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MONEY TO THE MINUTE

by Fraser Macdonald

Canada’s federal government laid out its budget last Monday, the first in over two years. 

From a fiscal standpoint, both the short and long-term numbers are galling. A record deficit… doubling the national debt in 18 months… and no plan to bring back fiscal stability in the next 10 years… are all concerning.

The government says this budget will set the stage for increased economic growth that will outpace higher debt and interest payments, but there’s little evidence and certainly no plan to achieve the productivity gains that will be required to make this enormous bet pay off.

Much ink has been spilled on the economic assumptions that underpin this budget—the perpetual low interest rates, traditional rules of inflation no longer applying, and lenders continuing to have confidence in our solvency. (The bond market doesn’t appear to agree with the government here.)

But what about broader questions about the role of government and whether this budget helps with the popular capitalist goal of allowing more people to benefit from economic growth? (Or, to use language the government has used, help “the middle class and those trying hard to join it.”)

When it comes to housing, tinkering at the margins and taxing foreign investors for what is actually a failure by all levels of government to increase housing supply will do next to nothing to help Canadians achieve home ownership. 

How many small businesses will see any of the massive stimulus being doled out, as opposed to the large corporations friendly with the government? This spending seems designed to further intertwine government and big business, not help the entrepreneurs that create jobs.

For workers, a federal minimum wage will only impact a handful of people, but there’s no meaningful consideration of the relationship between employees and employers, shareholders and companies, or market makers and participants.

The vaunted national childcare program shows exactly how this government thinks—its job is to run things for Canadians, not support them in making decisions for themselves.

Popular capitalism stands for policies that help more people participate in economic growth and exercising their own free choices on how to run their lives. 

And this budget takes the opposite approach: proposing policies and spending that insert the federal government into more elements of private life and the economy.

Fraser Macdonald is a capitalism policy fellow of the Canadian Freedom Institute

MONEY QUESTIONS

Chris Spoke is the founder of August, a Toronto-based agency that designs and builds digital products.

How will the federal budget impact the ability for the average Canadian to afford their first home?

It won’t have any material effect. Housing in urban centres is expensive because there’s not enough of it. The federal budget does nothing to change that other than introduce a tax that would apply to foreign non-resident owners who keep their units vacant, in an effort that they might then list those units for rents.

We shouldn’t expect a tsunami of new units coming to market as a result of this tax, and certainly nowhere near enough to offset increased demand for housing from higher immigration level targets.

Over the medium term, absent radical action from provincial and municipal governments, it will become harder for the average Canadian to afford their first home in or near major urban centres.

What should the federal government focus on to make housing more affordable?

The federal government should focus on the underlying problem. Again, housing in urban centres is expensive because there’s not enough of it. There’s not enough of it because municipal land use rules constrain new supply so as to minimize the impact of development on current residents. Over the past 80 years, we’ve baked NIMBY-ism into law.

The federal government should use every lever available to force municipal land use liberalization. As a starting point, they should tie significant upzoning requirements to any transit infrastructure funding.

Give us an example of a city or jurisdiction getting things right at the moment.

I’ll save my Tokyo and Houston praise for a later date and speak instead to the relative price elasticity of supply in Canadian cities.

Supply elasticity refers to how responsive housing supply is to rising prices. A city with more elastic supply would see more homes built as prices rise than a city with less elastic supply.

CMHC studied this question and found that housing starts in Montreal, Calgary, and Edmonton rise 1 to 2 per cent for every 1 per cent increase in home prices. For every 1 per cent home price growth in Toronto and Vancouver, however, housing starts only grow by 0.5 per cent and 0.3 per cent respectively.

Were Toronto’s housing supply to be as responsive to rising prices as it is in Montreal, Edmonton, and Calgary, between 2010-2016, we would’ve seen an additional 18,000-30,000 homes started and built.

What is the biggest misunderstanding about the housing market for the average would-be homebuyer?

The biggest misunderstanding might be a conflation of prices and goods. Prices reflect the relative scarcity or abundance of a good, but should not be confused with the good itself.

At the risk of repeating myself one too many times, housing in urban centres is expensive because there’s not enough of it. For first time homebuyers, this manifests as a big price tag on the house they want. Some then think that dollars from the government can help them pay some of that price.

But more dollars does not equal more housing in a severely supply constrained market. Dollars from the government are inflationary if the scarcity problem—the real problem—isn’t being addressed.

