The Premiers Need to Stop Misleading Canadians about How our Country Works

Transfer and equalization payments are an essential part of any country with multiple juridictions that share a currency. If you want to break Canada, break transfer payments.

This is a recent tweet from the Premier of Saskatchewan.

This is about premiers arguing that billionaires should get tax cuts in the richest provinces while we cut funding to provide health care and and education for other Canadians, who don’t live in a province that has massive reserves of oil or gas, a commodity whose price is set globally.

There is so much wrong with the debate on equalization in Canada, which is riddled with false, and divisive assumptions.

First, I’ll talk about what is being suggested by the Premiers in this debate, and why it’s wrong.

Premiers are pretending that the richest people in their provinces share all of their income with you, when they don’t. Whether you think they deserve a tax cut or not, they’re not going to share it with you.

If you’re someone who’s living in BC, Alberta or Saskatchewan, and you’re suffering or having a hard time, as many people in those provinces are, this is a way for the Premiers and governments of those provinces to pin the blame for your suffering on someone else.

It suggests that the reason you’re suffering is because YOU are being taxed, and YOUR tax dollars are being sent to people in another province, and that if it stopped or changed YOU would get more money.

Absolutely none of this is true.

There’s a reason why “The rich keep getting richer while the poor get the picture,” as Tom Scharpling has said. When anyone suggests the problem is that poor people are getting too much money, take a look at your own bills, and where governments and businesses all spend. It’s because we keep giving more and more money to people who already have it, not to those that don’t.

Federal equalization is largely paid by the very top income earners - people whose salaries and bonuses put them in the top fraction of a percent of the entire population. Billionaires, and multi-millionaires paying federal taxes, not provincial taxes.

It’s often been pointed out that 50% of all income taxes are paid by the top 10% of Canadians. That’s not because taxes are going up - in many cases, they have actually gone down - it’s because the people at the top of the income scale keep seeing their incomes go up that they are earning a huge amount of all the income.

In 2014, 10% of the people in Alberta were earning 50% of all the income in that province. So equalization is really funded mostly by people in a fraction of the top 1% of earners across Canada.

That is what makes the difference between what, in Canada we call “have” and “have not” provinces - the concentration of a surprisingly small number of people who are very wealthy or who own large amounts of revenue generating properties or shares.

This relatively small number of uber-earners and uber-owners pay into the federal fund, and if you reduce their obligations, they are the ones who will benefit. It will not mean lower taxes for you, and there is no reason the money would even stay in your province to be re-invested.

This also matters because if you are reading this and you live in BC, Alberta or Saskatchewan, chances are that the taxes you pay are NOT going to another province.

The Mixed Blessings of Oil and Gas

The other is the reason BC, Alberta and Saskatchewan don’t get equalization is because those jurisdictions’ economies and governments get a lot of revenue from oil and gas, which are international commodities that are part of a global market, where huge players like OPEC and Saudi Arabia are “Price setters” and the rest of the market are “price takers”. OPEC cracks the whip, and the Canadian oil industry gets whipsawed by it.

This means there are major challenges that come along with the “boom and bust” of natural resource prices, which create and destroy fortunes that are based on a limited supply of something that is dug or pumped out of the ground. When the oil runs out - or drops below a price that people can make a profit, all the money that was going to come in and provide payback on all the investment isn’t there. Houses, businesses, governments, infrastructure projects.

That’s why people talk about the “oil curse” which distorts the economies of so many jurisdctions that have oil.

Norway’s success in handling its oil revenues is that it has created a colossal reserve fund so that the country as a whole has shared ownership in investments around the world, using present-day surplus to invest in businesses that will continue to generate income when the oil runs out. That involves higher taxes, because the money is being taken and reinvested.

The boom-bust cycles tend to be amplified by the governments in oil-rich jurisdictions that are “fiscally conservative,” because they do the opposite. When times are good, and governments are in surplus because of high oil prices, there is a real “hand-to-mouth” quality where the governments are focused only on maximizing the boom.

Rather than build “heritage” funds that could tide the jurisdiction during the next bust, government is kept small, as a matter of economic ideology, these governments will all cut taxes to the benefit of their high income earners, and corporations.

British Columbia, Alberta Saskatchewan, Manitoba, Ontario, Quebec have all cut or are cutting taxes - reducing the tax obligation of the highest income individuals and companies, instead of investing in new programs and services for their own citizens.

So, the idea that if the Federal Government stopped taxing these uber-high-income individuals in Alberta, BC and Saskatchewan, that that money would find its way into your pocket, it’s not going to happen.

It’s the myth of “supply side” or “trickle down economics” and one reason it’s a myth is that, when people have money to invest, it tends to be in an existing business or property which are perceived as lower risk, not a new venture or business, which are perceived as higher risk. Left to itself, this creates two-self reinforcing feedback loops that undermine the economy.

