banks. Once all the increase in the money supply starts affecting the real economy the stock market will increase dramatically as corporate earnings inflate and the market seeks to adjust the P/E ratio.

What does this mean? With all the policy interventions in the economy, one can not trust any of the usual indicators of economic activity. Whether the global economy enters technical recession this fall is a flip of a coin, which is exactly what you are hearing from all the experts and why you should probably just ignore them. It would be a lot easier to know if the governments of the big economies of the world would start fixing their economies rather than just trying to juice the statistics and hope everything works out.

Economic Policy and the US Rating Downgrade

2011-08-11T08:26:00.000-06:00

The rating downgrade by Standard and Poors of the long term US bonds was only unexpected as for its timing, and that only by the general public. Rumours were circulating around New York for several days prior, that the down grade was imminent. That US treasuries do not deserve a AAA rating I do not disagree with, the intellectual rigour with which the rating was applied is questionable.

I think the criticism that if the US was going to be down graded that France should have been down graded as well, is a valid criticism. France also does not have the political structure nor have the leaders demonstrated the political will to deal with the French budget deficit. I guess the French are just a little bit better at being discreet about their disagreements.

That being said, the idea that the US deserved a AAA rating is simply not supported by the facts. Many of those who make this argument are pointing to the fact that the US can monetize its' debts as a means of meeting its' obligations. As I pointed out in my last post, monetization of the debt, or currency devaluation, is the equivalent to default, and as such means that if the policy of monetization is being considered, that in itself justifies a down grade far more serious than the one assigned by S&P.

That raises the issue of the weakness in the US political system that really led to the downgrade. The political grid lock, the self serving gamesmanship, that led to the brinkmanship over a routine book keeping matter being turned into a crisis. Hopefully, the politicians have learned that what they say in Congress can have an impact in the real world that leads to real consequences for them. I think most of them got the message, but I'm not sure that there aren't enough ideologues left to block real progress. Time will tell.

As I pointed out last week however, the downgrade is more a matter of economic trivia than actual real economic news. Yes, the markets tanked the first trading day after the announcement, but they did the day before as well. The sharp decline in the equity and commodity markets was merely a continuation of declines that had been occurring for several months. If the down grade had actually had an impact on the markets, US Treasuries would not have been the preferred asset for refugees from the equity and commodity markets.

There are plenty of nominal reasons for why the financial markets have been in decline for the past couple of months. You can point to the debt crisis in Europe, the end of qe2, weak economic data around the globe, and there are several others that the analysts will point out. Under pinning all of these reasons however is the one that the politicians and many of the market participants do not want to address: the global economy has not been allowed to clear after the financial crisis of 2008.

Financial crises, like all economic failures are the markets way of dealing with an accumulation of dead wood and debris in the machinery of commerce. Organizations, particularly those that accumulate money and/or power, attract people who's ambitions exceed their abilities and over time this mass of mediocrity causes the organization to fail. The financial crisis was the result of a system wide accumulation of pretenders: people who wanted the power or prestige of the corner office but really didn't understand how to do the work required of the office.

That governments have intervened heavily in the market place to 'save the system' has prevented the system from purging the pretenders. The transfer of the consequences of the misdeeds of the mediocre managers to the balance sheets of the government, has exposed the politicians throughout the developed world as pretenders themselves.

As painful as it may be, the market must be allowed to purge itself. This is the medicine that the US and Europe have forced upon smaller countries for the past 20 years, and without exception, those countries have recovered in due course, and are the countries that have been least affected by the global crises of the past 3 years. The refusal of the politicians in the US and Europe to be honest with people and tell them that the only cure is painful, is perpetuating the crisis and ensuring that the pain is not born fairly or equitably, never mind equally. It is ensuring that the greatest pain is born by those who can least afford it.

Failed businesses must be allowed to fail. Failed government enterprises must be wound down. Inefficient government enterprises must be sold off or liquidated. Governments must focus on their core proficiencies, governments must restrict themselves to doing what governments do well. This is tough medicine in both the US and Europe where so many individuals and businesses earn their livings by exploiting the inability of elected officials to say no.

The markets are declining because they are finally coming to the realization that the global economy has not really recovered from the financial crisis of 2008. Yes, nominal GDP has increased in most every country (Greece being one of the few exceptions), but it is almost entirely an illusion. Central banks have grossly increased the money supply in every country. GDP is a simple product of the money supply multiplied by the velocity of money in the economy. A quick calculation will tell you if GDP goes up by 2%, but the money supply doubled, what does that tell you about the velocity of money in the economy? The money supply in the US has done way more than just doubled over the past 3 years.

