Canadians are not willing to pay user fees for infrastructure.
It would be unfair to dismiss the first report from Finance Minister Bill Morneau’s Advisor y Council on Economic Growth as a disappointment: no one should have expected much in the first place. The Liberals speak often about economic growth, and while that’s not a bad thing in itself — it’s difficult to achieve improvements in our standards of living without it — the Trudeau government runs the risk of promising something that it unlikely to be able to deliver.
The goal set out in the council’s report is optimistic, to say the least. In its baseline scenario, real, median household incomes are expected to grow at an average rate of 1.2 per cent a year between now and 2030: the goal is to increase that growth rate by one full percentage point, to 2.2 per cent a year. An increment of one percentage point increase is unremarkable in the short term, but in the context of growth empirics — where growth rates are averaged out over longer time periods — a sustained improvement of that magnitude would be a very big deal indeed.
The problem is that while that kind of sustained boost to growth rates would be more than welcome, economists don’t have a good handle on the policy measures that could make it happen. They have identified any number of ways in which governments can bring about temporary, one- time increases — things like liberalizing trade and adjusting the mix of tax instruments — but these are all subject to diminishing returns. Sustained economic growth is about innovation and the sort of technical progress that makes it possible to produce more value with the same amount of physical resources: capital, labour, land, natural resources and the like. Our understanding of the mechanics of economic growth is still rudimentary, and there was no reason to expect Morneau’s advisory council could have solved this problem in a few months.
Instead of offering ways to create more value from the factors of production that are already in place, the council recommends adding more inputs: accelerated immigration to restock an aging labour force, and promoting foreign investment to expand the stock of capital. Although these suggestions are sensible enough, they’re unlikely to have much of an effect on median incomes. I don’t see how these measures add up to a sustained one percentage point increase in income growth rates, and the council has yet to release a backgrounder that makes the link between its recommendations and its objective.
The more interesting proposal is to set up mechanisms to promote foreign investment to finance infrastructure projects in Canada. The fact that it’s being made to an apparently receptive Liberal gov- ernment is even more intriguing: if adopted, it would mark the definitive end of a tradition of economic nationalism that started more than half a century ago during Lester Pearson’s time. To paraphrase Joan Robinson, the Liberals have finally learned that the only thing worse than being exploited by foreign capital is not being exploited by foreign capital.
There are some impressivesounding numbers, most notably the $ 16 trillion — roughly eight times Canada’s annual gross domestic product — that is currently “parked” in assets that are currently earning a negative return. The prospect of tapping hundreds of billions of dollars of foreign investment for infrastructure in return for some administrative reorganization seems almost too good to be true.
It probably is. For one thing, when Canadians hear the word “infrastructure,” they think “stuff I can use for free.” But foreign investors will insist on a return on their investment, and that means revenues generated by tolls, user fees and the like. The economic arguments for pricing infrastructure are well- established, but the problem has always been political resistance. For example, a water treatment plant built with foreign capital would charge user fees — a practice that would run counter to Canadians’ deeply held sense of entitlement to infinite quantities of water at zero cost.
Attitudes to user fees are probably more of an obstacle to the development of revenue- generating infrastructure than the availability of capital. If Canadians could be persuaded of the virtues of user fees, we probably wouldn’t need much in the way of new foreign investment flows: domestic investors would be happy to earn a steady return at home. Moreover, the revenue requirement would also exclude most pointless boondoggles and white elephants. Projects selected on their ability to generate income would almost certainly increase Canadian productivity and output.
But those revenues are also why we shouldn’t expect Canadian incomes to get much of a boost from foreign investment in infrastructure. When access to infrastructure is free, then the gains are shared in varying degrees among the Canadians who use it. The point of putting a price on the use of infrastructure is to capture those gains and transfer them to the owners of the project. If those Canadian productivity gains are monetized and sent to foreign capitalists, then there’s not going to be much effect on Canadian incomes. (More technically, this is the difference between gross domestic product and gross national income: GDP would increase, but GNI would be little affected once net income flows are taken into account.)
If we get so little from foreignowned infrastructure, why are we so keen on foreign investment in other areas? The usual gains from foreign investment are the jobs they create ( that income stays in Canada) and the potential for knowledge transfers. In the case of infrastructure, the potential for knowledge transfer is still there, but there is almost no employment income generated by infrastructure once it is in place.
The advisory council’s recommendations are, on the whole, sensible and worth pursuing. But the potential for long-term increases in Canadian incomes is almost certainly being overstated.
SUSTAINED ECONOMIC GROWTH IS ABOUT INNOVATION.
— STEPHEN GORDON
IF CANADIANS WERE WILLING TO PAY USER FEES, WE WOULDN’T NEED FOREIGN CASH FOR INFRASTRUCTURE.