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MONEY NEVER SLEEPS

The housing file

The Bank of Canada brought forward its timeline for a possible rate hike from 2023 to the first half of 2022, due to its brighter view of the economy, but with that comes worry about how the housing bubble will pop. “The inability to buy a home will be seen as a failure of the system,” writes Daniel Tencer in this column for The Line:

Who’s on labour’s side?

The one group that clearly understands the folly in both perspectives is workers themselves. Workers have shown that they dislike the hyper-adversarialism and political activism that American unions bring into their workplaces but are eager for more representation, voice, and support than they can achieve individually. What they want, and need, is a middle ground that neither side is offering.

— Oren Cass, the executive director of the “post-Trump” conservative think tank American Compass, offers this takeaway from the news that only one-eighth of the workers at Amazon’s Bessemer, Alabama warehouse voted in favour of a union.

The last words, for now

Labour was the focus of one of the week’s most viral stories, about the “king of absentees” at the Ciaccio hospital in southern Italy. Salvatore Scumace, 66, was placed under investigation for fraud, extortion and abuse of office, having been reportedly paid €538,000 since the last time he showed up to his civil service job, back in 2005:

First, the facts.

On the site, the r/WallStreetBets forum went on a hunt for companies with heavy hedge fund bets against them. GameStop, the world’s largest video game retail store, battered by the move to online sales and failed investments into other areas, ended up being the home run.

With huge downward pressure from short-sellers and no economic case for significant positive investment, the “Outsider Trading” community ganged together using their Robinhood trading accounts and pushed the stock higher and higher, ultimately leading to a 1,700% gain from its January 1st price to its recent peak. With it, the hedge funds betting against it suffered enormous losses. Melvin Capital, the biggest loser in all this, had to borrow over $3 billion to close out its short position.

An internet movement was born.

Since GameStop peaked, we’ve seen the movement funnel off into other investments, partly due to Robinhood restricting trading of GameStop stock. It remains to be seen whether their claims of settlement mechanics being the reason for these restrictions are the whole truth, but it underscores a fundamental policy point in all of this.

What does an internet subculture boosting an unpopular stock, making some hedge funds take some heavy losses, and restrictions on an app-based trading platform have to do with popular capitalism?

One of the core elements of our philosophy here at The Money is a belief in fair and equal access to open and efficient capital markets. The stock market has always to some degree favoured insiders, brokers, and well-connected traders, but in recent years technology has democratized the market more than ever before. Apps like Robinhood allow for commission-free trading that is easy to access and quick to execute. Anyone who wants in the game can instantly deposit cash in their account and purchase securities in the public markets.

The traditional gatekeepers – stockbrokers, trading houses and investment bankers – are having their walls torn down. Many of them aren’t happy about it. The complaint hedge funds are levelling against the r/WallStreetBets community is that they’re manipulating the market to their own advantage. This is undoubtedly true. Leveraging hundreds of millions of dollars in purchasing power to direct it against short sell bets is (almost certainly legal) market manipulation. Yet how is it any different from the common short-selling tactics of hedge funds who use their billions in cash reserves to pummel vulnerable stock prices lower in order to make tidy profits? The only difference this time is that it backfired.

The more troubling aspect of all this isn’t the cries of hedge fund managers but the trading restrictions applied to Robinhood account holders. The democratization of the stock market doesn’t mean much if the taps can be turned off when the gatekeepers complain. At this stage, it’s too early to predict the legal impact of that decision, but it looks like the U.S. House Financial Services Committee and the Securities and Exchange Commission are both going to investigate what happened.

It will take some time to see how Robinhood itself is impacted, or determine the future direction of the Reddit-led investor community. There are a few takeaways we can take be sure of now, however.

First, despite the recent trading restrictions, Robinhood and other similar trading apps have lowered the barrier to entry for the average person to engage on a fair basis in public markets. This is undoubtedly a good thing, and we should advocate for more of this on an increasingly transparent basis.

Next, shutting down trading of particular stocks for what appears to be political reasons is extremely problematic. We should demand answers from those who made the decision, and work towards a system where this can’t happen.

Additionally, predatory short sellers are a problem in the market, but got a taste of their own medicine in this case. The market won out over big hedge funds that acted as if they were invincible. It’s possible this will be a watershed moment for public markets if it changes long-term behaviour.

Fourth, hopefully the public interest in this story will lead to more financial literacy among average people, in particular for younger generations who (not unfairly) view the stock market as being somewhat rigged, and not in their favour.

