The core of the European crisis is a lack of economic freedom

As the Greek crisis rapidly turn into the European crisis there is a scramble by world leaders to “fix it.” Of course it isn’t that easy because the real crisis in Europe is a systemic one; the real downfall of Europe is a lack of economic freedom and it isn’t going to be easy for European leaders to change that overnight.

I backed up the claim that a lack of freedom is the primary issue in a recent op-Ed I wrote with Fred McMahon. We examine where the Euro-countries place on the Fraser Institute’s Economic Freedom of the World Index:

A glance at the Eurozone countries shows us that nine out of 16 of the member countries fall under the “mostly free” category, five of the 16 are “relatively free,” and two of the countries are “relatively unfree.” The freest country in the Eurozone is Finland, ranked 11th in the world in the economic freedom index. In contrast the least free country, Greece, ranks 88th in the world. The massive difference in economic freedom enjoyed in different countries in the Eurozone creates a dividing line and it is pretty easy to see conflict arising across that line.

The list of countries that fall into the less free side of the line reads like a list of the economic problem children of Europe. Spain, Italy, and Portugal all fall into the “relatively free” category. Greece, the main problem child, is ranked “relatively unfree” on the index. The only country that has required assistance that is “mostly free” is Ireland, and Ireland has shown the strongest signs of economic recovery.

The “mostly free” United States has also experienced economic turmoil but the downturn there pales in comparison to Greece or Spain. No one but the most exaggerating of alarmists would claim that the American economy is in danger of imminent collapse, while the complete unraveling of the Greek economy is quite real. More so than in America, it is the less economic free countries of Europe that are bearing the brunt of the ongoing global economic crisis.

Some European countries (as we write above) are pretty high on the economic freedom index.
Proponents of economic freedom would expect these countries to be more able to handle the shock of the crisis, and so they are. At the same time, however, the freer Euro-countries are being dragged down with the not so free.

It isn’t because investors don’t trust Germany that the German bond auction went so badly. It is because investors now know that Germany is tied to the hip to countries that they do not trust. The bad economic policies of Italy and Greece are damaging the German economy and finances in a big way. At the same time the only thing that is keeping Greece from completely sinking is that they are tied to the hip of Finland and Germany

Ultimately, for the long run, there can only be one solution to this problem:

Austerity measures are not enough. Greece and the other troubled countries need to take a fundamental look at the very structure of their economies and find a way to increase economic freedom if they want to ensure a prosperous future for their citizens.

CD Howe fiddles while Canada's health care system burns

Don Drummond, through the CD Howe Institute, has recently published a paper on Canada’s Health Care system. It is an interesting piece of work. The interest is not so much because of the conclusions it reaches, there isn’t much there that’s new or innovative, but because it is an example of what is wrong with the health care policy debate in Canada. There is a blatant and conscience effort to avoid discussing changes that can be made to the single/public-payer model. That is to say, no one wants to talk about private financing in Canada’s health care system.

The report itself is an effort to come up with ways that health care spending could be reduced without touching the financing of health care. Mr. Drummond discusses creating incentives that will reduce overuse on the part of the patients and encourage efficiency from suppliers. He suggests that fees to providers should constantly be reviewed to reflect innovations and cost changes. He wants funding to shift from one area of health care to another where he believes that demand is rising.

Throughout the whole paper he completely ignores the fact that there already exists a method that would accomplish all of this in one shot: price signals.

Price signals allows for the consumers to act as if they know without actually knowing how much supply there is available of a good. Price signals encourage providers to adjust to changes in demand and the accompanying profit motive gives them an incentive to be more efficient. Price signals will do everything that Mr. Drummond wants done, but he won’t even talk about it, because for price signals to work private financing would have to be introduced to the system.

To the CD Howe Institute’s credit they are pretty blunt about why they won’t talk about financing. The president of the Institute writes that changing the financing “would be so politically inflammatory as to block reforms.” What he means is that he is too afraid of a public backlash to speak truth to power.

