Published on May 11, 2016

Professor Richard Schultz, who heads McGill University’s political science department, wrote a very interesting analysis of the reforms that I accomplished in the telecommunications sector as Canadian minister of Industry. This analysis makes up a chapter in the book How Ottawa Spends 2008-2009: A More Orderly Federalism? The Financial Post ran an excerpt of this document in its May 29, 2008 edition, which is reprinted below. The quotation refers to the British Comedy series Yes Minister. — 14 April 2009

Maxime Bernier: the ‘yes’ minister

Financial Post May 29, 2008

McGill professor Richard Schultz says that as industry minister, Maxime Bernier courageously took on telecom bureaucrats and won major victories for market reforms of Canadian telecommunications.

By Richard Schultz

That would be courageous, Minister, very courageous.
– Sir Humphrey Appleby, Yes Minister

Over the past 40 years, telecommunications has largely been neglected by elected policy-makers. For the most part, the industry has been bureaucratically shaped while politicians have played only a supporting role for decisions made by others. This is true even for the 1993 Telecommunications Act which did not substantially affect the policy directions pursued by the CRTC ever since it gained jurisdiction over telecommunications in 1976.

This political-bureaucratic dynamic dramatically changed with the election of the Conservatives in 2006, particularly with the appointment of Maxime Bernier as minister of industry. Telecommunications was not one of the vaunted five priorities of the new government. But in one of his first appearances as minister, Bernier made it clear that he had his own agenda: “As many of you may know, our new government has five priorities, but I can assure you that telecommunications is at the top of my action list.”

Over the next year, Bernier succeeded in fundamentally changing two major decisions of the CRTC through the appeal process and imposing a policy direction on the CRTC, the first since Cabinet was authorized to do so under 1993 legislation. These initiatives represented the most profound policy changes to the regulatory regime since the introduction of competition in 1979. They also established, for the first time, that elected authorities, not appointed officials, were responsible for setting policy.

Bernier was able to overcome both Cabinet and PMO doubts and determined opposition from both his departmental officials and those in the Privy Council Office. For the first time in the past 40 years of federal regulation of telecommunications, a minister had made a policy difference. The major direction Cabinet sent to the CRTC substantially re-interpreted the policy objectives of the Telecommunications Act. The regulator was ordered to give market forces primacy in its regulatory decisions which was a fundamental re-ordering of the objectives of telecommunications regulation.

There is no evidence that Maxime Bernier came to the position of industry minister with any prior knowledge of telecommunications or with any agenda for the sector. What he did bring was a philosophical outlook that would allow him to adopt, and aggressively pursue, an interrelated set of policy prescriptions for telecommunications.

In Bernier’s case, his sense of mission was clearly ideologically inspired. He is a staunch advocate of free market principles. In his first speeches as a minister, Bernier emphasized that he saw himself as a defender of economic freedom and open competition who embraced “the spirit of entrepreneurship and all it stands for – individual freedom, self-reliance, responsibility and autonomy.” In his first speech on telecommunications, Bernier signalled the importance of his principles: “I came to this portfolio from the private sector with a strong appreciation for the benefits of markets and their ability to deliver results.”

Bernier faced a formidable opponent to his agenda: the Canadian Radio-television and Telecommunications Commission (CRTC). Since acquiring jurisdiction over telecommunications in 1976, the CRTC had become the dominant force in shaping telecommunications regulatory policy. Without any overt political direction or guidance, for example, it had radically redefined legislative provisions dating from 1906 to permit competition in the terminal equipment and long distance telecommunications markets.

The only direct political intervention in the telecommunications regulatory system was the Telecommunications Act. It empowered the CRTC to forbear, or conditionally refrain, from exercising its powers to regulate rates and other aspects of market behaviour. Second, it permitted the CRTC to develop alternative methods for regulating telecommunications other than relying on traditional rate of return methods. Third, it gave the Cabinet authority to issue policy direction to the commission.

Bernier’s role in changing the CRTC came in the battle over VOIP – Voice over Internet Protocol – and forbearance of local telephone regulation. In March, 2006, a Liberal-appointed review panel reported with a recommendation that “market forces should be relied upon to the maximum extent feasible as the means to achieving Canada’s telecommunications policy objectives.” The panel was particularly critical of the CRTC.

The panel report would become crucial to Bernier’s overthrow of CRTC policy. In May, 2005, the CRTC had announced the rules that would be imposed on VOIP services. It rejected the major telcos’ position that VOIP services were revolutionary new services which should not be regulated through tariff approval and other requirements. The CRTC adopted the opposite view that such services, rather than being novel, simply marked “another step in the evolution of telecommunications networks” and were not a substitute for primary local exchange services.

The CRTC said it would continue to regulate the prices and service conditions for such services offered by the telcos but forebear from regulating new entrants and resellers on the grounds that they did not have any market power. This would give the cable companies especially a very significant competitive advantage. Included in the regulatory rules were the so-called “winback rules” which prohibited a telco from initiating contact with a residential customer which it had lost to a competitor. These rules would supposedly prevent anti-competitive behaviour by the telcos before a market had “matured.”

Less than two months after the CRTC’s decision, the telcos appealed to the Cabinet. The Liberal government declined to take up the case. And so, following the Conservative assumption of power, Bernier inherited the CRTC policy issue.

Weeks after Bernier’s appointment, he had lunch with members of the Telecom Policy Review Panel as well as departmental officials to discuss among other matters the VOIP appeal. Departmental officials discouraged Bernier from entertaining it, saying it “would be too technical and difficult” to explain to other Cabinet ministers why they should take the extremely unusual and politically risky step of overturning a CRTC decision. Review panel members, however, said the central issue was not how complex the matter was but that VOIP was exactly the type of novel breakthrough technology that should not be regulated by anything other than market forces.

Over the objections of his officials, Bernier supported the appeal but only to the extent of persuading Cabinet, in May, 2006, to send the decision back to the CRTC for reconsideration. Just in case the CRTC did not “get” the message, in June, 2006, Bernier announced that Cabinet was prepared to employ for the first time the power to issue a policy direction to the CRTC. The CRTC appeared to ignore the Cabinet. Bernier viewed the CRTC’s lack of response as an arrogant and wilful dismissal of political policy direction. Convinced that this was evidence that the CRTC was out of control and “did not get it,” Bernier easily persuaded his Cabinet colleagues that a Liberal-appointed commission was not sympathetic to the “new” government’s policy direction in telecommunications.

