Montréal, le 15 mai 1999
Numéro 37
  (page 10) 
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 by Jean-Luc Migué
           Hard as it is to believe outside Quebec, Lucien Bouchard can some times be right, even in matters constitutional. The rejection of the social union pact by his government was a principled position. The action taken by the Quebec government may have been motivated by political interest. Mr. Bouchard presumably calculated that no new social programs would ever be implemented by the federal government without Quebec being alloted its share of the program funding.  
          The fact remains that for the first time in the history of Canada, the provinces formally recognized the insidious federal spending power and agreed that the federal government could invade any field of provincial jurisdiction with the consent of six provinces. This latter requirement could be met simply by gaining the agreement of 6 small and poor provinces holding less than 15% of the population. One can hardly conceive of a consent that an offer of a few million dollars by Ottawa could not buy.
          Now it is true that in budgetary terms most social services provided by Ottawa already overlap with provincial services. But instead of working, as promised, to contain this deplorable tendency, through arrangements that included financial compensation for provinces that opted out of federal programs, provincial governments formally ratified the practice which, as shown below, underlies the historical overexpansion of the public sector in Canada.  
Federalist Politics 
          When both levels of government supply overlapping services as provided for by the social union pact, politicians of both levels find themselves competing in the same pool of votes for the supply of similar services. Viewing votes as inputs in the production of political outputs, we are then faced with a situation of two public suppliers competing for a common pool of resources (votes). Presumably the conventional analysis of allocation under common-property rule should shed light on the outcome of this process.  
          Mainstream analysis of conditions where resources have common-pool properties holds that competitive market organization may lead to waste. Consider for instance the case of a particular pool of oil belonging to more than one owner. It usually proves difficult to identify and assert property rights over portions of the oil patch. Each owner has an incentive to exploit currently as much as he profitably can. He has no interest in calculating the effects of his actions on resource availability in the future, because he cannot expect to reap the future benefits. Oil in the ground belongs to whoever land owner pumps it first. Overoptimal rates of extraction are predicted. The collective action paradox holds. In the absence of clear property rights, competition leads to wasteful rent seeking.  
A Common-Property Theory of Federalist Politics 
          In conditions where functions overlap between two levels of government in national federations, a similar common-pool problem arises. Let us assume for instance that both levels of governments have the power to offer aid to some group of voters such as university students. Let us further assume that such a policy is politically profitable in that it attracts more votes than it repels. Under a single government system, a monopoly government would simply calculate the political benefits and costs of its actions and realize that there is political mileage to be made in adopting such a program. Its calculus would lead it to supply the politically optimal level of aid. By contrast, in conditions of competition between two suppliers of the same services, it is in the interest of both suppliers to seek to gain the votes in implementing the program first. Should one of them abstain from supplying the political output, the potential gain of votes would be lost to it in favour of its competitor. Competition between two suppliers leads each one to attempt to realize the net political benefits for fear of losing them to its competitor.  
          In the conditions specified, each of the two suppliers faces the same demand and supply conditions as the single monopoly supplier would face. Each level of government only calculates the potential vote gain and loss to itself, to the exclusion of potential vote losses inflicted on the other level of government. From the standpoint of each supplier, the whole pool of voters is up for grab. Each player has an incentive to exploit currently as much of the market as he profitably can. It has no interest in calculating the effects of its actions on voter support in the future, because it cannot expect to reap those future benefits, once the vote pool is appropriated by its competitor. Like oil in the ground, votes belong to whoever captures them first. Yet any increase in the supply of output by one reduces the opportunities to gain votes by the other. Just as in the pumping of common-pool oil, each level of government seeks to outbid its competitor and attempts to pre-empt the political field in supplying its own output.
« Whenever a field of activity offers the
likelihood of political gains,
all levels of government will bid
to supply political output. »
          Assuming no particular strategic game on the part of any player, each will therefore be led to supply a level of political output equal to the level chosen by the monopoly supplier. The level of public output should rise to some multiple of what it would be under single government.  
Implications of Federalist Politics  
          Some of the more significant implications of the theory are discussed in the next few lines. In terms of social welfare, the outcome is guaranteed to be excessive government spending and regulation. The logic of federalist competition results in a wasteful expansion of the public sector. The social union agreement thus marks a futher step in the excessive growth of government in Canada. Here is an implication of public choice under federalism that runs counter to predictions derived from the more familiar Tiebout line of analysis(1). Our results show that there are two forces operating in a typical federal system, an expansionist one rooted in the political dynamics analysed above, and a restrictionist one based on the mobility of resources among decentralized entities. This may explain why the empirical record is rather mixed on the contribution of federalism to containing government growth.  
          Another important consequence of the analysis is that, barring strict constitutional or technological constraints, all levels of government will have a tendency to enter every field of intervention. Whenever a field of activity offers the likelihood of political gains, all levels of government will bid to supply political output. The observed amount of overlapping should trend upward, a conclusion clearly supported by historical facts. Taking Canadian modern history as a case in point, Ottawa, along with the provinces, is active in all the following fields, which constitutionally are the sole jurisdiction of the provinces: manpower training and apprenticeship, social services, culture, housing, tourism and sports and recreation. Furthemore, this listing fails to include the vast range of programs whereby Ottawa « bribes » provinces with federal money to influence decisions in provincial jurisdictions. All cost-sharing programs (medicare, higher education and welfare) and of course equalization programs, which by nature affect all provincial fields, must therefore be included in overlapping areas. Taken together, these fields account for the bulk of the modern expansion in public budgets. 
          An important lesson of the modern history of federations however is that the central government has the technological edge in the race to enter all fields of activity. The ability of the central supplier to discriminate between citizens and regions is greater due to its monopoly power over the whole national common market. The potential political « profit » available to it from invading lower-level juridictions is higher than it is for lower-level governments to enter higher-level jurisdictions. This consequence is clearly confirmed by historical trends in all federations. In Canada, the bulk of the expansion in federal budgets and regulations over the past 50 years occurred in areas of provincial jurisdiction. The iron law of centralization holds with even greater force than previously thought.  
          It is also significant that the rate of growth in public expenditures over the last three decades was highest in areas of provincial jurisdiction where the extent of intrusion by federal initiatives is most pronounced. Three areas of intervention have contributed most of the growth in provincial expenditures over this period: Education and training, medicare and welfare. All three are characterised by the largest amount of overlapping. By contrast, increases in budgets were the lowest at the municipal level, where the extent of overlapping and the level of monopoly power are minimal. This would mean that the restrictionist Tiebout effect was the strongest at the municipal level, while expansionist political competitive forces were limited. To complete the picture, the rate of growth of federal expenditures for own purpose was intermediate. In the latter case, the Tiebout effect was inoperative, but so was the competitive effect in the absence of overlapping. Overall the two opposite effects resulted in intermediate growth. 
Constitutional Implications 
          A direct, if possibly naïve, constitutional implication of the above analysis would be to radically decentralize federations by eliminating overlapping jurisdictions in favor of provinces and states. The analysis developed above shows that the Tiebout theory of federalism was based on the assumption of firm constitutional limits on the powers of the federal government. Once these limits broke down, both levels of government began to exploit the common pool of voters, with the expected consequences on the explosive growth of government. Some of the desirable constitutional changes implied by this approach would provide that: Provinces and states have the sole jurisdiction in fields where overlapping presently is the rule; the federal spending power and its power to bribe lower-level jurisdictions is struck out; referenda, initiatives and recalls are required for all constitutional amendments, including regional majorities conferring veto powers to provinces/states; federal powers to disallow provincial laws or to legislate in areas of provincial jurisdiction are ruled out. Note that all these conclusions conflict head-on with the provisions of the social union pact. 
1. Because they can easily move away from unfavourable legislation by provinces, 
    resource owners in federations are more sensitive to relative tax and regulatory actions 
    by provincial administrations. For this reason, the originator of the economic theory 
    of federalism,Tiebout, led to the conclusion that governments would grow 
    more slowly in federations than in unitary states.  >> 
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