One feedback loop is that investment pours into driving up the price of assets, like housing, stocks, and many other assets that are even shakier, like crypto, and ponzi / pyramid schemes. What’s driving the price increases and returns are the other investors bidding up the asset - not revenue.

As this category of “safe” investments outperforms “risky” ones, real economy investments - factories, bakeries, etc, falter, because their returns are based on revenue from ongoing operations. As sectors, they cannot attract investment, and so, they continue to fall behind.

This results in a “hollowing out” of real economy businesses because new and productive businesses, and innnovation have trouble attracting investment.

At the macro level, this means that you get “bubbles,”. “Real economy” businesses and activities involve ongoing revenue from customers based on services and manufacture.

Equalization and transfer payments stabilize the whole economy

Equalization payments are about much more than making sure that Canadians can get roughly level amounts of services without huge differences in taxes. They are an essential part of maintaining macroeconomic stability that comes with having a single currency in multiple juridictions.

Canada used to not have transfer payments, until the Great Depression, when the provincial governments of Manitoba, Saskatchewan and Alberta were all on the verge of default for several years in the 1930s. No place in the world was hit harder by the Depression than Western Canada.

The price of wheat collapsed, and there were areas in Western Canada where unemployment reached 75%.

To get out of the Depression, there were a number of major "New Deal" financial measures and reforms in Canada and the U.S. Aside from fiscal stimulus, infrastructure and work programs, in Canada, that including forgiving Depression-era debt for some provinces, inluding Alberta and Manitoba. Farmers' debts were reduced by half through a Federal Debt Compromise Board, introducing unemployment insurance.

Canada did not have a central bank until 1935, and it played a critical role in putting the Canadian economy back on its feet in the 1930s, 40s and 50s.

There are lots of arguments and explanations about what caused the Great Depression. It followed a massive stock market crash.

The problem with most of them is that they are based in quasi-religious moral ideas about how the economy should function to reward or punish people. They don’t actually describe the workings of the economy, so their solutions don’t work.

One of the way of thinking about financial and market crashes is that the entire economy is a series of deals, with every contract and debt commitment acting like an app that automatically processing money and information, with human beings doing the job of computing it all.

The government and laws provide an operating system, all the businesses and contracts are like apps running on the system, and there’s a point where the system starts to get buggy and crash.

The belief of liquidationists and others is that if you just let the system bottom out, it will come back to balance.

The problem with this belief is basically that the market has broken down, but all those contracts and debt expectations are still in place, even though the money to pay for them isn’t there. So people have all the debt they took on in good times, and it keeps growing even as their purchasing power has collapsed.

What Keynes called “priming the pump” means that governments can inject funds into the economy to stabilize it and get people and businesses working again.

By ensuring that if there is a local collapse in revenues for a jurisdiction, the government can ensure stability and prevent a crisis for provincial governments.

Transfer and equalization payments are an essential part of any country with multiple juridictions that share a currency.

Every successful economic federation - the US, Australia, the UK, and Canada all have transfer payments to different state or provincial governments. National economies can't function without them.

This is a map of transfers within the U.S. Notably, the transfers come from green states, which are often Democratic because they have large cities with concentrations of headquarters - financial, manufacturing, or conglomerates.

In the U.S., some have called it “red state socialism” but really, it’s shouldn’t be politicized.

Transfer payments are essential when you have multiple governments with different concentrations of population, natural resources, infrastructure, access to international markets, and economic activity, all sharing the same currency.

In Canada, provincial governments are incredibly powerful and responsible for considerably more combined spending than the Federal Government. They have many more responsibilities, including health, education, cities and rural municipalities, and much more.

Between juridictions, there are stark differences in access to the tax and other revenues due to whether a jurisdiction has a lot of oil or not. The price of oil specifically is important, because oil is priced in American dollars. The higher the price of oil goes, the more Canadian dollars our non-Canadian customers need to buy, to buy oil which is mostly from Alberta and Saskatchewan. So the Canadian dollar now tends to track the price of oil, which is global.

This means that the booms and busts of the oil economy send shock waves through the rest of the economy, both in good and bad times.

So, transfer payments exist both to reduce the impact of shocks, and to prevent real disasters from happening, A provincial government defaulting on its debt, would be a disaster, not just for citizens and their government, but can pose a “systemic risk” because these events are contagious.

After the oil boom of the 1970s and 1980s ended, cratering the province’s economy, in the 1990s, Saskatchewan was a “have not” province There were discussions that Saskatchewan could default.

So, regional transfer payments are part of the price of having economic sovereignty, which is a government having its own currency.

There are real advantages to economic sovereignty, one of which is that, if there is a crisis that can be solved by money, central banks and national governments will have the financial tools to address it.