Consequently, on Dec. 14, 2006, Cabinet issued an order directing the CRTC to implement the revised telecommunications policy objectives. Bernier had won again, ignoring or overriding the advice of his officials, and the CRTC had lost again. But he was not finished. He would encounter the most strenuous opposition, not just from some industry players, his own officials and the CRTC, but from the most senior levels of the government in both the Prime Minister’s Office and the Privy Council Office.

In April, 2006, in a decision closely linked to the VOIP decision, the CRTC had issued its decision setting out how and when it would forbear from regulating the incumbent telcos providing local retail exchange services. It effectively said the CRTC would only forebear from regulating the telcos under certain conditions. They would also be subject to restrictions on their ability to “winback” lost customers. The telcos immediately appealed.

Bernier took up this case, and waged the most controversial of his telecom battles. Departmental officials felt that he was going too far in his attempt to impose his vision on the CRTC. According to several sources, Bernier in turn complained that his own Cabinet memos were rewritten in ways that undercut his arguments. On several occasions he was told that Cabinet did not have the legal authority to pursue his plan. He overcame that argument by obtaining independent legal opinions from outside the department. When Bernier persisted, departmental officials, according to several sources, then sought external support, primarily from the Privy Council Office to defeat their minister.

As a key decision date approached, Ottawa witnessed a bureaucratic coincidence worthy of Yes Minister. On March 27, just nine days before the deadline, the CRTC announced that it would forbear from regulating TELUS’ local service offerings in Fort McMurray, Alta. Although he did not take part in the decision, Konrad von Finckenstein, the new chair, declared in the accompanying press release that the “decision reflects our commitment to act quickly to bring the benefits of competition to Canadians.”

Cabinet was meeting that same day to take its decision on Bernier’s requested order. For the relevant PCO and PMO officers, here was sufficient proof that the CRTC did indeed finally “get it.” Bernier went to the Cabinet meeting only to discover that his item, approval of the Cabinet order, had been lifted from the agenda. Bernier was not yet prepared to concede defeat. He ordered his political staff to contact senior Bell and TELUS officers to tell them that, unless they were able to give him some help quickly, the order was doomed and the decision would stand. Both companies immediately issued press releases critical of the CRTC’s decision. TELUS said that it was “extremely disappointed” because it said that “the conditions for deregulation they set out are unattainable in any practical sense and . their decision runs entirely contrary to the government’s direction.”

In another coincidence, Bernier had a pre-arranged meeting with Prime Minister Harper that afternoon. Armed with the two press releases, he persuaded the Prime Minister that the need for the order amending the CRTC decision was in fact as strong as ever. As a consequence, Harper instructed officials in both the PMO and the PCO that, unless they had substantive problems with the order, he was authorizing Bernier to announce that the government was varying the CRTC’s decision.

On April 4, one day before the legal deadline, Bernier made the announcement that the Cabinet had opted to rewrite fundamentally the CRTC’s original decision and invited the telcos to file for forbearance in a number of major urban markets. This order was undoubtedly the most comprehensive variance of a CRTC decision.

Three weeks after the Cabinet order, the new CRTC chair said, “the message is clear: the government wants to move quickly toward more reliance on market forces in telecom services, less regulation and smarter regulation. I welcome the clarity and I welcome the variation order.” Thus concluded the 12-month series of battles that had been fought following the appointment of Maxime Bernier as minister of industry, battles that the minister had clearly won.

Unfortunately, we will never know whether he would have been able to deliver on the other components of the action plan developed by the Telecom Policy Review Panel because, after little more than a year-and-a-half as industry minister, Bernier was “rewarded” for his performance by being promoted to minister of foreign affairs. But in the short time he was industry minister, he decidedly made a difference that other ministers, past and present, can only envy.

**********

Richard Schultz is James McGill Professor and Chair, Department of Political Science, McGill University. This article is adapted from Telecommunications Policy: What a Difference a Minister Can Make, in How Ottawa Spends: 2008-2009, just published by McGill-Queen’s University Press.

Published on May 11, 2016

On June 13, 2007, I again was invited to address the Canadian Telecom Summit in Toronto as Industry minister. I reminded the audience of the reforms adopted over the preceding year and mostly discussed the reforms to come in the management of the frequency spectrum, a crucial element for the telecom industry. My transfer to the Foreign Affairs department two months later unfortunately prevented me from going forward with these plans. — 14 April 2009

A lot has happened in telecommunications policy since last June.

When I was here a year ago, I told you I wanted to modernize the way the telecom industry is regulated. I told you I had just tabled a proposed policy direction to the Canadian Radio-television and Telecommunications Commission (CRTC). We wanted the CRTC to rely on market forces to the maximum extent possible, and to regulate services only when necessary.

I told you this was the first step in a series of telecommunications policy changes. I was also examining two CRTC decisions – one on local telephone markets and another on Voice over Internet Protocol.

These decisions I believed were not consistent with the market-based approach that will make your industry stronger – an approach that guarantees there will be more competition among providers, and that consumers will get a bigger telecom bang for their buck.

Today, one year later, I am here to say that the policy direction is in force. Access-independent VoIP services were deregulated in the fall. In April, we abolished the regulations restricting telephone companies from offering promotions and calling back their former customers to offer them a better deal. These types of restrictions do not help competition and should not exist in a market-based economy.

Also in April, the criteria for deregulating local telephone markets were streamlined. This means that consumers in major urban markets such as Toronto will benefit sooner from the impact of competition in the marketplace, potentially bringing lower prices and better choice. And the CRTC has also recently announced that it is re-examining its existing regulations in light of the policy direction.

I am very proud of these accomplishments. They have reduced the burden of regulation on the industry. And they will benefit businesses and consumers!

I told you what Canada’s New Government would do. We acted. Today, one year later, I can say: mission accomplished! Now, with your continued support and advice, our government intends to move forward and make more changes to telecommunications policy that will benefit Canadians.

This year, we want to concentrate on another central aspect of the telecommunications industry – spectrum. Or, more precisely, the portion of spectrum – radio frequencies – that is the basis for wireless transmission.

