Monday, July 27, 2020

Post Covid 19 Policy - A successful restart means smart investment and avoiding spending

We have been faced with a horrific event; we are reeling to a degree. I believe that most people in government are seeking to help. The road to hell is often paved with good intentions; however, that is why I am compelled at this time to offer suggestions to the government on a way forward.


Whenever one begins any endeavour, as Mr Covey taught us, it is wise, to begin with the end in mind. Then one needs to strip clean all the entrenched interests and the politics and design a solution. Once the solution is developed then one needs to look at the landscape as it is and fit the solution in place. The process of fitting the solution in place then involves addressing the interests of affected parties; a process that is most often under-addressed – think NAFTA, we heard a lot from the 11,000 people put out of work and nothing from the 100s of thousands put to work.  To effect change in the face of entrenched interests, it is critical that you commit to seeing to those whose interests are negatively impacted – this should be done as a humanitarian imperative – but if that is too ultraistic a cause, know this – people with entrenched interests are going to fight you every step of the way absent a mitigating offering.

I have spent a good deal of my life now, thinking about how to make Canada better, more than better, the best. How to address the issues of the “left”, like inequality, like poverty, like discrimination of all sorts – the progressive agenda as it is commonly perceived. I have thought about fixing these problems from the perspective of someone who believes that we need evolution as opposed to revolution, I believe that we are living in the solution, we need only tweak what we have in Canada. Please let me remind the reader that we live here and now at the pinnacle of human existence – no collection of people have ever had it better.

The first step toward finding solutions is to look back, see what has helped and what has harmed – take an objective look at history. Through the seventies in Canada we ran up massive debt, we stimulated the economy and there were inherent realities that drove our economy to capacity – I think it would be fair to say the inflation we experienced in the seventies was about half fiat currency and about half capacity. What we know for sure is, if you increase the money supply, you get inflation, John Law showed us how that worked in France. Moreover, building up large debt is the heroin of public policy, feels good until paying it back takes food from the mouths of children. The government should INVEST, the government should never spend.

Inequality is bad, as it builds a group of people who are the have nots, justifiably frustrated at the absence of opportunity. It is the inherent reality of capital that it attracts capital. A market economy is a well-oiled machine and excels at the distribution of goods and services – we have to avoid letting the behaviour of capital rob us of the source of our prosperity – the market economy.  The inequality in our society is in sharp relief, the people negatively impacted by it look to solutions that seem to fix inequality but in time impoverish us all.  If I have $10 million, Bill Gates having $60 billion is no bother, however, if I am Sally, a single Mom, working two jobs, watering down the milk for my kid's cereal in the morning – the $10 million guys are as bad as Bill – Sally is resentful, to her “they” are a bunch of greedy capitalists. She has a right to be resentful, she is playing by the rules, she needs opportunity and a path to success. If you give her a path to success, you have a friend to the free market and prosperous policy, if you turn your back on her, or worse, find new and creative ways to exploit her, you have someone who will throw in with people who peddle equality as the solution rather than inequality be the challenge – from there comes the quagmire of crippling policy “solutions” known as "redistributive policy".


To the redistributionist I say this, it is bad policy for a whole bunch of reasons, and here is one, a big one. In case you’ve never noticed, people hate it when someone takes something they view as theirs and they love to be prosperous and secure – so rather than threaten to take from the successful what they have earned and accumulated for themselves and their families – tie the interests of those negatively impacted by inequality to the interests of the people who have resources – think win-win.

When designing policy, wherever possible, the most important thing you can do is to FUND PEOPLE, never institutions. When you fund people, you empower them and institutions respond to them. When you fund institutions the institutions become insular, the holders of power and oftentimes turn their back on the interests of the people they are there to serve. This truth is rarely uttered in halls of power because it threatens so many entrenched interests. We need institutional reform in Canada, funding institutions feeds institutional inertia and the hardening of problems, rather than feeding the solutions.

If the market is functioning as it should and people have access to the resources to enter the market, most of the progressive agenda is taken care of.  When a market works correctly, there is a demand for a good or a service and there is someone who seeks to provide the solution. If price drives the purchasing decision – then whether the service provider is female, black, white, smart, challenged, mentally ill, young or old – if they can provide the product or service then they get the benefit. The thing that corrupts this process are regulations that prevent fair access to markets. The only thing that inhibits participation in markets is the absence of resources at critical mass to access the market.