And when I say, it can addressed with money, it's because the are people to do the work, technology, resources, and know-how are available. When people say “it’s a matter of political will,” it’s often the “political will” to allocated finances/

It is something that can be done, and the only reason people think it can’t, or won’t work, is because of what is really a financial and political superstition. As Arthur Okun wrote, we shouldn’t confuse the judgment of heaven with the judgment of the market.

What do “have provinces” get from transfers and equalization? Workers, doctors, nurses, engineers in their own province & customers in others.

One of the complaints about transfers and equalization is the implication on the part of “have” provinces that they are sending money to other provinces and therefore that there is no benefit, when not only to people from other provinces move to “have provinces”, they buy products from them as well.

The equalization payments mostly go to provide government services that are, in and of themselves, social investment that results in long-term benefits and wealth. That includes health care, which can result in lives, limbs and abilities being saved, which also allows people can return to work and be productive.

Provinces that receive transfers spend an enormous amount of money on the education and training of young people - K-12 and university, from every discipline. Having been trained at the expense of one province, tens of thousands of people leave “have not” provinces and move to “have provinces.”

At the time transfer payments were created, a politician in Ontario was asked why he supported them, and his response was that it meant he could sell Ontario goods to other provinces. This is exactly what happens. Ontario builds cars and trucks and sells them across Canada. Alberta produces oil and gas and sells it across Canada and to the U.S. Manitoba spends billions of dollars on imported oil and gas from Alberta and Saskatchewan.

It is not an exaggerration to say that taxes for equalization being levied on auto or oil executives are sent to other provinces, where people use that money to buy cars, oil and gas, creating new markets and profits that wouldn’t exist otherwise.

This doesn’t fit the usual explanation, and it certainly seems to contradict people’s theories of how the economy works, but it does work. Transfer payments and equalization payments pay for people to do work. It’s not an income supplement. It pays people’s salaries to do hip replacements, and provide chemotherapy for sick children, and pay police salaries, and run courts, and schools.

So work gets done, value gets created, and the people who paid taxes in the first place get their money back in the form of profits.

It works, and it has to work this way, because when you don’t have transfer payments, economies can collapse.

That is what happened to Greece in 2010.

What happens when you have no transfer payments? The immolation of Greece.

The 2008 Global Financial Crisis was followed by a colossal economic crisis in the EU, because of a problem with the Euro.

It was blamed on Greece and tough measures and austerity cuts were imposed, which proved to be a total disaster. Unemployment for adults rose to 25%, and for youth to 50%, and the economy kept collapsing, shrinking by 30% in just three years, which is a worse contraction than occurred during the Second World War. As Mark Blyth put it, the IMF and European Central Bank did more damage to the Greek Economy than the German occupation.

As international investors circled Greece like vultures, looking to strip the state of productive assets at fire sale prices, 95% of the financial “bailout” packages sent to Greece flowed straight our to pay off their lenders, instead of providing relief and restabilizing the Greek economy.

What was presented as a support package for Greece was actually a massive bailout of investors, who were major European banks in the UK, Germany and France. The same is true of the other “PIIGS” (Portugal, Ireland, Iceland, Greece, and Spain) where the same pattern existed.

Canada, the United States and Mexico have a free trade agreement, and each country still has its own currency. In Europe, they set up a European common market, then created the EU and decided to have a single currency - the Euro.

While the idea of the EU was to create a “United States of Europe” that was not what happened, in a number of very significant ways.

In Europe, they never really created a federal government, because people couldn’t be convinced to give up their political sovereignty. For similar political reasons, despite sharing a currency, countries wouldn’t agree to transfer payments.

Instead, they gave up their monetary sovereignty.

Having your own currency has real drawbacks as well as real benefits. The most fundamental benefit is that a government with its own currency has the power to create it, which can at least address some domestic challenges. Being without a central bank or a “printing press” for money means that in a currency crisis or financial crisis, democratically elected government and institutions have no tools to help citizens, and have to rely entirely on decisions made by foreign actors.

In this case, that was the European Union (EU) the European Central Bank (ECB) and the Imternational Monetary Fund (IMF) were all involved.

Like so many fundamental global policy choices in the last 50 years, the EU was founded in strict opposition to Keynesian principles. The Maastricht Treaty, like many other balanced budget laws around the world, are part of an attempt felt around the world to outlaw Keynesian “countercyclical” economic policies.

The European Central Bank, for its part, was not a real central bank. It was also prohibited from providing assistance to a state in financial crisis - but they could support private investors.

What actually happened in Greece is a grim story of incompetence and wrongdoing on a scale so massive that there are no terms adequate to describe it. We know this because an internal report by the International Monetary Fund (IMF) makes it crystal clear that the economy and people of Greece were deliberately sacrificed in order to save the Euro currency and protect banks in France, Germany and the UK from their own reckless mistakes.

