Why equalization destroys wealth

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Saturday, August 3, 2002

Imagine a stock market that works on the following egalitarian principle: At the end of each year, a tally is made of the market's winning and losing stocks; and the winners are forced to fork over half their newly minted market-capitalization to the losers. Thus, a booming software manufacturer might be required to pay billions to, say, the Acme Buggy Whip Corporation. And a maker of MP3 players would have to help support the Do-It-By-Hand Cod Salting Company. No one would go bankrupt -- but no one would get rich either. Does this sound like an efficient way to allocate financial capital?

If you answered "no," congratulations. You have mastered a bedrock principle of capitalism: Resources are put to their most productive use when they are directed to sectors where the economic return is high, and diverted from sectors where the economic return is low.

And yet, though the federal government would never pervert our capital markets with the above-described scheme, this is more or less the way Ottawa has structured our labour market. Through equalization, regional development, overgenerous employment insurance, welfare and a welter of inefficient government make-work programs, we transfer billions from rich provinces to poor provinces. In the process, the government destroys the natural incentive of workers to migrate to better, more productive jobs.

The fruits of this perverse policy were described in a new study reported by the Post on Thursday. According to DRI-WEFA, an international economic think-tank, Alberta's per capita gross domestic product -- the average value of all goods and services produced by each person -- was $49,000, almost double the $26,000 per capita GDP of the Atlantic provinces. And yet, Albertans do not get to keep much of their bounty. Thanks in great part to interprovincial redistribution, disposable income in Alberta is less than 10% above the national average. The same is true of Ontario, Canada's second-wealthiest province.

In other words, though the average Sydney, N.S., worker would produce far more wealth if he moved to Calgary, there's little economic incentive for him to do so: Chances are he can enjoy more or less the same standard of living by staying home, living off the generosity of Ontario and Alberta.

This phenomenon helps explain why Canada is poorer than the United States. Just think: Would Silicon Valley have emerged as the economic powerhouse of the New Economy if Palo Alto entrepreneurs were required to subsidize obsolete fish-gutting plants in the Mississippi Delta? Would Austin, Texas, be a high-tech boomtown if its residents were subsidizing call centres in Detroit and Newark?

There is no question that a certain amount of income redistribution is desirable in any society. That is why the rich pay more taxes than the poor. In Canada, moreover, the concept of equalization is embedded in our constitutional scheme; and even the poorest provinces should have the money to provide adequate schooling and health care. But the scale of the transfers must be scaled back dramatically if Canada's economy is ever to catch up with that of the United States. Albertans and Ontarians are getting awfully tired of subsidizing the buggy-whip makers of Canada's backward regions. © Copyright 2002 National Post

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