Seven Public Sector Myths

By Ed Finn
(Canadian Union of Public Employees)


To hear right–wing businessmen and politicians tell it, the public sector is the root of all economic evil.

By discrediting the public sector and glorifying the private sector, they seek to divert more government revenue into their own pockets to ‘privatize’ those public services that can be made profitable, and to cut back further on the funding of health care, education, unemployment insurance and most other social programs.

To accomplish these objectives and repeal the 20th century, the forces of the New Right in Canada are disseminating fallacies and distortions about the public sector and public employees. This article examines some of these myths and provides facts and figures to dispel them.

Myth No. 1: Governments in Canada have become too large

No matter how you measure government growth, statistics don’t support this widely–held belief. The number of public sector workers is less than one–fifth of the work force. Governments still account for less than 10 per cent of total capital investment in Canada. Government consumption of resources is less than one–quarter of total spending in the economy and has not increased significantly in the past decade. The chief form of government growth in recent years has been transfer payments old age pensions, the Canada/Quebec Pension Plan, unemployment insurance payments, family allowances, social welfare benefits and other cash payments from government to individual Canadians.

The role of governments in these transfers is to reallocate funds from some people to others through the tax system. Governments don’t spend all this money. It is spent by the recipients of all these social benefits and spent for the most part in the private sector.

Is it therefore misleading to point to the increases in transfer payments as evidence of excessive government growth. The major increases have been in unemployment insurance and welfare benefits, which have been necessary to help the victims of a faltering economy.

The public sector in Canada is still smaller than it is in many other countries smaller, in fact, than the average for the 13 OECD countries. Austria, Denmark, France, Germany, Italy, Norway, Sweden, the Netherlands, and Britain all have larger public sectors than does Canada.

It is the private sector in Canada that employs four–fifths of the labour force, absorbs over 90 per cent of investment and accounts for over 75 per cent of consumption in the economy.

These figures give the lie to right–wing charges that government spending in out of control.

Myth No. 2: Economic slumps are caused by government mismanagement

It takes merely a glance at the history of the private enterprise system to see that economic recessions have occurred at regular intervals right from the start. Following a pattern known as ‘the business cycle,’ the system has continually lurched from periods of overproduction and high profits to periods of unemployment and bankruptcies. This pattern existed long before governments began to intervene in the economy in any significant way.

One reason governments began intruding in the economy was to moderate the excesses of the business cycle that led to the Great Depression. To put it more bluntly, governments had to intervene to prevent the capitalist system from destroying itself.

The problem today is not that governments have too much control over the economy, but that they don’t have enough or their policies are wrong–headed. Fiscal policies that worked in the past are now ineffective, because corporations have the power either to evade such measures or to force governments to back down.

Basic decisions on the extent and direction of investment are now made by the multinationals and by the international banking and financial institutions not by governments. If governments won’t provide the tax concessions, grants and other subsidies business demands, the multinationals can and do turn off the investment tap.

The reality of our present economic system, then, contrary to the anti–government tirades of the business community, is that governments have too little economic power, not too much. They are being blamed for economic problems they didn’t create and have no power to control.

Myth No. 3: Canada’s social programs are too generous, and cost too much

Spending on education, health care, pensions, unemployment insurance and other social programs has indeed risen substantially in Canada since the 1950’s but less than it has in most other countries.

Social spending now makes up about 22 per cent of our Gross Domestic Product (GDP), but in West Germany it’s 31 per cent, in Italy 29 per cent, in Britain 24 per cent and in France 23 per cent.

Far from being a big spender on social programs, Canada ranks 15th on a list of 19 industrialized countries, according to a study conducted by Prof. Harold Wilensky of the University of California. Our public pensions, our workers’ compensation, our UIC payments, and most of our other social programs are not nearly as generous as those in most other countries.

Right–wingers often claim our allegedly too rich social benefits make people lazy and less productive. But West German workers, who are among the most productive in the world, also receive the most in social welfare. So the two are not at all incompatible. It could more reasonably be argued that workers who don’t have to worry about the costs of getting old or sick, or of educating their children, would tend to be more efficient in their jobs.

The fact is that Canada has been far more stingy in its approach to social spending since 1975 than have most other nations. The problem is not how to control the costs of Canada’s social programs, but how to prevent their continuing erosion.

Myth No. 4: Government deficits must be reduced and the best way to do it is to cut public services

Government debt has risen in Canada in spite of sharp cuts in the funding of social services over the past decade.

The main cause of these deficits is the very policy of fiscal restraint that our federal and provincial governments had adopted. The economy has been stifled, output reduced and tax revenues lowered.

Unemployed people don’t pay taxes. Instead, they are a multi–billion dollar drain on government finances. Economists estimate that if our unemployment rate had been held to even seven per cent instead of being allowed to rise to nearly twice that level, government deficits would have been wiped out, or even converted into a surplus.

Another reason for the growing public debt has been the sharp reduction of taxes on corporations and the wealthy. Corporate taxes 30 years ago provided more than 21 per cent of total government revenue, but today that share has dropped to just over six per cent.

