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Shouldn’t All Policy Be Science-Based?

Thomas Mulcair recently wrote an opinion piece in the Institute for Research in Public Policy’s publication Policy Options, calling for Canadians to build a “balanced, sustainable energy future.” Overall, it is a thoughtful piece. Mr. Mulcair highlights “science-based” environmental assessments as key to NDP priorities. He is right to do so, but he should favour science-based economic policies too. Putting aside the political rants that permeate the article, let’s evaluate specific policy claims that are inconsistent with an evidence-based evaluation of economic policy.

The first issue raised in the article is how best to achieve environmental objectives. Economics as a field almost unanimously supports putting a uniform price on carbon (through taxes or a cap-and-trade system). Mr. Mulcair seems to support this (and rightly should, but for some reason doesn't say carbon taxes explicitly but instead says "polluter pays"), but in the same breath he pushes for value-added jobs in Canada. This displays a clear lack of economic understanding of what value-added is. Value-added is the difference in total sales revenue and the total cost of components, materials and services purchased from other firms. It is an industry’s contribution to GDP. Employment in extractive resource industries **are** value-added jobs. Let’s look at the evidence: Statistics Canada’s CANSIM Table 383-0022 reports 2008 value-added per hour of work in Mining and Oil and Gas Extraction equals $305, while the corresponding value-added per hour in Manufacturing is barely over $50. It is hardly an evidence-based claim to say that primary sector employment is not “value-added.”

Mr Mulcair argues the Conservatives were short-sighted in “letting” Shell’s Voyageur project be cancelled, stating “an $11-billion project to process raw bitumen was cancelled with seemingly no concern for the loss of tens of thousands of value-added jobs.” At the risk of insulting Mr Mulcair, why on earth should the government fund a project that a company deemed unprofitable? If we really want to create jobs, we can just start generating electricity using bicycles. Or perhaps start transporting crude oil using a bucket brigade. Pushing for government subsidies for upgrading projects violates the laws of economics (thus jeopardizing our prosperity) just as surely as denying climate change is contrary to evidence from climate science.

It is disappointing that Mr Mulcair fails to acknowledge the strides already made in reducing greenhouse gas emissions. He states: "Projects that fail to uphold basic principles like polluter pay are being met with increasing hostility." This ignores the fact that Alberta has a carbon tax on those large emitters, and is considering raising the price tag on carbon as well as strengthening the reduction targets.

There are also some minor slip-ups. First, Mulcair claims Canada is only country to withdrawal from Kyoto. There are three countries that withdrew, not one. The others are Japan and Russia. Second, he seems to display a xenophobic view of FDI that is very troubling. What evidence exists showing international capital flows are damaging to an economy? All the evidence is to the contrary, in fact. Canada should eliminate all government review of foreign investment and let businesses sell their assets to whomever they choose. Barriers to FDI will lower investment, lower capital accumulation, decrease wages and lower productivity. In short, the evidence from economic science is clear: internationally mobile capital promotes prosperity, not the reverse.

In another claim related to Canada’s international integration, Mulcair also continues to promote the Dutch Disease view, by stating: “The Conservatives’ single-minded focus on the export of raw resources … has contributed to an artificial rise in the value of the Canadian dollar that is hollowing out our other export industries.” The claim that commodity exports harm manufacturing is something for which clear evidence does not exist. See two recent papers by The School of Public Policy on the topic (here and here). Consider, for example, the fact that Canada’s manufacturers has been declining at a similar rate to manufacturers just south of the border. Consider also that Canada’s manufacturers also purchase a huge amount of intermediate inputs from abroad – a rising dollar means cheaper access to inputs, thus benefiting domestic manufacturing. In any case, we do not wish to claim the case is closed one way or the other, but a science-based view of economic policy means admitting when the evidence is unclear. We simply do not have enough evidence to definitively say that oil exports harm Canadian manufacturing or not.

To be clear, this is not only a feature of NDP politicians but of all politicians. Consider, for example, the recent Federal Budget introduced by the Conservative Party of Canada. This budget contains a huge number of import tax increases on thousands of items (see the recent pieces by Mike Moffatt of the Ivey School of Business for a startling list) that will increase prices and lower Canada’s international trade flows. The magnitude is striking, with nearly $1.1 billion over the next five years in increased import tax revenue (see the budget table here; look at the last row of the table in particular). Evidence from economic science couldn’t be clearer: free trade increases prosperity. The Conservative approach to environmental policy also takes a regulatory / command-and-control approach, which is among the least efficient methods to achieve environmental goals. The evidence in this regard is equally clear: Carbon taxes or a cap-and-trade system will achieve environmental goals with the least economic damage.

"Science-based" means looking at evidence, and objectively evaluating that evidence free of normative value judgements. It means not making claims about the world without such evidence. We hope that politicians of all stripes learn to accept evidence in all aspects of policy making. Canadians would surely see tremendous benefits.