GDP is a useful statistical tool for analyzing the performance of an economy, but it is subject to manipulation by the government and the central banks overseeing those economies. Sooner or later, the participants in that economy figure out that the 'official' statistics are being cooked. That is what is happening in the markets now. The participants are realizing that the global economy is in trouble.

The solution that is being talked about is qe3. Increase the money supply so that GDP does not begin to fall. Manipulate the statistics so that hopefully the people don't realize that things aren't actually getting better. A great solution for those who pretend to be great.

The European crisis is not difficult to fix, it is only painful. The badly indebted countries must restructure their debts. The badly run banks must be allowed to fail. Germany must either torpedo the Euro and force this to happen, or choose to form a fiscal union to backstop the Euro and share the pain of the regions. Germany must decide, a simple decision, all in or walk away from the table. Simple but painful, which is why I have argued for months that the European problem is a problem of leadership.

The problems in the US are the same. It is a crisis of leadership. In some ways the US problems are more difficult because the US has multiple options for dealing with its' problems. In the end however, it still boils down to an individual or group of individuals to set out a reasonable plan that can gain broad public support and have the skills to actually go out and sell the plan to the public. It is not enough to sit on Capital Hill and preach to rivals, the public must be convinced that the plan is the best path forward.

The question then is why are the politicians not stepping up and dealing with the problem? The glib answer is that they are not real leaders they are only pretenders. This is true from the perspective of the individual. The individual is not rising above the system that they find themselves operating within.

From the broader social perspective however, one must look at this in terms of the system trying to perpetuate itself.

The regimes in Libya and Syria are fighting tooth and nail to perpetuate themselves. They may succeed for a short time but eventually they will fail. The economic and political elites within the developed worlds are also fighting tooth and nail to perpetuate their privilege. They may be using completely different techniques but the underlying social force is the same. Elites will always try to present the problems as issues of a failure to communicate, or a statistical anomaly, or the fault of the victims. They will not accept that the failure is at the top, that sewers flow downhill.

This is one of the reasons that I am more optimistic about the US situation than I am about the European situation. The strength of democracy is not that it is a good way to choose a government but rather that it has a mechanism for getting rid of bad governments. In a little over a year, the citizens of the US will have the opportunity to elect a new government that may have the ability and willingness to tackle the real fiscal problems with real solutions. They may be people who understand that it is the attempts to preserve the economic system that are killing the economic system. They may be people who understand that hope of a better future must accompany the prescription that will cause immediate pain.

The situation in Europe I am not so optimistic about. The situation in Europe is plagued with undemocratic decision makers, elected decision makers who were not elected to deal with the problems that they are being asked to deal with, populations that have diverse socio-economic objectives, and relationships rife with stereotypes ready for the unscrupulous to exploit. As I said six months ago, the markets are not going to wait forever for Europeans leaders to come up with a narrative to rationalize the existence of the Euro. The bond vigilantes in the financial markets are losing their patience as witnessed by the attacks on Spain and Italy this past week and the attacks on the French banks in the past couple of days. The peoples of Europe will be forced to decide their future before the year is out or it will be decided for them by the financial markets (Germany can not bail out both Italy and Spain never mind France, Germany will be forced to abandon the Euro if it does not agree to fiscal union).

The down grade in the US credit rating certainly came earlier than I expected but reality is that the downgrade is merely a reflection of what is happening in the real economy both in the US and across the world. It is little more than a wake up call to citizens and politicians that the time for dithering has come to an end, the solutions of the past 3 years have failed, it is time to fix the problems.

The US Fiscal Fiasco

2011-08-02T23:09:00.000-06:00

Watching the contrived crisis in Washington for the past week has entertained everyone with a lengthy performance of the theatre of the absurd. With the immediate crisis post poned for a couple of months, it is perhaps time to give some consideration to the convoluted fiscal problems of the US government.

Firstly, let's consider the issue of whether or not the US government will default on its' debt obligations. That the US would never default on its' debt obligations was a position taken by both parties and repeated ad nauseum throughout the spectacle.