Similarly, the reduction of the top marginal income tax rate from 84 per cent to 49.9 per cent since 1972, along with the introduction of numerous tax loopholes, has given our wealthiest citizens the equivalent of an annual $13 billion tax rebate.

Finally, much of the swollen federal government deficit has been brought on by that government’s high interest rate policy. Interest charges on the federal debt amounted to more than $31 billion over a recent two–year period. In other words, nearly one–fifth of all federal government spending in those two years went into interest payments.

Instead of being unduly concerned about the size of government deficits and calling for more ‘restraint,’ Canadians should be pressing for a switch to policies that will foster economic growth, cut interest rates and make our tax system more equitable.

Myth No. 5: Public sector growth and spending are harmful to the private sector

Business people who claim that government activity interferes with ‘free enterprise’ could only be taken seriously if the public and private sectors were entirely separate in Canada.

In fact, the two are so interdependent that it’s often difficult to distinguish between them. Most goods and services are produced through the combined effort and resources of both the public and private sectors. And even the most seemingly independent of entrepreneurs relies in some way on government assistance.

A great deal of government spending takes the form of direct or indirect financial aid to business. The corporations receive more than $12 billion annually in such handouts from the federal government, and billions more from the provinces. When they complain about ‘big government’ and ‘public sector waste,’ they’re presumably not referring to all this tax revenue being lavished on them.

So what are big business executives talking about when they object to government spending? Are they talking about the funding of health care and education? About the money spent on highways and airports? About government–financed job training courses?

The truth is that much government ‘intervention’ in the private sector is not only desirable, but indispensable. Very few economic activities can be described as purely private or purely public. Our is a ‘mixed’ economy.

Take this example: A private company extracts public gas, sends it through a public pipeline to another private company which combines it with public electricity and private clay to make bricks, which go by private trucks on public roads to a private building contractor who is building public housing on private land to be sold to a private citizen with a mortgage from a public housing agency.

Obviously, all that would be achieved by reducing the public sector’s role in this economic process would be to hurt the private companies involved not help them.

They couldn’t operate without the help of the public sector they’re always complaining about.

Myth No. 6: Most government services could be provided more efficiently if transferred to the private sector

There are only two ways a private company can supply a service at a lower cost than a government can by paying the workers less, and by reducing the quality of the service. Most contractors do both.

Often, in order to get a public sector contract, a private firm will enter an unrealistically low bid. Then, after the public agency has lost the staff and equipment to do the work, the contract firm will jack up its rates when the contract is renewed.

The fact that the cost of private sector services must include a profit margin automatically gives the public sector a 20 per cent advantage. Whenever controlled experiments gave been conducted, such as dividing a service of public works project between a private contractor and the government’s own employees, the work performed by the private company is invariably found to be inferior and more costly.

This is not surprising. Contracted–out services have many drawbacks. For one thing, the public employer can no longer ensure that the services are being provided by qualified employees who take pride in their work. The chances are that, being underpaid, they’ll be less qualified and conscientious.

Contracting–out also limits the public employer’s ability to make long–term plans or to have the flexibility required to make late changes or adjustments to a project.

Contracting–out breeds corruption. The more public officials deal with private contractors, the more taxpayers suffer through graft, kickbacks, overcharging,tax evasions, and price–fixing.

There are also hidden costs associated with contracting–out that aren’t usually considered in making comparisons. Like having to monitor the performance of the contractor. Like the cost of patching up or revising the contractor’s unsatisfactory work. Like the cost of the tendering process itself.

The first fact is that contracting–out or ‘privatizing’ public services results not in greater efficiency, but in higher costs and taxes, and lower standards of service.

Myth No. 7: Government regulations are bad for industries and consumers

The push for the deregulation of airlines, banks, telecommunications, trucking and other industries is part of a broader campaign by right–wing elements for less government involvement in the economy.

But the would–be deregulators overlook the reasons these industries were regulated in the first place. They don’t tell us that some industries that can only function effectively as monopolies must be regulated to protect the public form excessive prices. They don’t tell us that other industries have to be regulated to stop corruption, bid–rigging, and other corporate abuses. They don’t tell us that, without regulation, some business firms disregard public health and safety, create environmental disasters, and provide inadequate levels of services to some groups or regions.

The advocates of deregulation in Canada point to the deregulation of the American airline industry to support their case. But the U.S. experience really hasn’t been all that beneficial.

A survey by the U.S. Civil Aeronautics Board disclosed that, since deregulation in 1978, 106 communities in 31 states have been cut off completely from air service, while another 351 cities and towns have had services reduced.

Deregulation has also led to the loss of more than 20,000 airline jobs and substantial pay cuts for many thousands of other airline employees.

Nor has there been an overall lowering of airfares in the U.S. On certain high–density routes (such as New York to Los Angeles), rates have dropped; but on less competitive routes they have risen considerably. According to the Commons Standing Committee on Transport, overall, air travel rates in the U.S. have actually risen by 17 per cent per annum since deregulation.

No one would deny that there are shortcomings in the current system of government regulations, including some unreasonably high rates. But the answer is not to remove all public safeguards. It is to reform the regulatory agencies and practices to make them more responsive to the needs and interests of those who use the services.

(CX5016)

 

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