More “truthiness” from the Fraser Institute

The Fraser is on a roll. After taking some time settling into the big chair, new Executive Director Mark Mullins has unleashed a torrent of new releases in the past couple months. Few of these are “new” in the sense of original material, mostly they are updates of previous reports with spanky new ISBN numbers.

Let’s look at a couple. First, run for the hills because the debt monster is gonna getcha:

Each Canadian taxpayer owes $171,032 in federal, provincial, and local liabilities, according to Canadian Government Debt 2006. … Federal, provincial, and local governments have accumulated $798 billion in direct debt and more than $2.7 trillion in total government liabilities. Total liabilities include direct debt and programs that the government has committed to provide such as Old Age Security and Medicare (Canada’s public health care system).

The objective of the report appears to be coming up with a really big number to scare people about “big government”. But I don’t think this stuff gets much mileage in these days of huge surpluses. According to the latest fiscal reference tables, the federal debt as a percent of GDP fell from 68.4% in 1995/96 to 35.1% in 2005/06. Total provincial debt has fallen from a high of 28.4% in 1999/00 to 20.1% in 2005/06. Because of economic growth, both debt-to-GDP ratios will continue to fall even if there are modest deficits, up to the point where a deficit was equal to the growth rate of nominal GDP.

What’s missing from their scary picture? The uncounted income we will have in the future. Like other reports from the Fraser this is one-sided, and even if one accepts that their calculations are useful on the expenditure side, they are meaningless without the context of projected future income. By such one-sided measures, my household has an unfunded cable bill liability of several hundred thousand dollars. And my mortgage is also an unfunded liability because I (like almost everyone) have borrowed against future income and do not have financial assets in the bank right now. Even the payroll of the Fraser Institute is an unfunded liability running in the hundreds of millions of dollars.

Second item, poverty in Canada:

The proportion of Canadians living in poverty fell to 4.9 per cent in 2004, the lowest level in history, according to … Poverty in Canada: 2006 Update.

“Poverty rates have decreased substantially, falling to 4.9 per cent in 2004 from 7.8 per cent in 1996,” said report author Chris Sarlo, a senior fellow with the Fraser Institute and Nipissing University economics professor. “This fall in poverty rates is especially encouraging following a lengthy period of stagnation throughout the 1980s and early to mid-1990s.”

… Sarlo uses the “basic needs” approach to measure poverty by determining the level of income individuals or families need to buy the basic necessities of life, such as food, clothing, shelter, and other household essentials. Canadians are considered to be in a state of poverty when they lack the income necessary to buy these basic needs.

It is true that poverty rates have been falling in recent years due to the state of the economy. But these findings do not square with what we see around us, at least in Canada’s major cities: a big leap in the numbers of people living on the street, using food banks, and availing themselves of charitable services. It could be that the depth of poverty has increased, and a decent economy in recent years is masking that behind a falling poverty rate.

Generally, I find the Sarlo measure to be interesting, at least when used as one data point among many different approaches to measuring poverty, because it does give us a sense of what a measure of abject poverty looks like. Conservatives have argued that poverty lines should be defined in strict, absolute terms by costing out a minimal “basket of basic goods and services” required for survival. UBC economist David Green calls this the “thin gruel” approach to measuring poverty.

For many years, forces on the right argued that poverty rates in Canada were too high because they used “relative” measures, based on the idea that whether one is poor or not depends on how others are doing. Statistics Canada measures poverty in two ways. The first, the Low Income Measure (LIM) is half the median income. If median income goes up, so does the estimated poverty line. This is the standard used for most international comparisons of poverty. Second, Canada also has its own unique measure of poverty, the Low Income Cut-off, or LICO. The LICO is a mixed measure: it estimates the poverty line based on an income level at which a household spends disproportionately more on food, clothing and shelter relative to the average household. According to the LICO, a poor family would spend 63% or more of their disposable income on these basic items.

Poverty activists have accused the Fraser Institute of trying to make poverty go away through statistical manipulation, and generally backed the LICO figures. Nonetheless, the government through Human Resources (and Social) Development Canada, began developing estimates of a “market basket measure” of poverty, or MBM.

For comparison purposes, I’ve taken the latest data year published for each of these measures. The LIM for disposable (after-tax) income in 2004 was $28,202 (family of four, Canada-wide, no adjustment for community size), whereas the LICO (family of four, unban centre, 2002) was an after-tax income of $32,556 in 2005. The Market-Basket Measure (MBM) for a family of four in Vancouver was $28,944 in 2002 (up to a couple thousand dollars could be saved if this family lived in a more rural area). Others have got into the game as well. The Social Planning and Research Council of BC did its own calculations, estimating minimum support costs of $28,500 for a family of four for 2004, which is strikingly close to that of the MBM. It would be fair to increase each of these by about 2% per year to reflect inflation if we were to make rough estimates for 2006.

The “basic needs line” published by the Fraser Institute rings in at $22,852 for a family of four in 2006 (it does not distinguish among provinces or size of community one lives in), much lower than the others. An interesting point is that even based on the “one calorie short of starvation” method, current welfare incomes fall below the threshold. Including both provincial and federal benefits, a family of four on welfare in BC receives $16,951.

Making the debate about how poverty should be measured is a red herring. Multiple measures are worthwhile. But let’s give the last word to the Fraser’s hero Adam Smith, and what he had to say in his treatise, The Wealth of Nations:

By necessaries I understand not only the commodities which are indispensably necessary for the support of life, but what ever the customs of the country renders it indecent for creditable people, even the lowest order, to be without. A linen shirt, for example, is, strictly speaking, not a necessary of life. The Greeks and Romans lived, I suppose, very comfortably, though they had no linen. But in the present times, through the greater part of Europe, a creditable day-laborer would be ashamed to appear in public without a linen shirt, the want of which would be supposed to denote that disgraceful degree of poverty which, it is presumed, nobody can well fall into, without extreme bad conduct. Custom, in the same manner, has rendered leather shoes a necessary of life in England.

One comment

  • Well done, Marc, to find the Adam Smith refutation of the “basic needs” approach. Mark Mullins and Co. will hate you for that one!

    In his Presidentail Address to the Canadian Economics Association a few years back, Lars Osberg provided an excellent refutation of the “basic needs” model. Here’s the citation:

    Poverty in Canada and the United States: measurement, trends, and implications
    Canadian Journal of Economics, 2000, 33, (4), 847-877

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