Technically, the politicians in Washington are correct: the US government will live up to the letter of its' obligations. In reality however, the US government has already begun defaulting on those obligations. Devaluation of the currency has a similar effect to asking the bond holders to take a reduced pay out. With the technical default at least there is the courtesy of asking the debt holders to take less than they are entitled too. With currency devaluation, the government presents the charade that they are delivering exactly what they agreed to deliver and the debt holders are just snivelling whiners. The difference is with default the bond holders get paid less, with devaluation they get paid with Monopoly money.

For every country that has a freely floating currency, the holders of US Treasuries in those countries have already taken a 10% hair cut over the past year and are looking at taking another 10% this next year.

American holders of US Treasuries take a hair cut through inflation (unless they purchased inflation protected treasuries). Currency fluctuations tend to be much more volatile than inflation, so those who are going to lose through inflation have not yet felt a significant hair cut. The most recent inflation numbers out of the US may be the harbinger for those people however. With talk today of QE3 being considered now that the latest economic numbers have come out worse than expected, inflation has the potential to seriously erode the value of the Treasuries held by US investors.

The idea that a downgrade by the ratings agencies will have a significant impact on the US economy is all hat and no cowboy. The point at which the ratings agencies actually make the downgrade will be a point in time when it is old news. The investors will already have made the determination for themselves and the ratings agencies will just be reflecting what the market is already saying.

Furthermore, as so many analysts have pointed out over the past week, there simply is no other market large enough to soak up all the money that goes into US T-bills. Money will continue to flow into T-bills because it has nowhere else to go, in the short term. That is, until investors start feeling the pain from devaluation and inflation, then yields will have to rise. But again, the investors will lead the ratings agencies, not the other way around.

Which leads to the next problem with the US fiscal problem: crowding out. The idea that investors, whether foreign or domestic, will continue to buy US Treasuries regardless of the credit rating should be alarming to every economist. This implies that the US government has gone into direct competition with industry for capital and is in effect crowding private industry out of the capital market. Start-up businesses find it much harder to raise capital to create jobs. Established businesses have difficulty justifying doing expensive R&D on uncertain projects when they can get a guaranteed return by lending it to the government.

I have argued in the past that there is a pool of capital that will only be invested in government securities and won't be used invested in more risky ventures, and this leads to the concept of optimal government debt levels. The US government is well beyond optimal levels and consequently they are not just selling debt to ultra low risk investors, they are now crowding out private industry by selling debt to higher risk investors.

By crowding out private industry in the capital markets, the US government is stifling growth in the economy. In preventing R&D from being financed, the government is reducing tax receipts down the road by reducing employment and potentially reduced corporate taxes.

Ultimately, staving off a true economic crises in the US will rely on economic growth. Fiscal austerity and revenue increases will not be sufficient to deal with the accumulated debt of the US government in the absence of economic growth. Both fiscal austerity and revenue increases come with considerable risk of adverse economic effects if they are not well thought out. If you watched the Keystone Cops race around Washington over the past week as I have, you can guess what I think the odds of well thought out fiscal policy emerging from Capital Hill will be.

It is only reasonable that I at least superficially mention what good fiscal policy should look like.

There is no doubt that significant budget cuts should be made. Those cuts should not be across the board, slash and burn type cuts. They must be targeted cuts. Take defence for example. The US military has a significant number of off the radar military operations in other countries that are not integral to either US foreign or defence policy. There are undoubtedly research programs within the Department of Defence that have continued without a real policy objective because no one has bothered to ask the question: how does this meed our policy goals?

Throughout the US government there will be programs and bureaucracies that have become self sustaining long after the reason they were created disappeared. The US government isn't special, it has the same problems as every other government on the planet, perhaps worse because it is so large and well funded.

Good fiscal policy is spending that meets the policy objectives of the government. The real debate in Washington should not be about which programs to cut, but rather about what does the government want to accomplish. Once you know what you want to do, it is simply a matter of getting rid of the programs that don't help you get there.

The other debate that needs to happen but won't is Constitutional and political reform. As I discussed in my rant against coalition governments, coalitions lead to bad government. As has been mentioned many times over the past week in the past, House and Senate leaders could always add 'earmarks' to legislation to get the votes they needed to pass it. This is the source of much of the problems, too many goodies being handed out to buy votes.

Furthermore, the midterm elections ensure that both parties are constantly in election mode. The next election campaign is never more than a year away, so the politicians can not pass painful legislation with the knowledge that they have time to recover, because they don't. This is one of the big advantages of the Westminster model of government. Majority governments know that they have the first two years of their mandate to get the bad tasting medicine down the throats of the public before they have to start looking for some sugar.