Unfortunately, most people are unaware of the importance of spectrum. The media rarely mention it. But you and I know it: the broadcasting industry would not exist without spectrum. And the telecommunications industry would be much smaller.

When I was a kid, we used to play with walkie-talkies. Today, cellphones are not merely toys – they are widely used in everyday life. It is the fastest-growing sector in the Canadian telecommunications market.

But spectrum is not just about cellphones. New applications are being developed and commercialized every year.

High-tech cars today come with satellite navigation systems, and this requires spectrum. Farmland irrigation systems are being switched on and off remotely, which requires spectrum. Bank cards and public transit passes will soon be able to communicate by using spectrum.

The wireless transmission of energy is being developed. Imagine how revolutionary it would be if we did not need wires to transmit power. There are dozens of other examples of wireless communication between people and machines.

Wireless technology is like the electrical grid. At first, it was used mainly for lighting. Since then, all kinds of new electrical devices have been invented and connected to the wireline electrical network: ovens and refrigerators, hair dryers and washing machines. As new devices are invented that communicate wirelessly using spectrum, they too will reshape society in unpredictable ways.

This is why we must have an effective spectrum policy. The next wave of innovation depends on spectrum. Countries that have flexible spectrum policies will attract innovators, researchers and investments. Their citizens will have faster access to all these new products. Countries that slow down the adoption of technologies, or inhibit market forces, will fall behind.

The most critical role of government is to allocate spectrum in a timely and efficient manner.

This week, I approved a new spectrum policy framework. It will be officially published in the Canada Gazette on June 16. It will guide Industry Canada in managing spectrum more efficiently. This means that service providers who need spectrum will have easier access to it. It will foster innovation. And ultimately, consumers will have better telephone, Internet and television services.

The framework provides a small set of concise and clear guidelines, starting with:

�”market forces should be relied upon to the maximum extent feasible”; and
�”regulatory measures, when required, should be minimally intrusive.”

You will recognize here some similarities with the policy direction to the CRTC!

To put Canada at the forefront of wireless innovation, however, we need to go further. In its report last year, the Telecom Policy Review Panel called for, among other things:

�the establishment of market-based exclusive spectrum rights, which means an ability to buy, sell and lease spectrum holdings; and
�the elimination of barriers to the development of secondary markets in spectrum.

A sizeable body of economic, legal and technical literature considers that this would bring significant improvements in economic efficiency and innovation. I want to look at best practices around the globe. I want to know how we can adapt and improve our current practices.

This is why I have initiated a study of market-based exclusive spectrum rights. A group of experts with an international reputation in this field has been awarded the job. It is headed by Mr. Martin Cave, a British expert in spectrum policy who has been responsible for important reforms in that country. There is also a Canadian, Mr. Robert Jones. He has worked for 30 years in the field of spectrum here and on the international scene.

They will report to me in two months. I hope this will launch a lively debate.

Spectrum is a technical matter. But we’re making decisions that have important consequences for Canadians in their daily lives.

Earlier today, I announced that 12 new orbital positions have been made available to two Canadian satellite operators, Ciel Satellite and Telesat Canada. These new orbital positions are necessary in particular to better serve the customers of satellite television services. They are also needed to provide faster and more accessible broadband services in northern and remote communities.

Awarding these new licences will bring all the benefits of competition, including increased product and service offerings, choice in supplier, and competitive prices. That will benefit Canadians for years to come.

Let’s talk a bit more about television. Last month, the CRTC established August 31, 2011, as the deadline for the transition from analogue to digital television.

Digital TV is more efficient and uses less spectrum than analogue TV. It means that spectrum will become available for other uses. And so today, I am pleased to announce that this spectrum will become available for the industry in four years.

As in the U. S., channels 52 to 69 will be moved to lower frequencies, freeing up the 700-megahertz band. Four of these channels will be used for public safety. The others will be allocated for new services, including:

�advanced mobile;
�wireless broadband; and
�broadcasting.

I know that there is already strong interest in this spectrum. In the coming months, we will start laying the groundwork for its allocation. Stay tuned!

Finally, as you know, other important decisions must soon be made regarding spectrum allocation. They are related to the spectrum auction for advanced wireless services, to be held in early 2008. There are consultations now taking place to determine the auction rules.

As I said earlier, Canadians usually never hear about spectrum issues in the news. But looking at the press coverage for this auction, some of you must have been working overtime!

I note with interest that there is a debate about the amount of competition in the cellphone sector. A good debate includes opposing views and new ideas.

There are those who say we need specific measures to allow new players into the cellphone business to guarantee more competition. Others say there is a lot of competition already, and the rules should be the same for everybody. And there are also those who believe another way to stimulate more competition is by removing foreign investment restrictions. I’m glad to see that everybody takes for granted that competition is a good thing!

You know, every few years, we witness a new revolution in the telecommunications industry. Today, we are on the brink of a wireless revolution. Digital and wireless technologies are merging to create something new – something that will impact all aspects of our economy and our daily life.

As Minister of Industry, I want to make sure that you can develop your vision and plans. I want to make sure that you can seize all these exciting opportunities. My job is to create the best possible policy environment for business to thrive – and that in the end Canadians consumers are well served.

I hope to come back again next year to share with you more fascinating developments, and to report on all the policy improvements our government has made.

Published on May 11, 2016

On January 20, 2009, I was invited by the St-Georges Chamber of commerce to offer my reflections on the economic crisis. This is the English translation of my presentation, which you can also watch (in French) on this video. — 18 April 2009

I have always been fascinated by economics: how to help our fellow citizens realize their dreams, build better lives and, by the same token, a better world for all of us.

The past few months have given me more time to take a closer look at this current economic crisis. Today, I would like to share my reflections with you.

Between 2001 and 2004, in the wake of the dotcom crash, in order to stimulate the economy, the Federal Reserve pushed down interest rates to as low as 1%. If you factor in the level of inflation, real interest rates were negative.

What happens when central banks maintain artificially low interest rates? Ultimately, people are encouraged to save less, because the return on savings is lower. Furthermore, they are more prone to accumulate debt, because credit is easier and cheaper to obtain.

It basically came down to subsidizing people to borrow. But we all know this lesson: you cannot live on just your credit card for very long! This is precisely what has been going on in Canada, in the United States and elsewhere in the world for the past 20 years.