The UK’s Telegraph reported that the IMF’s “top staff misled their own board, made a series of calamitous misjudgments in Greece, became euphoric cheerleaders for the Euro project, ignored warning signs of impending crisis, and collectively failed to grasp an elemental concept of currency theory.”

The IMF’s predictions were routinely terribly wrong.

The conventional wisdom is that the Greeks borrowed and spent too much, were lazy and didn’t collect their taxes enough. A simple problem - living beyond their means got them into trouble, so being forced to tighten their belts would solve it.

Except it wasn’t really true. Are Greeks bad workers? No, actually, they work some of the longest hours in the world - 600 more hours per year than the Germans, because their economy is mostly small businesses, and not large-scale manufacturing.

Did the cuts work? No. They were an economic and humanitarian disaster. In three years, the economy shrank by a third, adult unemployment soared to 25%, and youth unemployment hit 50%. Yaris Varoufakis, the Greek Finance Minister for Syriza, called it “fiscal waterboarding.”

One of the key recommendations in response to the crisis was that the EU should have had transfer payments for Greece - the entire crisis could have been avoided - including the failed cuts and austerity, as well as the bailouts for creditors.

Those are all the reasons that transfers and equalization both matter. The fact that it’s an ongoing payment is a reflection of the fact that the one of the prices we pay for having a lot of oil in a few provinces, which makes people lots of money, is that it distorts the economy for other kinds of business, and, the reality is that when it comes to oil, the richer folks in oil are, the poorer the rest of us are.

And that is the final point to be made about this. This entire argument - which, as I have pointed out, is based on pitting Canadians in different provinces against each other, to the benefit of some of the the wealthiest Canadians in Canada, is being pushed by politicians who get money from the oil industry.

That’s true of the governments of BC, Alberta and Saskatchewan,

And here’s the thing that really needs to be said about the economic suffering that Canadians are going through, and that is that in the last few years, oil companies hiked prices and raked in well over $150-billion in new profits, at all of our expense.

“US oil companies worked with OPEC to drive up the price of oil.

The impact was incredible, as Matt Stoller writes - it caused 27% of all inflation increases in 2021 in the U.S.. According to Stoller,

“The jump in profits in 2021 was about [US] $730 billion, or $2,100 per person.”

It also had a huge impact on energy prices and inflaton in Canada.

“Scott Sheffield, founder and longtime CEO of a leading American oil producer, attempted to collude with OPEC and its allies to inflate prices, federal regulators alleged on Thursday.

The Federal Trade Commission said Sheffield, then CEO of Pioneer Natural Resources, exchanged hundreds of text messages discussing pricing, production and oil market dynamics with officials at the Organization of the Petroleum Exporting Countries, or OPEC, the oil cartel led by Saudi Arabia.

Regulators say Sheffield used WhatsApp conversations, in-person meetings and public statements to try to “align oil production” in the Permian Basin in Texas with that of OPEC and OPEC+, the wider group that includes Russia.”

There is no evidence and there have been no allegations that Canada’s oil industry was price fixing, but the same high prices and record profits happened here, too. So did the lack of reinvestment in production - which would create jobs, but would lower the price and lower profits. The companies wouldn’t lose money, because they would still have tens of billions of dollars in profit. It’s just that it would be less.

Canada’s oil industry revenue was:

• $93.7 billion in 2020

• $174.0 billion in 2021 (increase of 87.5%)

• $269.9 billion in 2022 (increase of 49.0%)

That is an increase of $176.2-billion in profit-taking over two years - an amount equivalent to about one-third of the entire federal budget in 2024.

With a population of 40 million, that is an increased cost to each Canadian of CAN $4,405 per person over two years.

That’s where the money behind this attack on equalization is coming from - from politicians funded by oil companies who have been jacking up prices and not investing back in the economy.

It’s not about fairness, it’s about people whose short term greed will lead them to undermine or destroy a safeguard that was put in place after a financial disaster swept the country, and no one knew how to fix it, but people learned that you need transfer payments to make a country work, because when you don’t have them, it causes financial and economic disaster that people do not know how to build back from.

Financial disasters happen because people start surfing a wave of excitement and money that’s depending on growth coming from people taking out bigger and bigger loans. There’s a limit, and when it’s reached and no one can figure out how to get out of it, it’s because we are all, individually and collectively, in the exact mental state of a cat that has climbed a tree way too high and has no idea how to get down.

There is lots of real financial suffering across Canada right now. I’m 55 and in many ways, I have never seen it worse, and the reason it’s happening, and not changing, is that we’re being conned by fake-populist propaganda about equalization, which are based on what amounts to economic superstition.

The fact is that Premiers in Canada are signing on to yet another campaign that fundamentally misleads people about the way this country works. In the structure of the Canadian economy and federation, payments, including equalization, are a supporting wall, and if you tear them down, it will collapse, and a lot of people wil be hurt.

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