I am not suggesting that they US move to the Westminster model, only that getting rid of mid term elections would create a climate of stability in Washington so that serious problems could be tackled periodically.

Whether a form of party discipline could be adopted to ensure that leaders can use a stick as well as carrots in their efforts to secure votes should also be open to discussion amongst Americans.

(As an aside, it is frequently commented upon Canada's version of the Westminster model of government that it is a form of elected dictatorship. This is not true. In Alberta, the last three Premiers have been pushed out of office, either by their caucus (Getty, Stelmach) or their party (Klein). Jean Chretien's last election win was in an election that he called to forestall a coup within the Liberal party. More often than nought, Prime Ministers and Premiers in Canada do not leave office at a time of their own choosing, and it does not require a revolution in the streets to make them go.)

Revenue increases for the US government are also going to be hotly debated over the next year. Just as with fiscal austerity, increasing taxes can hurt the economy or have no effect. Rationalizing tax policy even has the potential to both increase revenues and boost the economy. The effects of course are a product of the design.

The Tea (Taliban) Party and Grover 'Ghadhafi' Norquist continuously rant that taxes must be lowered to stimulate the economy. That there is no theoretical basis for their argument doesn't seem to bother them, it is an article of faith.

Reality is that once taxes have been lowered below the optimal price point, there is no benefit from lowering them further. In fact, lowering taxes below the optimal price point has the potential to hurt the economy. Taxes in the US are already well below the optimal price point which is why the last stimulus package, half of which was tax cuts, had no measurable effect on the US economy.

The idea of making the rich and corporations pay their 'fair share' has been a popular refrain amongst the President and left leaning Democrats. Far better that they promote the idea that everyone must pay their fair share. That includes the less well off. The government should never be seen as a benevolent gift giver, but rather should be seen as something that belongs to every citizen. Contributing ones 'fair share' is ones way of taking responsibility and ownership of the government. That 50% of Americans pay no tax whatsoever may go a long way to explaining why they also don't vote.

Looking at the the situation in the US from the outside, I see a group of well intentioned, intelligent politicians, who are hamstrung by a small group of uneducated fanatics intent on destroying anything that doesn't conform to their insular world view. The well intentioned are further crippled by a political system designed by people who were so paranoid about authoritarianism that they refused to trust in their own people and instead created a system that ensured legislative paralysis so that the people would not have to hold their leaders to account.

Which leads to my next point. Why do so few seemingly well educated Americans not understand the division of power in the US Constitution? So often people blame President Obama, or President Bush, or President Clinton, for this budget or that budget deficit. The President asks Congress for money, Congress decides how much he gets. The deficit is not the responsibility of any of the President's, the deficit is the sole responsibility of Congress. I understand why the politicians want to spin it that it is the President's responsibility, but the media must look past the spin so that the people can hold to account the politicians who are actually responsible. (President's accept responsibility to enhance the Imperial Presidency, Representatives and Senators are more than willing to blame someone else.)

Given the severe limitations of the US political system that everyone has to live with, it is apparent to me that the only way that meaningful reform will occur is if an individual through tireless work, builds a grand coalition that is capable of convincing a broad base of the public that a particular course of action must be taken. Unfortunately, the only person I see who has had the foresight to do so is Grover 'Ghadhafi' Norquist. His influence over the entire process reminds me of how Moammar Ghadhafi never held any official title within Libya, but everyone feared him and needed his blessing to serve in the government. If someone with a more productive vision of what the US could be, would put a similar effort into accomplishing a goal, the US as a nation would be better for it.

The problems facing the US are immense and complicated. Trying to fix one problem will often make the other problems worse and the most serious problems, the political and policy problems, can not be dealt with while a fiscal crisis is looming, even if that fiscal crisis is a result of the political and policy problems. You can not put the fiscal problem on hold while several years are spent restructuring the political system.

Those of you who have read this far might have drawn the conclusion that I am pessimistic about the outlook for the US. I'm not. I look at the collective psyche of the US as somewhat of a Manic/Depressive. Right now the US is in a depressive phase but sooner or later the infectious mania that permeates throughout American society will burst out again in a flurry of creative economics and create another financial boom that will resolve many of the fiscal constraints faced by the US governments and ensure that any meaningful political reform is set aside for after the party is over.