For example, in Canada, in 1990, the ratio of total debt to disposable income for Canadian families was 90%. Today, this ratio has surged to 130%. In 1990, Canadian families saved about 10% of their disposable income. Today, their savings rate is down to 1%.

Some people felt comfortable with this situation because they believed that their debts would eventually balance out as the value of their assets continued to grow. More specifically, this belief was driven by the rising price of homes since the late 1990s and the increasing value of retirement nest eggs.

But with the decline of the real estate market and recent crash in the stock market, we now know that this was a monetary illusion.

In the United States, this bubble was made bigger by the policies of the US government. It encouraged banks to extend risky mortgages to insolvent borrowers; and pushed people to take up mortgages to buy houses that they could not really afford. All of which contributed to an unsustainable increase in house prices of 10 to 15% per year.

In 2006, 22% of all new mortgage loans in the US were subprime. You’ve heard the rest of the story. These mortgage loans were securitized and then sold on the market around the world. Financial institutions who bought these investments stumbled when home owners started to default and house prices went down.

One of the reasons, this financial crisis turned into international economic crisis because these securitized loans were sold on the global market.

Now, what should we do to get out of this crisis?

Everybody agrees that we must inject money in our roads, bridges, tunnels, and other infrastructures after decades of non investment.

We hear a lot about artificially sustaining demand by injecting even more money into the economy. But where do you find the money to inject into the economy? It’s not falling from the sky.

The money has to come from somewhere else in the economy. In effect, it is all about taking money from some and giving it to others. It’s like taking a bucket of water in the deep end of a swimming pool and emptying it in the shallow end.

A government cannot inject money in the economy unless it has first extracted it from the private sector through taxes; or put us further into debt by borrowing the money.

We are also being told by some commentators to continue to shop till we drop in order to kick-start the economy. In these uncertain times, when many could lose their jobs, this amounts to urging people to be irresponsible.

This approach tells us that the more we consume, the richer we get. But the truth is exactly the opposite. The richer we are, the more stuff we can buy! And you get rich by working, by saving and investing real resources, and by becoming more productive. There are no other ways.

There have been many examples of excessive government intervention. Roosevelt prolonged the Great Depression by a decade with his ultra interventionist policies. The Japanese also implemented such policies after their real estate bubble burst in the late 1980s.

They voted in huge spending packages and the Japanese central bank kept interest rates at 0% for several years. It did not work.

The only tangible result is that Japan went from the country with the smallest debt in the G7 in 1995 to the country with the largest debt today. And, 20 years later, its economy is still in crisis.

So, the only thing more dangerous than this economic crisis may be our way of responding to it. If we intervene too much or in an inappropriate manner, we could very well aggravate and prolong the crisis

We need to permanently reduce the tax burden on individuals and businesses to allow them to better cope with the situation and get through the crisis. Because people know better than any politicians and bureaucrats in Ottawa what to do with their money

Reducing taxes is exactly what our government has been doing, since 2006. New specific tax reduction measures took effect this January 1st: the tax free savings account, the increase in the basic personal amount to $10,100 and the reduction of the general corporate income tax rate to 19%.

Thanks to these tax cuts and others that have already been implemented, we will pay 31 billion dollars less in taxes than expected in 2009-2010.

As you know, the opposition parties are threatening to defeat our government if the upcoming budget does not contain an ambitious spending package.

When the opposition parties declare that we must resolve the crisis by spending an enormous amount of money, they, in effect, are saying that the solution to the crisis is to increase our taxes and our debt.

However, considering the current political climate, and because we are a minority government, we will obviously need to make compromises.

Yet, we need to stay focused on the fundamental principles that have been tried and tested: responsible finances and free markets. It is only by fighting for these values that will find our way back to prosperity, and safeguard our children’s future.

Published on May 11, 2016

On January 22, 2009, I was invited by the Calgary Chamber of Commerce to give a speech on the causes and solutions to the economic crisis.  — 20 April 2009

Published on May 11, 2016

On February 10, 2009, the governor of the Bank of Canada, Mr Mark Carney, appeared before the Standing Committee on Finance, on which I sit, to discuss the state of the economies of Canada and the rest of the world. I asked him a question on the nature of inflation and the inflation target of the Bank of Canada. You can watch this exchange (in English) on the following video clip or read the adapted transcript below. — 21 April 2009

Maxime Bernier: You said in a speech two weeks ago in Halifax, and I quote:

… monetary policy is concerned with how much money circulates in the economy, and what that money is worth. The single, most direct contribution that monetary policy can make to sound economic performance is to provide Canadians with confidence that their money will retain its purchasing power.

At the same time, you spoke about the inflation target of 2%, which you called the cornerstone of the bank’s monetary policy framework.

I’m wondering how money can retain its purchasing power when it loses it by 2% every year. An inflation rate of 2% per year may seem small, but ultimately when you add up 2% depreciation of the monetary unit year after year, you end up with big numbers.

I went to the Bank of Canada website and I used the inflation calculator you provide there to see how much value our dollar has lost over the past few years. Let’s take 1990 as a reference point. It is not that long ago, but from 1990 to today, inflation in Canada adds up to 42%. This means that our dollar can now buy the equivalent of only 70¢ compared to 19 years ago.

The fundamental cause of price inflation is that the money supply is continually increasing. We get price inflation because we first have monetary inflation. The more money there is, the more likely it is that overall prices rise and that our dollar will lose its purchasing power.

I also saw on your website that M1, which is one definition of the monetary supply, has increased by 6% to 12% annually over the past 12 years. That’s a lot more than the growth rate of our economy. This inflation eats away at the income of every Canadian and it reduces the value of their savings. When your colleague at the Federal Reserve, Mr. Bernanke, appeared before a congressional committee on July 16, 2008, he said that inflation is a tax because people are forced to pay more for the goods and services they buy.

I would like to ask you two questions. The first is whether you agree with the chairman of the Federal Reserve that inflation is a tax. My second question has to do with the 2% inflation target. This implies a very large depreciation of our currency over the years. I wonder why the target is 2% and not a 0% target that will allow a complete preservation of the dollar’s purchasing power. I understand that this target is fixed in agreement with the finance department and that you cannot simply decide to change it on your own, but I would like to have your opinion. As an economist, do you think a 0% inflation target would have more advantages, and if not, why not?