The truth is that governments can fiddle with the administration of the public funded system all they want but all they are doing at best is kicking the can down the road.

The single/public-payer model is at the core of the unsustainability of Canada’s health care system. It is the inability to solve basic knowledge problems of supply and demand through the price signals that creates waste and inefficiency. A central planner simply cannot mover fast enough nor can it know enough to replace prices as a solution.

The public is not being well served by respected academics like Don Drummond refusing to talk about this issue. The health care debate in this country is incredibly incomplete, with only a few individuals or organizations, like the Fraser Institute, willing to address it. Fear of the public not liking what it hears is no excuse. Real change does not happen from following a crowd but by leading it.

Federal government's pension proposal is better than CPP expansion

The federal government is set to announce today a new method for Canadians to save and invest for their retirement. I am unsure about the details of this plan and I imagine that I could easily find something objectionable about it once I learn the details, but it is already clear that it is better than the alternative. There has been pressure on the government to increase CPP payments, and that would have certainly been a bad idea.

First of all the claim that the CPP is cheaper to manage than a private firm is at the very least exaggerated but could also be simply false. The claim is based on the administration costs of the CPPIB (Canadian Pension Plan Investment Board) versus the usual costs of a private investment firm. The problem is that the operational budget of the CPPIB does not cover all the costs that private firms face. These costs are carried by other government agencies (such as Revenue Canada), so the straight one on one comparison is false.

Secondly and more importantly, the proposed plan is another voluntary method rather than government mandated. Putting aside the morality of forcing people to invest in something that they don’t want to invest in, it disadvantages some individuals. In general it is a good thing for people to invest in retirement, but there can be pretty compelling reasons why that money is needed more immediately (or perhaps needed for another long term project such as a new business). By allowing the individual to choice we are allowing them to set their own priorities and not disadvantaging those that wish or need to do something else with that money.

Thirdly CPP is not the safe investment that its proponents claim. It has the same disadvantage of any defined benefits plan. It is possible if not likely that the liabilities will outstrip the contributions. At which point it becomes unlikely that younger investors will get their full return. Also it is subject to the whims of governments that might change the contribution levels or benefits at will.

Fourth and finally, the CPPIB is about at the end of its effectiveness as an investment manager. Neil Mohindra of the Fraser Institute released a study a few months back that looked at the literature on the diseconomies of scale for investment managers. The study demonstrated that there are several disadvantages to having a too large money pool. These disadvantages can be offset in limited ways by various practices but the CPPIB has already put these methods into place. The return of an enlarged investment into the CPP is very likely to be minuscule because the diseconomies of scale would be too great.

The government’s new plan would have to be pretty awful to be worse than the disadvantages I have just mentioned. So even if it is not perfect, and I am sure that it will not be, I am confident that it will be the better of the two policy options.

Economic Freedom of the World Index shows decline in Canada

The Fraser Institute has released its new Economic Freedom of the World Index, and for the first time the United States ranks below Canada in terms of economic freedom. Not just below but significantly below. The United States ranks tenth in the world and Canada ranks a comfortable 6th. But before you get too smug you should take a moment to compare the scores of Canada this year to last year.

In the 2010 EFW Index (which is based on 2008 data) Canada scored 7.95 and came in 7th place. In the 2011 EFW Index (based on 2009 data) Canada scored 7.81 and came in 6th place. So we improved relative to the rest of the world but we declined relative to our past results. In fact all this really shows is that economic freedom is declining in Canada at a slightly slower rate.

Canada can’t even claim the prize for being the slowest to decline in the top ten. That prize goes to Singapore, which declined by only .02 points.

Australia deserves special mention as the only country to gain any points in economic freedom. They went from 7.90 to 7.98. The bulk of that gain came from increases in sound money and the freedom to trade internationally.

The bottom line is that when you look at Canada in isolation we are declining and when you compare Canada to our cadre of top economically free countries we aren’t doing that well either.