Finally, this isn’t the end of the GameStop story. At some point, economic reality will set in and someone will be left holding the bag. There’s a reason this stock was heavily shorted, and when the Reddit money moves on to something else (now that they’ve beaten back the hedge funds), GME is going to fall back to earth and cause a lot of pain to average investors.

At The Money, we aren’t going to re-invest stock market regulation overnight, but we will continue to advocate for a popular capitalist public stock market in which anyone with savings can access a fair, efficient, transparent and open trading platform. The GameStop Revolution may end up being a flash in the pan, but the direction it’s pointing in is the right one.

First things first – we must acknowledge that there are many definitions of these terms, the key distinction between working and middle class in this column is that the middle class have some degree of capital or equity available to them (often in their home), while the working class does not.

Accordingly, a large part of the popular capitalist response to this issue should be geared towards encouraging capital formation for those who don’t have much (or any).

A challenge this big will not be solved by one policy alone, and many bold responses should be considered. We will look at one of the biggest potential solutions – improving working conditions for the working class to provide more after-tax income, job and income stability, and opportunities to build wealth.

Many workers today, particularly working-class and young people with precarious job security (for example, in the gig economy) face inferior work conditions to the last generation. The popular capitalist response to this isn’t to ignore vastly unfair outcomes and say things like “it’s still better than the Victorian era” or “tough luck, the market decided”, but instead to find ways to improve their situation in line with free-market principles.

It’s not good enough (morally or politically) to simply resign ourselves to a permanent underclass of people who lack the wealth and opportunity to participate in the economic growth of society. The answer isn’t the redistribution of wealth at the source, but about equipping every worker with the opportunity to build wealth on their own.

Let’s not forget the stakes in all of this as well. Policymakers need to improve conditions for workers to prevent an even worse outcome – socialist redistribution, pitting parts of society against each other, and the unfettered expansion of the state.

The political reality is that where workers cannot afford a reasonable quality of life while working full time, the inevitable political consequence will be that the political balance of power shifts to politicians calling for more wealth redistribution. If too many people fall behind, they will vote for redistribution and other socialist schemes. Preventing this worse outcome was, in fact, the political rationale for FDR’s New Deal.

The elephant in the room is, of course, union leadership. We’ll explore labour market and legislative reforms in the future, but today we’ll look at other ways of empowering workers regardless of whether they are, or would like to be, in a union.

So how do we improve worker conditions without redistribution and without giving in to labour union leadership which is disconnected from the actual needs of their members? It can start by giving workers a direct say in how the companies they work for are run.

While this might seem a novel concept in the North American context, the concept of a “works council” is common in Europe and worth exploring. A works council is a group of workers elected from amongst their peers to represent their fellow employees in an official capacity. Depending on the jurisdiction, works councils have different rights and responsibilities.

For example, rights of consultation on certain issues, clear outlining of what information employees will receive, and a say in certain work policies. In Germany, the law clearly distinguishes between economic and financial issues (over which works councils and employees largely just get information and management quite rightly retains nearly complete control) and workplace issues (over which they receive much more of a say in day-to-day management).

Unions, on the other hand, tend to lead towards adversarial conflict and votes on all-or-nothing propositions. They have the power to hear grievances and bargain collectively, but rarely is it done collaboratively like a works council discussing workplace issues.

In most cases, a works council is entirely distinct from any union (and heavily opposed by them as a result). Importantly, workers don’t have to be a union member to be elected to a works council, even in a union shop. (Which interestingly has made “right to work” an easier sell in those countries.) In some cases, works council members are given seats on the board of directors of their companies.

A key feature to note as well is that rights are given to individual workers, not the collective union. This is about empowering workers, and in practice, working to prevent union leadership that is disconnected from their workers.

From the European experience, here’s what we know about the effects of properly functioning works councils:

·       vastly improved labour relations and a much lower strike rate;

·       higher productivity and productivity growth;

·       more collaborative decision-making; and

·       higher employee satisfaction.

They often also lead to higher wages, but in ways that are tied to productivity gains that economically justify the higher wages. This is the backbone of what we’re looking for in a popular capitalist model – empowering workers to create wealth that they have fairly earned and that companies are happy to pay for.

Which elements of this concept fit within the Canadian legal framework, with provinces getting much of the legislative power around work environments, is hard to say. Successful implementation will require experimentation and good faith efforts from workers, companies and unions. But the ideas have merit and need to be explored as part of the solution to this public policy challenge.