Mark Carney: You’ve been busy, Monsieur Bernier!

I’ll mention a couple of things very rapidly; we can have a deeper discussion later.

First, as you referenced, there’s a very clear accountability framework for the Bank of Canada. The 2% inflation target is an agreement with the Government of Canada. It runs through 2011, and I would say that since the inception of that agreement in the early 1990s, inflation in Canada, as it’s tracked, has averaged exactly on that 2%. So the agreement has been fulfilled. It’s important in times like this, where there are some disinflationary pressures, that Canadians have the confidence that inflation will be at that. Those expectations remain.

Let me make a very important point in the current environment. The fact that Canadians can expect, in the medium term, that inflation will be at 2% helps to bring negative real interest rates at very low interest rates at the moment. But I absolutely agree that your calculations are correct: they’re based on our calculator, so they’d better be correct. This is a political economy decision. We’re doing a lot of research on this, whether it would be better to have a lower target. We will come back to this committee to discuss that research at the appropriate time.

You used depreciation of the currency, and the one thing I want to flag on that is that what is relevant for exports and competitiveness is the real effective exchange rate, which is a product of where the actual headline nominal exchange rate is, and relative inflation rates in countries. So it matters what the inflation rate is in, say, the U. S. relative to Canada.

The last point I’d like to make is on M1 growth in Canada. What’s important in this time of crisis–and always important–is the relationship between the narrow monetary aggregates and the broader monetary aggregates. What you’re seeing in a variety of other countries is that the velocity of money has shrunk and so the broader monetary aggregates–the credit aggregates–are not growing, even though the monetary base is growing. The issue is to repair those linkages in Canada. You still have a more stable relationship and it’s relevant to Monsieur Mulcair’s question in terms of the medium term.

My last point is that one thing that has turned in the last month or so is that M1 growth is now above nominal GDP growth globally, which is normally a precursor of expansion.

Published on May 11, 2016

On April 3, 2009, I was a panelist at the third Annual Student Conference on Business Research held at HEC Montreal on the topic of “The Financial Crisis: What’s Coming Tomorrow?”. This is the English translation of my presentation. It is a slightly modified version of the speech I gave in St-Georges-de-Beauce and Calgary this past January. — 22 April 2009

How to react to the economic crisis? A presentation at HEC Montreal

Economics has always been my favourite topic of interest: how to help our compatriots to realize their dreams and to better their lives and, by doing so, to make a better world for all of us. 

Today, I would like to discuss this crisis with you. I wish in particular to bring your attention to the monetary policies of central banks. Because they play a crucial role in the current crisis.

My thinking on this issue has been inspired by the great economist Friedrich Hayek, who received the Nobel Prize for economics in 1974 and passed away in 1992.

He and his colleagues – who belong to what we call the Austrian school of economics – have for many decades warned us about the adverse consequences of central banks manipulating the money supply.

Central banks are continually increasing the quantity of money that is circulating in the economy. In Canada for example, if we use the strictest definition of money supply, it has increased by 6 to 12% annually during the past dozen years. The situation is about the same everywhere.

The consequences of constantly creating new money out of thin air have been a dramatic increase in prices and a debasement of our money. The faster the quantity of money increases, the higher will the inflation level be and the larger the reduction in the purchasing power of each dollar.

An inflation rate of 2% a year may seem small. But when you add up 2% of depreciation of the monetary unit year after year, you end up with large numbers. Total inflation in Canada from 1990 to today adds up to 42%. This means that your dollar can now buy the equivalent of only 70 cents if you compare it to 19 years ago.

This inflation eats away at our revenues and our financial holdings. It is the equivalent of a hidden tax.

Besides pushing prices up, what happens when central banks maintain artificially low interest rates? That is, rates that are lower than the natural rate of interest, which should balance the supply of voluntary savings and the demand for investment funds?

Well, what happens is that people are encouraged to save less, because the returns on savings are lower. And they are led to carry more debt, because credit is easier to obtain.

This is precisely what we have been doing in Canada, in the U. S. and elsewhere in the world for the past 20 years. In 1990, the ratio of total debt to disposable income for Canadian families was 90%. Today, this ratio has gone up to 130%.

In 1990, Canadian families used to save about 10% of their disposable income. Today, their savings rate is down to 1%.

Many people thought that there was no problem there because the assets of Canadians would continue to grow to compensate for these larger debts. In particular because house prices had been going up since the late 1990s, and because funds set aside for retirement were increasing in value. But with the slowing down of the real estate market and the stock market crash, we now know that this too was a monetary illusion.

Which brings us to another consequence of monetary manipulations which has the effect of wrecking the economy: the creation of artificial booms followed by busts and recessions.

Remember: we had the dotcom bubble at the end of the 1990s. And now we’re experiencing the burst of the real estate and financial bubble that followed.

Between 2001 and 2004, in order to stimulate the economy after the dotcom crash, the Federal Reserve pushed down interest rates to as low as 1%. If you factor in the level of inflation, real interest rates were negative. This is the same as subsidizing people to encourage them to take loans. But we all know this lesson: you cannot live on a credit card for very long!

This bubble was made bigger by the policies of the U. S. government. It encouraged banks to extend risky mortgages to insolvent borrowers; and it encouraged people to take up these mortgages and buy houses that they could not really afford. All of which contributed to an unsustainable increase in house prices of 10 to 15% per year.

In 2006, 22% of all new mortgage loans in the U. S. were subprime.

You’ve heard the rest of the story. These mortgage loans were securitized and then sold on the market around the world. And the financial institutions that had bought them got into trouble when home owners started to default and home prices went down.

Another reason why this financial crisis reached global proportions is that central banks elsewhere in the world have had more of less the same expansionist monetary policies as the Fed. We got to a point where there was too much money and credit available, and these funds were invested in too risky and unprofitable places.

Economic downtowns are always preceded by an inflationist boom. The Great Depression happened at the end of the “Roaring Twenties.” By allowing the creation of gigantic quantities of money, central banks are responsible for these inflationist booms and for the following crisis.

Now, what should we do to get out of this crisis?

We hear a lot about artificially sustaining demand by injecting even more money into the economy. That’s the Keynesian solution.

But if you inject resources in the economy, where do you take them? They’re not falling from the sky. They have to come from somewhere else in the economy. In effect, you take resources from some and you give them to others. It’s like taking a bucket of water in the deep end of a swimming pool and emptying it in the shallow end.

A government cannot inject resources in the economy unless it has first extracted them from the private sector through taxes; or put us further into debt by borrowing the money; or stimulated inflation by printing it.

We are also being told by some commentators to continue to shop till we drop in order to kick-start the economy. In these uncertain times, when many could lose their jobs, this amounts to inciting people to be irresponsible.

In any case, isn’t this exactly what we’ve just been through? A time when monetary policies were encouraging us to go into debt and live above our means?

This is based on the belief that the more we consume, the richer we get, when the reverse is true: the richer we are, the more stuff we can buy! And you get rich by working, by saving and investing real resources, and by becoming more productive. There are no other ways.

Roosevelt prolonged the Great Depression for a decade with his very interventionist policies.

The Japanese also had recourse to such policies after their real estate bubble burst in the late 1980s. They voted gigantic stimulus packages and the Japanese central bank kept interest rates at 0% for several years. It did not work. The only apparent result is that Japan went from the country with the smallest debt in the G7 in 1995 to the country with the largest debt today. And its economy is still in crisis 20 years later.

The only thing more dangerous than this economic crisis may be our way of responding to it. If we intervene too much or in an appropriate manner, we run the risk of worsening and prolonging the crisis. The best thing to do is to stay focused on the fundamental principles that have been tried and tested: sound money, responsible finances and free markets. We will only find our way back to prosperity, and guarantee the future of our children, if we continue to fight for these values.

Thank you.

Published on May 11, 2016

On April 28, 2009, the governor of the Bank of Canada, Mr Mark Carney, and the senior deputy governor, Mr Paul Jenkins, appeared before the Standing Committee on Finance, on which I sit, to discuss the Bank’s interventions in dealing with the economic crisis. I asked them a question on quantitative easing, which is the method used by the Bank to increase the money supply when interest rates are close to zero. You can also watch this exchange on the following video clip (mostly in French) or read the adapted transcription below. — 5 May 2009

Maxime Bernier: In the annex to your Monetary Policy Report, which you tabled last week, you explain how the Bank of Canada will proceed with what the experts call quantitative easing or, in other words, how it will increase the amount of credit in the economy. You traditionally do that by buying treasury bills.

In the context of this exceptional measure, you could also do so by buying financial assets from the private sector, that is to say the shares or bonds of individual private businesses. The bank will buy those assets by creating money out of nothing.

I must first tell you to what extent this practice of creating money out of nothing and artificially inflating credit troubles me. The inflationary theories of Keynes have been discredited for a number of decades. However, you’d think everyone has suddenly become a Keynesian. If creating new money and inflating credit could really stimulate growth, there would never be recessions or economic slowdowns.

In fact, a number of economists believe that excessive money creation caused this crisis. Excessively easy credit during most of this decade purportedly caused bubbles, particularly in the finance and real estate sectors. A recession occurs when those bubbles burst and the economy has to readjust. If it was easy credit that caused the bubbles and the crisis, I would like to understand how we can hope to get out of the crisis by further increasing credit. By doing that, don’t we risk further distorting the economy?

Some say that quantitative easing is now the path to take, since it is practised at most other central banks of the major countries. However, if Canada experiences a less severe crisis because its monetary policy is more conservative and more prudent than those of its partners, it seems to me that doing the same thing as the others is not necessarily the best option.

Mr. Carney, in your report, you admit that purchasing private assets will increase their prices and that that will be done in a neutral manner with respect to sectors and assets of a similar nature. How can you remain neutral, when there are thousands of different financial assets in various sectors? Isn’t the bank running the risk of putting itself in a position where it will favour certain sectors or businesses over others?

Mark Carney: Thank you for your question. First, I would like to emphasize a few points. The objective of these transactions would be… I’m using the conditional for a reason. This isn’t the Bank of Canada’s plan, but it is one card up our sleeve, only in the event it becomes necessary to promote greater monetary easing as a result of a negative shock. We would have options, such as easing credit rules. The purpose of these transactions is to improve financial conditions, credit conditions across Canada as a whole.

As regards neutrality with respect to similar sectors, we can use adjudication, for example. That is one way to be neutral with respect to certain sectors. It’s one tool used by the Bank of England to ease credit.

With respect to your reference to Mr. Keynes, I would simply like to emphasize that it is more a question of Mr. Friedman than Mr. Keynes, this idea of the relationship between the money supply and inflation. In that context, even though our situation and our financial conditions in Canada are better than elsewhere-and that’s the truth-they are nevertheless difficult and are remaining difficult. The velocity of money fell, so that relationship, that danger is much less, as a result of the recession and the global financial crisis.

Paul Jenkins: There are other techniques that can be used to achieve a neutral impact. For example, we could think of the indices. There are techniques that a central bank can use to achieve a neutral impact.

Mark Carney: The Bank of Canada has no interest in pursuing an industrial policy.

Maxime Bernier: I’m very pleased to learn that you’re talking about quantitative easing in the conditional only and that you won’t automatically resort to it. If Canada’s economic position requires it, you’ll have another option in your tool box. I believe that’s very healthy.

With regard to the neutrality issue, if I understand correctly, it’s perhaps not so much the direct purchase of securities in the stock or bond markets, but rather the indices in the various sectors that could help achieve a neutral impact.

Published on May 11, 2016

20 July 2009

Hello everyone,

As a Member of Parliament for the Conservative Party, I am often described as a right-wing politician. According to conventional ideological divisions, this is what distinguishes conservative politicians from those of the Liberal Party, who are supposed to be in the centre. And from NDP or Bloc members, who are seen as left-wingers.

I have never really liked those distinctions, because I don’t believe they really tell us anything useful.

Left-wingers are seen as supporting progress and equality. But it is well known that under communist regimes for example, members of the party had all kinds of privileges that were refused to ordinary people.

Socialist governments around the world have often adopted reactionary laws against freedom of enterprise that blocked economic progress. Can someone tell me, what is so progressive about forbidding people to make and exchange things to fulfil their needs?!

Right-wingers on the other hand are supposed to favour tradition and freedom. But some moral conservatives try to impose their values by using the coercive power of the state, which is an attack on people’s freedom.

And what about the policies of George W. Bush, whose administration was seen by everyone as right-wing? He practically nationalised the American financial sector, invaded a country without any justifiable reason, and increased the size of the government more than all his predecessors. That has nothing to do with freedom or tradition.

In reality, when we look at history, the values of the left have often been defended by right-wing governments, and the values of the right by left-wing governments.

I prefer to use a more precise rule to define my position: when we are faced with a problem, should the government intervene or should we leave individuals to find a solution by working together? In general, should the government intervene more or less?

My answer is that in general, the government should intervene less. And every time it’s possible, we should defer to the free market and to individual initiative instead of imposing new rules.

This was the guiding principle for the reform of the telecommunications sector that I instituted as minister of Industry. We directed the CRTC to regulate the telecom sector only when it could prove that it was absolutely necessary to fulfil one of the objectives of the law. Otherwise, it should rely on market rules.

Before that reform, the procedure had been the opposite: new regulations were imposed as a matter of course, unless it could be shown for certain that they were not needed.

I have respect and admiration for politicians considered to be right-wing, like Margaret Thatcher or Ronald Reagan. They managed to reduce government interventions in some areas.

But I also respect and admire politicians considered to be left-wing who did the same. For example, Bill Clinton significantly reformed welfare programs, cut down spending and eliminated the budget deficit of the American government. Even French socialists like François Mitterrand liberalised radio and television, which had been monopolies of the state; and Lionel Jospin privatised Air France, France Telecom and other important sectors of the French economy.

The categories of left-wing and right-wing only create confusion. Many people do not really understand what they mean, with good reason. There is no confusion when you say that you either favour or not less government intervention and more individual freedom and responsibility.

I will have other occasions to discuss these principles in more detail.

Goodbye for now.

Published on May 11, 2016

While putting my papers in order recently, I found the text of a speech I gave in December 2005, just a few days after resigning as vice-president of the Montreal Economic Institute to run as a candidate in the federal election that took place in the weeks thereafter. The event was a debating contest among students organized by the Canadian University Society for Intercollegiate Debate at Bishop’s University in Sherbrooke, Quebec. I spoke about the importance of defending the right ideas and discussed one idea in particular: the threat to individual freedom arising from the growth of government. — 31 July 2009

The growth of government in the 20th century and the importance of debating ideas

By Maxime Bernier
Bishop’s University

December 3, 2005

In public debates, it is easier to be on the side of conventional wisdom than to defend controversial ideas. I will try the difficult road. I will defend an idea that is not very popular among mainstream intellectuals, students, and academics.

When something is wrong, we need political leadership, we need a government program. Right?

In fact, this is not the sort of idea I will defend. It is too consistent with the general assumption that the government should do something whenever somebody sees a problem somewhere.

Tonight, I will defend the opposite idea. As a lawyer by profession, and somebody who worked until recently with economists at the Montreal Economic Institute, an independent think tank, I am too aware of the problems that government intervention creates in social relations.

Public debates are at the heart of what the Montreal Economic Institute does. They often start debates on topics on which the politicians don’t want to talk.

Recently for example, the Montreal Economic Institute published a study showing how a government monopoly on alcohol distribution – like the Société des alcohols du Québec or the Liquor Control Board of Ontario – is inefficient from whatever point of view one looks at it. Except, of course, from the point of view of the busybodies, and of those who have an interest in the status quo.

Public debates are important because they are one crucial means to find the truth. I say “one” important means because talking is not sufficient. It is also important that individuals be free to live in accordance with their ideas and their values. The status quo, the old ideas, need to be challenged. Especially today, with political correctness all around us.

One thing that public debates can shed light on is not the difference between the mixed bags called “the left” and “the right,” but between people who, whether in the social or the economic field, argue for more or less government.

The century of the state

Benito Mussolini was the author of the article on “Fascism” in the Italian Encyclopaedia of 1932. He wrote:

For if the nineteenth century was a century of individualism, it may be expected that this will be the century of collectivism and hence the century of the State.” (Reproduced in Internet Modern History Sourcebook, Fordham University,http://www.fordham.edu/halsall/mod/mussolini-fascism.html.)

The problem is that Mussolini’s hopes have been realized. The 20th century was the century of the state. In all countries of the world, the government’s role and power increased dramatically. If we use the admittedly imperfect measure of public expenditures, their average ratio to gross domestic product in the main countries of the free world doubled from 1913 to 1960 (from about 13% to 28%), and went up again to 46% in 1996. Public expenditures in Canada have followed the same trajectory. (Vito Tanzy and Ludger Schuknecht, Public Spending in the 20th Century: A Global Perspective, Cambridge: Cambridge University Press, 2000, pp. 6-7.)

If we look at public expenditures per capita in constant dollars since 1961 in Canada, we get a clearer view of what has been happening lately. Real public expenditures per capital (all levels of government) have tripled from less than $4,000 in the early sixties to about $13,000 in the mid-1990s. After declining to $12,000 in the late 1990s, they are on the rise again.

Thus, there has been no reduction in the size of government, but only a levelling, apparently, temporary, of its growth.

Now, public expenditures, and the taxes that go with them, only provide one aspect of the growth of the state. Another aspect is the evolution of regulation. On this front, the picture is the same, or perhaps slightly bleaker.

The Montreal Economic Institute has calculated that the Quebec government now adopts some 8,000 pages of new laws and regulations every year, while the federal government tops this with another 2,000 pages. In Canada, like in other countries, the creation of new laws and regulations slowed down a bit in the 1980s, but this was only temporary. In fact, very few regulations have been abolished, while a host of new ones have been imposed. We are a more regulated society than at any time in our history.

Why has government grown so much?

Why did our democratic governments grow so much? Why was the 20th century the century of the state? Did everybody really want such monstrous governments, probably more powerful than any monarchical government in western history?

These questions have been addressed by Public Choice economists during the past few decades. Those of you who are studying economics or political science know that Public Choice is a school of economic analysis, developed by thinkers like Anthony Downs, James Buchanan (the 1986 Nobel laureate), and many others. Public Choice has now become part of mainstream economic analysis.

