Before we get into the meat and bones of my article, I will present some introductory reading, which will answer questions like:
- Why do inefficient systems exist in the first place?
- What kinds of inefficiencies are there?
- Intro into control plans and PFMEAs
This article will introduce concepts like deadweight loss to society and showcase 1 instance of where government intervention has led to an inefficiency in society; it will then touch ramifications of that government intervention. We will do a deep dive of a government service and how a control plan and PFMEA would look like in a future article.
In the real world, “there’s no shortcut to getting rich”. But for most services in Canada, we don’t pay the true cost for services. One reason for this is that there’s often some form of government intervention (often taxes) that has lead to the inflated costs that we pay.
I will bring up the taxi industry as an example where government intervention has led to a inefficient solution and now a more efficient solution (Uber) is winning out. Once more efficient solutions come around, the inefficient solutions are at a disadvantage as they have permanent fixed costs that still must be paid.
The taxi industry is a solution to matching those people who require short km transportation (<50km) but lack access to a vehicle of their own to those who are renting out their time driving people around. It’s a transportation solution where government policy (the medallion system) has led to limiting the supply of taxi cab drivers on the road; in turn this policy has created an entire generation of inflated wages for taxi cab drivers. For anyone who’s taken a basic economics class, supply normally intersects demand at a given market price and that’s the price that is supposed to be paid out as wages to drivers (in this example). When government limits supply (by utilization of a medallion system), this raises prices and creates inefficiencies (in economics classes, this is termed dead-weight loss). When government artificially raises the wages for a certain class of workers, it creates many untold inefficiencies that are not captured in any published government metric.
Imagine, I am a 17 year old, fresh graduate from high school, deciding whether to pursue post secondary education or enter the labour market right away. I see my friend who makes 90-100k (not a stretch for a taxi cab driver who works 60-70 hours a week) from driving cab and figure it’s an easy job, which also happens to pay great. Well I drive cab for 5-10 years, then Uber comes to town and because of fixed costs inherent in the traditional system (e.g. paying for the government issued medallion) I’m not able to compete on price. Since price is a main determinant in a customer’s mind, I am at a permanent disadvantage all because of municipal government policy (municipal governments issue medallions and collect revenues for each medallion issued). On top of this, since I’ve been driving cab for 5-10 years, I have become disillusioned with school and am unlikely to go back leading to an immeasurable deadweight loss on society.
Economist’s Moment – deadweight loss and what does that actually mean?
By deadweight loss, I mean the economic cost associated with this loss of potential from a worker. When that worker foregoes training/education for short term cash flow, those short sighted decisions have a cost. For many jobs that have a 20-30 year lifespans, this notion is a non-factor, however since many jobs are (effectively) coming to an end, the impact is now noticeable. This deadweight loss can deliver a massive blow to a country’s GDP and devastate communities. Examples of this type of deadweight loss include:
- in Alberta, many younger people who forewent school to work in the oil sands
- people driving cab & trucks who will now face lower wages because of competition/automation
- when people forego formal education or private sector training to become high-paying public servants
I have no problem with public servants getting paid the prevailing market wage because that’s what they deserve. I have issue when people want to gain employment with the government because it’s ‘easy’ or because the pay is ‘really good’. Getting through engineering, I can tell you I saw many bright individuals give up on their dreams for a chance at the public sector and many only made the choice because the public sector provided job security (as well as a pension). I look at that as unfortunate. I’m not going to be someone who’d call out anyone as overpaid until I see some data but control plans and PFMEAs will help to illustrate exactly what kinds of government jobs deliver value and what kinds don’t.
–back to article–
But back to taxi drivers. Through the medallion system, taxi drivers paid for the government monopoly and now in many big cities, they are getting screwed. I use Uber all the time, I see it as a better solution to the transportation problem I detailed earlier, but I understand why many cab drivers are angry. They are being left out to dry by their municipal governments and that’s because government itself does not have its costs controlled. This government issued monopoly was really the previous generation’s solution to the logistics problem of matching those who need a ride to those who have a car. Taxi cab drivers are not happy since their livelihoods are being threatened but maybe they deserve what’s coming to them since they entrusted government to protect their livelihoods – moral of the story, don’t become dependent on the government to take care of you.This is also one of the reasons why more auto companies are investing in Mexico than ever before. The unnecessary taxes (note I don’t think all taxes are unnecessary but some taxes definitely are) we expect private industry to pay are this form of unnecessary overhead; directly comparable to the extra overhead cab companies have to pay in the form of the medallion tax. Right now auto is booming, but if sales were to stop growing at the 7-10% clip the industry has been accustomed to the last few years, that’s when pressure will be added to reducing costs. That’s when companies will have to compete more so on costs and less on quality and reputation. Those companies that didn’t diversify into Mexico will be at a disadvantage and in the end could suffer the same fate as the taxi industry.
For public sector employees who have “guaranteed” pensions, go and ask government employees in Detroit or Greece what happened with their “guaranteed” pensions. When you cannot afford something (due to perpetual budget deficits), do not pay for it, because you’ll end up selling the assets you do own to cover the costs you owe (ask any Greek of how many public assets have turned private). Does this mean I am suggesting for governments to go the austerity route? No. What I am suggesting is for governments at least know their own costs! Currently, I don’t think they do. Modern day (wreckless) government fiscal policy is putting the future generation at risk; when debt payments become due, we’re going to be selling our public assets in a desperate state (a la Hydro One) or a state where the government just flat out undervalued a key asset (e.g. the 407). That’s only going to cost us because we will be selling our public assets in a position of weakness; never sell in a position of weakness. You cannot just flip the tax switch and expect to get guaranteed revenue. I covered the elasticity of taxing the rich in my Economist’s moment of this previous article, the people who have less money to spend (on accountants) will be the ones paying.
At the end of the day, when I pay taxes, I don’t know where they go, I don’t know what percentage of each dollar is spend efficiently and there’s been no real initiative by the government to clarify this. This is where control plans and PFMEAs come into play. They will trace dollars spent to government actions and allow for citizens to look at very concise summaries of government programs to understand how their taxes are being spent. This is why they are important for the future of modern day government.
Article was written by gtareguy (Greater Toronto area real Estate guy) . I release a new article every Friday and I write about economics, the nba and real estate in the GTA.