In conclusion, a well-functioning works council concept should be explored in the North American labour market. It would help work around the inherent challenges of ideological union leadership, create productivity gains with the resultant wage gains that go with it, and ultimately allow more workers to get the full value of their labour, build capital, and allow them to participate more fully in the free market economy.

We’ll be discussing the idea of wider wealth ownership more generally in the coming weeks. Today, we’re considering another important question: what does ownership of equity capital actually mean, and how do we ensure that people can properly realize the value of that equity capital in practice?

Equity capital is most commonly held in the form of share capital – shares in companies (publicly traded or not) which entitle the owner to a set of rights, most notably a “share” in any profits of the company.

Share ownership is not just an end – a right to a slice of the pie. Share ownership also holds practical value: capital gets to hold companies accountable. This is a key element of the capitalist model (popular or otherwise), yet to give full effect to this value, the accountability measures must work in practice and not just in theory.

The ultimate question being answered here is “who runs a corporation – its owners/directors, or its management?”

The textbook answer is that management runs a company day-to-day, but the board of directors (elected by the shareholders) hire and fire the management. Shareholders have the opportunity to vote at an annual general meeting of each company on specific issues and electing the board, and in some cases have additional oversight over specific decisions of the company (such as major loans, asset acquisitions or sales, etc.) However, much like we vote every few years to send representatives to Parliament, shareholders vote to send director representatives to a corporate board then are largely at the mercy of those directors for any say in what happens with the company.

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Yes, there are exceptions to this, and yes, the law builds in certain protections for shareholders. For example, a company can’t change its classes of shares without the approval of 2/3rds of shareholders.

But the normal situation for Canadian shareholders is this basic relationship – you vote in a board, they represent you. As is commonly said regarding our elected representatives in government, “you’ll have the chance to send them a message in the next election”.

But if holding share capital is to be an equalizing function across society, do we need to find a new balance between the ability for a company to run its affairs versus its owners (the shareholders) legitimate expectation of having an active say in how their equity is deployed?

Boards hire and fire the top executives in a company. If there is a disconnect between the board and the shareholders who elected them, boards can be voted out and replaced. Proposing such a change has a fairly low bar to entry in Canada – shareholders representing 5% of the market value of a company can initiate such a change.

However, beyond the nuclear option of replacing a board, shareholders lack a full toolkit of remedies to deal with other situations that warrant shareholder intervention but not wholesale replacement of the board and management.

Suppose a board is functioning well and holds the confidence of shareholders, but they approve compensation packages for management which create incentives to push for short-term stock price movement rather than sensible, long-term growth of the company. The board (often made up of large shareholders) may be happy to have their share value grow in this way and reward management while shareholders disagree.

In Canada, shareholders are essentially left with the following choice: (1) allow management to get what it wants and retain the existing team despite misaligned incentives, or (2) replace much or all of the board and perhaps management, almost certainly leading to major disruption in the company. Both options are poor ones, and both potentially leave equity capital without the means to properly realize its assets.

A 2018 Harvard Business School study showed that when looking at S&P 1500 companies from 1977 to 2017, director compensation suffered from the same issues as management compensation in that they kept raising compensation in response to what was viewed as competitive pressure to keep directors and management on board. As a result, the study concluded that “directors have weak incentives to pursue shareholder interests in executive pay”.

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To combat this clear misalignment in incentives, some jurisdictions have recently given shareholders additional specific powers that adjust this balance back towards shareholders. For example, in the United Kingdom, executive compensation policy is now subject to a binding vote. Preliminary studies suggest that this has led to lower executive compensation without affecting performance (further suggesting that shareholders are correct in their caution on these issues).

Some may counter these ideas saying “you know you’re buying shares with limited rights – these are priced into their value – if you don’t like this structure then don’t buy the shares”. This is not a helpful attitude in solving the overall tension between a company’s management and its owners, nor creating a society where we can count on wider equity ownership to allow more people to benefit from economic growth. Shareholders need a remedy with teeth to enforce their rights such as those given to investors in UK companies.

If our policy aim is to have both wider and more meaningful equity ownership across society, reforms in this direction must include robust shareholder rights and a meaningful discussion over how share capital can protect its interests without harming business innovation. The UK is a leader in this regard, and it’s time for Canada to take steps in the same direction. While individual companies and activist shareholders occasionally achieve similar outcomes, it’s clear that the broad-based reforms being contemplated here must be backed by legislation.

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The goal here is to proudly defend the strengths of capitalism, show readers why the free market works in their best interests, and can still be harnessed to do even more, and above all discuss the concept of The Money, which is explained below.

