It is commonplace knowledge, Premier Kathleen Wynne, that the chief executives of the world’s largest financial corporations took risks that put the very survival of their organizations in grave jeopardy. And, in fact, they put the entire Western economy at risk.
The debacle on Wall Street and elsewhere, however, was not because these business leaders were willfully ignorant or even suicidal. It was because the governance structures inside and around their institutions gave them an incentive to behave as they did. In a sense, the governance structure even compelled them to do it.
They opted for short term private gain, while society bore the long term risk of a cascading collapse of the entire financial system. The rest is history, even if still unfolding.
Everyone similarly understands that governments too are short sighted. The news cycle, the annual budget cycle, and the election cycle every four or five years necessarily rivet their attention.
As I have earlier outlined, our version of parliamentary democracy concentrates power in the office of the prime minister or premier. Personal success for our political leaders might mean winning back to back majority governments - 8 to 10 years of real power. While longer is possible, it’s not probable.
Nonetheless, prime ministers and premiers must make decisions which have impacts stretching far beyond their probable tenures at the pinnacles of political power.
Yet political leaders also know the voting public has a very high discount rate on the future. Much of the public lives paycheque to paycheque. Except in circumstances of “clear and present danger”, these citizens have a low tolerance for short-term pain in order to get long term payoffs or to minimize long term risk. This problem has only grown as a result of the growth of income inequality in our society.
All current governments, therefore, have an incentive to push forward costs and other unpleasant decisions onto future governments. Consume now, pay later is embedded in their governance DNA.
The results of this incentive show up in a multitude of decisions at all levels of government, and in a multitude of ways - from large deferred compensation for public servants, to subsidized electricity, to underestimating the cost of war, to deteriorating water, sewage and transportation infrastructure, to ambitious long term targets but little immediate action on climate change. We are building up potential trouble for the future, but no one has an incentive to stop it now.
This “tyranny of the present” is heightened even further when there is talk of election in the air. So it is a particularly pressing consideration in the current Ontario context.
For example, more damaging detail on the cost of moving the Oakville gas plant is due, more detail on the costs of temporary peace with the teacher unions is coming, more price increases in electricity are scheduled, and a difficult budget for 2014-15 must yet be written. And your government needs money for the priorities you have set out as leader.
In this difficult context, Premier Wynne, resist magic solutions. For example, resist the type of idea floated by your predecessors that would have created a new super corporation, combining the business lines of Crown-owned monopolies – such as the Liquor Control Board of Ontario (LCBO), Ontario Lottery and Gaming Corporation (OLG) and Hydro One.
Most analysts acknowledge, even if belatedly, that the outright privatization of any one of these corporations is neither economically nor politically appealing. Some, however, have promoted the idea of “securitizing” their combined future revenues by selling shares in them. The businesses themselves, folded into a single entity, would remain under government control. The promised magic result is increased revenues from the sale now, without raising taxes or giving up control of the assets.
Some will say this is good politics. Maybe; but it is bad economics. The Ontario government faces a serious “structural deficit”. The deficit will not disappear even with a return to a high employment economy. Eliminating this deficit will require real and difficult decisions over the next several years, as you are no doubt painfully aware.
Yet the only possible merit of the transaction outlined above is short term political optics. There are no operational advantages or real economies. And not only will nothing real have changed in the operation of these government enterprises, the long term structural deficit problem could be made marginally worse.
While no one knows what the new “shares” would covenant, it is likely better to simply borrow the money than to sell the future revenue stream. Nor does selling these new securities to public sector pension funds make the idea better. It’s still a bad deal for taxpayers.
If anyone comes to you Premier Wynne with some financial gimmick to make the books look better for next year, listen politely and then kick them out. While the public may not have a taste for the pain of tough choices, they most certainly should not be misled by pure financial manipulation. Surely the debacles of Wall Street and Greece, if not Enron, have taught us something in this regard.

Purchase: Say no to gimmickry

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