The starting point of Public Choice theory is the rather realistic assumption that politicians and bureaucrats are not less selfish than ordinary people like you and me. This is why we have “government failures,” the failure of the political and bureaucratic system to satisfy the preferences of voters and deliver efficiently what they want.

There are many reasons for this. Let me try to summarize them by referring to what Milton Friedman, the 1976 Nobel economics prize winner, called the “iron triangle” of politicians, special interest groups and bureaucrats.

Politics is often driven by small concentrated interests who win the support of politicians against more important but dispersed and unorganized interests. Thus, the special concentrated interests win against the larger but dispersed interests of the taxpayers. We observe this in the case of government subsidies and all forms of protection that are granted to commercial enterprises.

This is why so many people obtain privileges from the government, and we all end up paying for this, whether we want it or not. If you add all similar instances, you get governments that take and spend 45% of what people earn.

One reason is that, as Public Choice economists say, the voter remains largely ignorant of politics. The typical voter spends less time researching political and economic issues than inquiring about the car he buys. Consequently, the politicians will respond to the demands of special interests more than to the general voters’ preferences.

Finally, consider the last side of the iron triangle: the government bureaucrat. Have you ever seen a government bureaucrat begging to make sacrifices to serve the public – for example, by requesting a lower salary? Not exactly. The government bureaucrat is neither bad nor good. He is just like you and me, that is, he is mainly interested in his own welfare.

The typical government bureaucrat will try to get more income and perks. If he has some influence on the political decision process, he will try to expand the programs he administers. And, in fact, bureaucrats, except at the lowest levels, do have much impact on the political decision process because they control the information and the agenda of the politicians.

If both special interests and bureaucrats want more government and politicians respond positively to them, voters get more government whatever they want. This is the real life, the state as it is, and not as it should be in some people’s dreams.

Out of control government is a systemic problem. Every year, the Fraser Institute calculates when Tax Freedom Day falls, that is, when the average Canadian stops working for all levels of government (federal, provincial and municipal) and starts keeping for himself what he earns. This year, that day was June 26. In a sense, we are slaves of the governments for six months and free the other six months: we are forced to pay taxes, and these taxes are used to control us and to solve the problems that were created by too much government.

The practical consequences

The practical consequences of governments taxing and subsidizing, monitoring and controlling virtually everything are less individual liberty and less economic prosperity. It should be quite obvious that wild government intervention does not produce prosperity. If it did, Quebec would be the wealthiest region in North America. In fact, in terms of gross domestic product per capita, Quebec occupies the 55th rank among the 60 states and provinces.

Alberta is the wealthiest province, and this is not because of oil. There is no oil in Switzerland, and a lot of it in Nigeria. In fact, Alberta’s gross domestic product per capita is higher than Texas’s. Lower government intervention in Alberta quite certainly has something to do with this.

There are many economic studies showing that less government intervention means more prosperity. One of them in particular analyzed 23 OECD countries over a period of 36 years and found that larger government spending reduces economic growth. For every 10 percentage point increase in the size of government relative to gross domestic product, there is a permanent reduction in economic growth of 1 percentage point per annum.

Government cannot control the economy without controlling people. Big, fat, interventionist government affects individuals – you and me – not only through its impact on economic prosperity but, more directly, through the loss of control of individuals over their own lives.

Individual sovereignty is undermined when adults must, like children, ask the government for myriads of authorizations and permits, often for activities that used to be completely free until a few decades ago.

What will come next? Should the government dictate what people will eat and when they will exercise? Should the government impose a special authorization to people who want to have children as some philosophers and public health specialists have been proposing? Why not? Adoption is already regulated, isn’t it? All this, for our own good, of course. If we believe Public Choice theorists, it seems that we are going right into George Orwell’s novel, 1984.

As I said at the beginning of this address, the real division is not between left and right, but between statists and defenders of individual liberty.

There is hope

I still think that there is hope. We are not condemned to have more and more powerful government and less individual liberty.

There is hope, if you believe in yourself. If you believe in your right to control your own destiny and plan your own life. If you act as a citizen, not as a beneficiary. As a citizen, not as a spectator. As a citizen, not as a subject. As a responsible citizen.

Our fellow citizens need to be persuaded that their individual liberties are being threatened by government tyranny. It will not be easy, but it can be done.

The fact that the growth of government has slowed in the 1990s supports my hope. One reason why I am optimistic is that I believe in the individual. Individuals will start again demanding the respect of their sovereignty. Individual sovereignty is what is important – not sovereignty of the state. Indeed, the sovereign state is, by its very nature, a steam-roller of the individual.

Thus the intellectual and moral battle of the 21st century is between those who favour liberty versus those who favour government control of peaceful activities.

I will end by quoting two economists who were, in many ways, at opposite ends of the political spectrum. One was John Maynard Keynes, the economist whose 1936 book, The General Theory of Employment, Interest and Money provided, for many decades, a powerful justification for government intervention in the economy. The other one is Friedrich Hayek, who opposed Keynes’s theories from the very beginning.

Both Keynes and Hayek thought that debates and the exploration of ideas were important, which is the point to which I wish to come back for my conclusion. Keynes wrote, at the end of his General Theory:

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else.

Hayek wrote:

We must make the building of a free society once more an intellectual adventure, a deed of courage. (…) If we can regain that belief in the power of ideas which was the mark of liberalism at its best, the battle is not lost. (“The Intellectuals and Socialism”, 1949)

Everything that happens in our society is the result of the people’s actions guided by their ideas. We must fight wrong ideas and replace them with better ideas. People’s ideas and only people’s ideas can bring light where there is darkness. That’s why debating is important!

I am confident that better ideas will be spread by your generation. In the last resort, it is you who will decide if we will have a more prosper and free society.

Ladies and gentlemen, dear friends, congratulations on this event, and long live individual liberty!

Published on May 11, 2016

Two months ago, I posted a video message to support the idea of a flat rate income tax. In it, I mentioned the short book I wrote about this topic that was published in 2003. It is now available (in French only) on this blog. It offers the main arguments for the implementation of a flat rate income tax in Quebec and aims to refute the myths that sustain the current progressive income tax regime.

You can read it by going to the French version of this blog (click “Français” at the top of the page”) or you can download the PDF version here.