Our intention isn’t to teach Economics 101 through your inbox, but to explore popular capitalism while charting a course to better public policy decisions based on this framework.

It’s possible to find a wide variety of definitions for capitalism itself, but for these purposes, the simplest meaning is a system in which the economy is owned and controlled by individuals and firms rather than the state. “Popular capitalism” in turn refers to a capitalist system in which the goal is for everyone to benefit from the economic growth capitalism creates, primarily through ownership of capital being more widely shared.

A deep discussion on this subject could not be timelier. Countless studies over the past few years have shown that unlike their parents and grandparents, younger people across the western world find socialism at least as appealing as capitalism - in some cases much more appealing. My generation, which is just now beginning to take on more and more leadership roles in the corporate and government worlds, have not been convinced that the capitalist model works for them.

The impacts of the COVID-19 pandemic will only compound the resulting challenges. The level of government borrowing, spending, and control over our lives has increased dramatically - in most cases without any electoral mandate. I know I’m not alone in being extremely concerned when I hear socialist politicians say “we will build back better”, as we know what it really means - more taxes, more spending, more state control.

Free-market thinkers are facing a unique generational challenge. How do we rebound from the economic challenges of the pandemic, push back against the current socialist narrative, and do so in a way that changes the views of a whole generation who are drifting towards a collectivist model?

The answer must include a robust set of new policies based on popular capitalism. A free-market model that shows younger generations how it will work for them and does more to include them in all the benefits of economic growth and prosperity. These ideas can’t just be abstractions or philosophical ideas - they must be rooted in the practical reality of today’s economy, and take tangible, measurable steps to make people’s lives better.

It’s important to note from the outset that the free market predates the nation-state, and is the natural state of affairs when free people exchange value. Thus, no government activities beyond the protection of private property and a judicial system that upholds it are required for capitalism to take hold. The inherent competition among participants in this free market is what keeps the others honest - a check on rent-seeking behaviour - and ultimately benefits both the consumer and broader society as a whole.

Popular capitalism is a more moral and fairer framework for solving public policy problems than any others currently devised. All free-market-oriented political parties would do well to look at policy through this lens, not only because of the sound policy rationale for doing so, but politically as well as it offers the opportunity to counteract many policy areas to which socialist policy responses are perceived as being the only solutions.

Popular capitalism completes the picture for people advocating for the free market. It’s the fairest and best system for prosperity, but today’s version of capitalism can leave people out. It’s no wonder that the younger generation flirts with socialism when the gap between this generation and the ones before it in terms of wealth and opportunity is widening every day. How political parties respond to this will determine both the political and public policy landscape for the next few decades.

As opposed to the socialist “share the wealth” mantra, popular capitalism aims to have all of society “share in the wealth creation”. A classic example of this comes from Margaret Thatcher’s Britain, where she implemented a program to let people living in public housing to purchase their residences over time, with a view to - in her words - further develop “ a property-owning democracy”. 30 years later, a generation of formerly low-income citizens now have valuable equity in the housing market and the wealth to propel them into the middle class.

When David Cameron privatized the Royal Mail in 2013, 10% of the floated shares were reserved for employees. Again, the goal was to bring a wider range of citizens into the benefits of the market - not through redistribution or wealth transfer, but by structuring the interactions between the state and its citizens in a more free-market way. As with Thatcher’s public housing purchase option, those employee shares have been worth as much as GBP800 million.

So where does that leave us today? What is the popular capitalism response to housing policy? To environmental regulation? To the role of Crown Corporations and state-owned assets? How do we ensure that shares in companies - the backbone of much of the capital owned in society - confers appropriate rights on shareholders?

As noted above, socialist political parties have well-developed talking points on these issues. They’re almost always wrong and based on flawed assumptions, but in most cases, free-market parties have ceded the territory to these parties and allowed them to trumpet these big-state answers to problems the market can address in a better way. Winning back the public starts with winning the battle of ideas and answering these questions in a way that will make ordinary people’s lives better.

The answers to these questions are not simple, but by approaching the problem through this less explored lens, this newsletter will seek to show how these philosophical underpinnings can form the basis for a robust policy response that will have both political and public policy impact.

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We hope you’ll subscribe to this newsletter and share it with like-minded friends and colleagues. You can expect more depth on what popular capitalism means in today’s policy landscape, views on how political parties can build sustainable voter coalitions based on these ideas, and a road map to a sustainable economic and political future that seeks not to “build back better” but to “build back freer”.

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