We have at this time in Canada one of the largest pools of wealth in the form of boomer wealth accumulation and the wealth they have inherited from their parents. They are presently investing that money via traditional investment modalities, some doing okay, some not – this pool of capital is in effect latent from the perspective of getting capital to young people starting out in life, or people with innovation, people starting a new business – the kind of people who need resources and find little or no support from traditional lenders and capitalization modalities.

CLICK HERE - ECONOMIC STAGNATION - BOOMER WEALTH


Creative Use of Bonds and Creative Bond Distribution Systems

One can view these solutions as the creative use of bonds that would be analogous to Municipal Bonds; a different but similar structure augmented by varying degrees of return subsidies and tax incentives.

Capital goes to the lowest risk and the highest return – the only way to attract capital is to address one or both of these realities. The people who need capital to enter the market normally represent a higher risk for a number of reasons. The government has engaged in effectively quantitative easing already, the government has effectively “guaranteed” loans already. The challenge for this group of people is that the government has used all the traditional channels – banks, credit unions etc. An entrepreneur is normally impaired rather than helped by these lenders.

Programs like these accelerate the provision of capital to entrepreneurs and/or individuals needing capital to enter the marketplace for any reason. Perhaps most exciting is the government’s partial guarantee and return subsidy, unleashing the now latent “boomer” capital now receiving mediocre returns due to risk considerations.

There is no sector of the economy harder hit than the small business/artisan sector. Aggressive stimulus in the manner suggested here, gives this extremely productive segment of the economy a boost and expands it and if designed properly access to capital will be more or less free of red tape.    

Policy Suggestion 1 – Entrepreneur Bond

The government should develop a bond program for this sector of the economy.  The bonds would be structured with a partial guarantee, a capital gains credit in case of loss and a return subsidy to a certain threshold. The return subsidy could be varied in response to prioritized activities; the return subsidy would be perhaps higher for innovation, or perhaps a regional premium to encourage activity in economically suppressed regions. These provisions for targeted quantitative easing and gets capital to those who are typically rebuffed by traditional lending modalities.

Bond distribution would take the form of an individual posting their intended course of action on a website with their desired market capital requirements. Investors would access the data, interface with the individuals and choose to participate or not. Market Cap would be held to perhaps $10 million.

The Venture Capital Program in British Columbia illustrates how the elevated capital tax credit against capital loss would work.     

Policy Suggestion 2 – Forestry Bond

In the same vein, the government in conjunction with other actors would initiate a forestry bond market. There is a collection of Silviculture practices that when undertaken generate an approximate 7% annual return – they consist of thinning, limbing and other practices. The benefit of doing these practices is the forest is healthier, more productive, and less fire-prone forest and it shortens the harvesting cycle which offers more revenue opportunities – increasing the long-run sustainable yield. The inhibiting factors are funds and the projected return is light. Here a small return subsidy would go a long way to incentivizing various jurisdictions to do the Silviculture that now goes wanting.

The bondholder would purchase a forestry bond issued by the bond seller. The bond seller would be the entity that designed and implemented the Silviculture prescription for a given plot of Forest. The forest performance would be benched marked against historical data – the incremental forest volume benefit would be calculated at harvest. At this point, the government would have the opportunity to “clawback” the subsidy or a portion thereof and the entity that has invested in the Silviculture program and having used funds to bond funds to perform the work, will perhaps generate a premium at harvest – keeping the provisioning entity in hand in this way incents long term stewardship of the resource, an element that is wanting in British Columbia and in other jurisdictions as well. Given the nature of the forest cycle, bonds would likely trade through the course of 50 years as would the relative value structure of the entity doing the Silviculture.
   
This has an obvious climate premium and social premium as well. The climate premium comes from faster carbon sequestration, the social premium is generated by first driving rural economic activity and this type of work offers employment to a stratum of the workforce whose opportunities are shrinking.   

Policy Suggestion 3 – Building Carbon Reduction Bond

It is the case many of the things we want to do in the realm of conservation are challenged by economic realities – the marginal benefit of performing the action fails to return sufficiently to cover the cost of doing the action and offset the opportunity cost of capital involved.

In the same vein as above, a bond system could be put in place, with bond returns tailored to effect incentive for carbon us reduction. 


A person wants to super insolate their home, they access funds through the bond program and returns are augmented by the government so capital is rewarded to the degree needed to incent the work. These types of programs are very simulative and if offered in this way they open the door to several approaches to participants – the work can be done in house or offered at contract.  


More thinking on the Subject


No comments: