Make Canada Greater: What would change if New York joined Confederation?

I am reading “Divided We Fall” by David French. He may be the first thoroughly mainstream commentator to seriously posit that the American federation may break up under the weight of our political differences. Cheery reading for another happy election day, or not.

Even a mutual breakup of the United States would be a tragedy, but not because of American exceptionalism or any such thing. No, any collapse of a political union is a tragedy. It means that differing peoples could not share a fate or manage a common endeavor. It means shrinking horizons and cramped futures. Even when divorce is better than the realistic alternatives, it is still a tragedy. 

But there is one way that the American federation could break up and avoid such a tragedy! Instead of retreating into smaller polities, blue American states that wanted out (or were being thrown out) could replace one expansive continental dream with another. They could link their fate with their better-governed neighbors to the north!

Such a move would also be amazing validation of the Great White North—for Canadians to reject it would show a lack of confidence and a fear of dreaming big. Canadians should have confidence and dream big! (Yes, I thought Maximum Canada was a great read, why do you ask?)

One Canadian certainly has no fear of success: the Prime Minister invited American states to join as new provinces!

But enough with the blather. Let’s say something happened to crack the American federation. What would a switch entail in practical terms? In order to get my mind off the damn election (and grading exams) I decided to take a preposterous idea seriously. What would happen if New York State became the Province of New York?

The name

Well, first, NYS would not need to rename itself. Canadian law can handle a province that calls itself a “state” as easily as the U.S. constitution handles states that call themselves “commonwealths.” But let’s call the new jurisdiction “New York Province” anyway, just to make things easier.

Integrating the judicial systems

The biggest issue isn’t the one you’d think. (Although I’m getting there.) The biggest issue is that under current Canadian law, state criminal law will be replaced by the Canadian federal criminal code. The transition would be tough. State judicial elections would go out the window. I think you could continue to elect the Attorney General, but her authority would shrink considerably. You could probably continue to have elections for sheriff, but it would also be a departure from Canadian norms. The Canadians would also have to decide how much leeway to give New York in its civil codes. If they mandate that New York conform to the Canadian system, then civil courts will lose much of their power and many trials that were previously decided by juries will switch to judges.

Integrating the two systems would be a major headache for judges and lawyers. I have no idea how long it would take them to adapt. One year? Two? Ten? Canada would have to agree to long phase-in period during which the New York court system would be linked to Canada’s but not integrated into it. During this time every lawyer in New York State will have to effectively retrain. Law schools would also have to revamp their curricula.

Alternatively, the Canadians could work out an exception for the new province(s). Conceptually, such an exception would be relatively easy to implement and administer. (Australia and the United States do it and New York allows certain municipalities to create their own criminal offenses.) It would be a departure for Canada but it would not mean that the federal criminal code would cease to apply to New York. Rather, it would mean that New Yorkers were subject to two (or three) separate criminal codes, much as they are today.

Business ownership

In some industries, American companies operating in the state that weren’t locally owned would be required to pull out and sell their assets in that state to a Canadian company. (Canada would of course now include New York and any other states that made the switch.) These industries are pretty broad, including transportation, airlines, railways, shipping, publishing, financial services and telecommunications.

Telecoms and airways are pretty straightforward. U.S.-owned airlines would need to divest their operations for point-to-point flights between New York and other parts of Canada. Ditto, telecoms companies would need to sell or spin off their New York operations. Canada has been pretty liberal with allowing foreign ownership of transportation companies, so there shouldn’t be major problems for trucking or railroads. Some retail chains might want to spin off their New York operations, but that won’t be that difficult.

Some banks with equity of $8 billion or more and large demutualized insurance companies would need to be restructured. Canadian law requires that no person may own more than 20 percent of any class of voting shares or 30 percent of any class of non-voting shares. In addition, a majority of the board of directors and the CEO of every bank or federal insurance company would need to be Canadian residents.

Publishing is a weird one. Existing operations would only need to sell their operations to Canadian buyers if they intended to acquire an existing Canadian company. But it’s equally likely that you’d have big New York publishing houses would not qualify for Canadian subsidies or be able to acquire smaller Canadian competitors. It would probably get weird very quickly, but there shouldn’t be any constitutional problems. The Canadian government could continue to protect small Canadian operations against large New York-based Canadian operations. Of course, how long that would last once the New York representatives from the federal branch of the Working Families Party entered the Canadian parliament is a different question …

Unions

New York employers are going to be unpleasantly surprised. Most New Yorkers are going to love it. Of course, a lot depends on what the politicians in Albany do with their liberation from the strictures of American labor law.

Gun laws

There may be some disquiet in parts of upstate (as there is in rural Canada) but most New Yorkers are going to love this as well.

Fiscal federalism

Canada channels significantly fewer resources through its federal government than does the United States. Gross federal spending in New York (sans interest payments and direct purchases of goods and services) came to 13.2% of state GDP; the equivalent number for Ontario was only 10.9%. (The high level of direct purchases in Ontario is due to the fact that the federal government is based in Ottawa.)

Let’s take each category in turn. For retirement spending, the transition would be smooth. Canada could take over Social Security payments for existing retirees without much problem while transitioning younger workers into the Canada Pension Plan and Old Age Security.

For other transfers (not including medical care) the Canadian federation is about as generous as the United States, giving a bit more directly to individuals and a bit less to the governments of rich provinces like Ontario. (The whole thing is actually distorted by Alberta’s oil money, but let’s leave that for now.) On the margin, New York Province will receive a bit less non-health federal aid than New York State.

Federal spending and taxation as a % of jurisdictional GDP

	Retire-ment	Medical care	Revenue sharing	Individual transfers	Goods and services	Total spending	Gross federal taxation	Surplus to Feds
Ontario	5.1%	1.7%	1.8%	2.2%	4.0%	14.8%	(18.2%)	(3.4%)
NY State	4.6%	4.7%	2.5%	1.5%	1.4%	14.7%	(16.3%)	(1.6%)
NY Province	4.6%	1.1%	1.6%	2.2%	1.4%	10.9%	(18.2%)	(7.2%)

But health care … oh boy. A back-of-the-envelope calculation (using 2014 numbers, so at the beginning of Obamacare) shows that public and private entities in New York state spent about 8.4% of GDP on covered medical services. That’s more than most Canadian provinces, since health care is more expensive in the USA, but not prohibitively so: the Province of Ontario spent 7.1% of GDP in 2014.

New York is going to have a problem under the Canada Health Act. Medicare and Medicaid transfers from the U.S. federal government will dry up, and here (somewhat perversely) the United States is way more generous than the Canadian confederation. New York will lose Medicare and Medicaid money worth 4.7% of GDP. The Canadian Health Transfer (CHT) would come to only 1.1% under the current formula, blowing giant holes in the New York provincial budget. New York State currently spends about 2.0% on Medicaid, but adding the Canadian Health Transfer to that leaves a minimum budget hole of 5.3% of GDP (8.4% covered spending that will need to be made free – 2.0% existing spending – 1.1% CHT.)

And that figure of 5.3% is a minimum since Medicare and Medicaid are (again, perversely, I know) more generous than Canadian health care, even though they require co-pays. (More generous for the minority of people that they cover, that is.) You can’t tell seniors that they are going to be worse off now that they are Canadian, can you? That would be thoroughly un-Canadian!

New York Province could fill the hole with a VAT rate of 12% on top of existing sales taxes, or a tripling of state income taxes, or some combination thereof. That’s not an impossible thing. In this world where the U.S. peacefully divorces passing some version of Medicare-for-all should be popular. But it would be very expensive. Add to that the fact that the province would be passing upwards of 7% of GDP to Ottawa and becoming Canadian looks like a bad deal, even with all the benefits from being part of a big continental federation. 

Only there is here the outline of win-win deal for everyone involved, which is simply that New York Province is going to be a huge net payer into the Canadian federal budget.

The Canadian federal government could sign a Medicare Accession Grant Agreement (MAGA) with New York Province that would kick back, say, half the cost of establishing single-payer system. New York would get a federal tax point transfer worth 4.2% of GDP, and the Canadian taxpayers would still come out ahead with a net transfer of 3.0% of New York’s GDP. Win-win for everyone!

TLDR: Joining confederation would be a headache and New York would lose some fiscal revenue from the federal government. But if Ottawa is willing to be flexible it could be a win-win for everyone involved. 

I leave the effect on Canadian politics as an exercise for the readers ...

Comments

[Roy]

I love this post and want to theorize some negative effects of NY joining the Confederation:

- NY is probably the worst-run blue state in the county, with an entrenched 'labor aristocracy' that delivers average public services at world-record prices, paid for by financially strained 'corporations'. The state won't even negotiate (and is some cases forbidden to !!) to improve productivity. It's unmentionable on all sides of state politics. Even compared to Quebec it's bad.

- NY has a fierce NIMBY streak, one of the worst in the US. NYC will not grow, between the AOC anti-gentrification crowd and the 'I got mine' Manhattanites. Add on top the total inability to build any infrastructure and there's no reason for a Canadian to see the state as a long-term asset. Compare this to the crane counts in Vancouver and Toronto, two of the fastest growing cities in the hemisphere. And no more growth means very bad consequences for all that bonded debt... especially because the bonds are paying for daily operating expenses, not capital investment....

- NY also has a dysfunctional governance structure, with agencies like the MTA and schools being controlled from the Governors office but having boards appointed by NYC/Legislature... all designed to evade all political accountability and reward the status quo. Does this sound like a bright spot in the confederation?

Sure NYC is a huge economic and cultural center. It would add a lot to Canada. But Toronto, Montreal, Calgary, and Vancouver are no slouches either and seem to be on a better trajectory than NYC. Playing devil's advocate here.

[Noel Maurer]

There's a lot to unpack here, Roy! So let me take them in turn.

(1) Partially true on labor practices! The corporations aren't financially strained, in the sense that there isn't much evidence that NYC is overtaxed. The cost of public services is hard to measure, but they are good in New York even by Canadian standards. What is true, though, is that public procurement and contracting in NYS is a mess.

The problem is that in what we can best measure, infrastructure construction costs, Canada appears to have caught the American disease. The Rest of Canada will need to get a grip on the problem; adding New York to the Confederation wouldn't make it worse.

(2a) True on NIMBY! Canadian cities build a lot more housing than American ones. That said, Ontario and B.C. won't stop building houses if NY became a province and more than NYC impedes growth around D.C. What's more likely to happen is that NYC will suddenly face amped up competition from Toronto with no international border in the way.

(2b) False on public finance. NYS does not have high debt levels.
Adding together state and local debt came to 21% of GDP. Ontario was 37.1%. As for the future, I've already pointed out that Canada seems to have sadly caught the American cost disease. (See also this.)

(3) True on a messy governmental structure. But that's not something that would affect the rest of Canada, anymore than it currently affects Pennsylvania or Massachusetts. (And that weird structure reflects a really strange NYC-NYS dynamic that's sui generis.)

So you get a big jump in international importance, a boatload of new tax revenue, and all the opportunities that come from having New York inside your country! (Including opportunities that come from making reform easier there.) What's not to like?

[J.H.]

This was a thoroughly interesting exercise. I would love to see the same exercise done for New England (or perhaps just Massachusetts as a representative state for New England) and the reverse scenario of Ontario joining the Union and....Quebec joining the Union (now THAT should be a really interesting exercise).

[Roy]

@Noel

I appreciate your detailed response, and for educating me about debt levels. I suppose my fear is that these problems would spread to the rest of the confederation due to NY's population and cultural status, 'damaging' Canada's brighter spots rather than improving NY.

But, if New York became willing enough to join Canada, it would also reflect an institutional willingness to change that I don't see right now. Now Cuomo needs to get appointed to a cabinet job so his ego doesn't impede the process!

[Shwi]

“...exercise for the readers”

Sure. NYS has 19.5 million people. In comparison, Ontario has 14.5 million, and 121 members of parliament. That gives NYS about 175 MPs. The House would have 513 members, 257 required for a majority. NYS would also get six senators in the unelected upper house. The Supreme Court may also need to be expanded by 3, building on the current regional balance (3ON, 3QC, 2 West, 1ATL)

(For a Canadian, the weird thing about NYS is that it’s population has been roughly stagnant since 1968! In that same period, Ontario has doubled in size. Even PEI has increased by half.)

Quebec’s population share in confederation would decline from 23% to 15%. A slight decrease in national influence, but with the upside of increased equalization. Some Quebeckers may look for greater autonomy to assure the French fact in North America. New Yorkers would need to adjust to official bilingualism at National Parks, airports and train stations (Aeroport JFK Airport), and French on all their cereal boxes.

Ontario would face the greater shock, and especially Toronto, the current HQ of Canada’s finance and English media, and a with self conception as the most international and dynamic city in the country. Ontario voted against the Tories in the free trade election of 1988, and may be uncomfortable finding itself becoming “New Illinois”.

I expect that NYS would return anti-confederation politicians to Ottawa right away, joining the long Canadian tradition of unconsummated separatism.