Fixing Our Own Problems First

Living next door to the United States as Canadians do, we are innundated with daily doses of American media. A significant percentage of us have relatives on the other side of the border, or own property there, or have spent part of our own lives living there. Then, too, much of what interests us for our own savings and investments tends to be American in nature: American companies on the stock market, for instance. We are, as a people, invested in outcomes in the USA almost to the same depth as we are to Canadian ones.

That’s why it’s not surprising to find most Canadians feeling that there’s nothing wrong with helping our neighbours out as they continue their descent into an economic collapse of their own making. (Too harsh, that? What else would you call no commitment to ending deficit spending and ever-ratcheting-upward debt, no concern for the health of their currency [odd, given the dependence of the United States on imported energy: slipping US dollar exchange rates means it costs Americans more even if the world price of oil and natural gas is stable], financiers who have once again taken on too much risk and a Federal Reserve policy of saving their bacon at the expense of Main Street, USA?) Indeed, as the combination of the US Department of Homeland Security’s incessant border actions impede business as organized under NAFTA, destroying the effectiveness of just-in-time industry supply chains, and as the insolvency crisis around mortgages continues to drain the American economy of consumers with cash, American businesses are consolidating, to the detriment of Canadian plants and suppliers. Canada ends up with clear differences across the country: sectors in trouble (lumber everywhere, manufacturing in Ontario and Québec), and sectors that are booming.

But we have our own issues. We, too, have been playing the “house equity ATM” game these past few years — after all, if we hadn’t been, local radio wouldn’t be full of advertising for second mortgages, home equity lines of credit, and borrowing from equity built up, especially in the country’s hot real estate markets. Meanwhile affordability has gone to hell in a handbasket: less than 30% of Vancouver-area residents qualify to enter the housing market, even with 95% mortgages CMHC-backed, and the target being a 400 sq. ft. overpriced postage stamp of a condo as houses are out of the question. At a time when fuel is (as it is here) over $1.20 per litre, the suburbs sprawl ever further out, with even longer commutes, to try and trade off land costs and create “affordable” housing. There’s a financial trap: too much money, still, to live too far away, with all the hours spent stuck on the road, in mounting traffic jams (the worst roads are inevitably in the suburban areas outside our cities), and all the life that is lost — not to mention the health care problems to come from all that sedentary, stressful driving time and worries about making ends meet!

Australia saw this coming back in 2004. They — like us, like the UK and Spain, like the Irish, and like the Americans — had a housing bubble and a growth in consumer debt. They decided to get ahead of the inevitable “popping” of the bubble (with consequences clearly on display south of the border). Interest rates were run up, to dry up the speculative building and house-trading. Even today Australian rates are more than double ours — and nearly quadruple where American rates are now after the US Federal Reserve’s 75 basis point rate cut today. This was a little less than anticipated, yet, judging by the futures and stock market action this morning, a continuation of the “preserve Wall Street, to hell with everyone else and the US dollar” approach taken to date.

Yes, Australian prices have fallen. Those on the frothiest edge of the speculative bubble paid the price for being the “last one in” — something that must happen when every set of conditions turns. But they have come down in an orderly fashion — that country is not filled with whole neighbourhoods in foreclosure or for sale at distressed (40% or more down from purchase prices of two years ago) asks with no bids. The Australians have had to tighten their belts for a year or two. But the country is growing, and prosperous; the danger was averted.

We in Canada can (just) still do this. The Bank of Canada ought to be doing the same for us: raising interest rates, signalling to lenders to think more about risk. Borrowers would pay more; real estate would begin to decline in an orderly fashion. Likely, the Canadian dollar would rise as well. The whole combination would likely bring screams of anguish from Southern Ontario (which has had both a housing bubble and a plethora of employers who figured the Canadian dollar would perpetually be the poor cousin of the US one). We would need, as a country, to begin to add high-value-add manufacturing to our mix, instead of competing on price. All this is a long-term benefit to Canada, worth the price of two or three years of pain.

The alternative, after all, will be to be a Japan, with a nearly two-decade long depression — exactly where America is headed. A deflationary depression, with all the levers of monetary policy jammed at zero and unable to do anything, debts galore, a declining currency and escalating costs for food, fuel, etc. due to imports and diversion of foodstocks to make fuel with the ethanol programme. Add a little of the usual American protectionism and the outcome will be America’s withdrawl from much of the world exactly as did Britain a century earlier: unable to afford to stay. This is where the world is headed — thirty or forty years of great power transition. Two world wars signalled the last one.

What Canada must do is take its medicine. Yes, it’s hard: it’ll bring pressure on the government, and will make people like Garth Turner, MP froth at the mouth. So be it. The alternative is to do what we have done so far in 2008: sink ourselves and our future so as not to “deviate too much from the United States”.

America is a dying empire. We need to step up to our own future — energy state that we are — and decouple from the US. We do that by straightening out our own house. Ideally we would go all the way and return to a gold standard. If not that, at least show some backbone — be Swiss, be European, be Australian.

There is no greater gift to the future — no better sign of stewardship — than that a dollar retains its value. When it doesn’t, saving makes no sense. Do we want to be Americans, with a negative savings rate, drawing down capital to keep spending? Or do we want to again practise thrift and a sense of longer-term interest?

The choice is now. Let us hope those in charge in Ottawa get the point, and do what we need, not what we, in our desires, may (at this moment) want.

Creating a Global Giant

There really isn’t very much that’s required to turn Canada into a world power, a country filled with jobs (and good ones) galore that attracts the best and the brightest from around the planet. It’s simply to remove the dead hand of government from the economy.

Dead hand? What other name would you have for $220,600,000,000 of spending by Ottawa? All that money, after all, didn’t come from nowhere: it came from you and me. That’s just a tall latté and a slice of lemon poppy-seed loaf at Starbucks (or a lunch special at Tim Horton’s) away from $6,900.00 from each and every Canadian: new-born babe, school child, university student, adult worker and retiree. This year, next year, every year. That sixty-nine hundred dollars doesn’t count the take by your province, or your municipality, but it does cover every tax the Federal Government assesses: the GST, the gas tax, the air conditioning levy, the tire levy and the like.

Then there’s the cost of administration. With 400,000+ Federal civil servants, even assuming a low $80,000 each for salary, benefits, office space, etc. we’d have 15% of that two hundred twenty billion simply going to pay for all the people whose hands touch this money through their work. Don’t forget all the money that goes to pay for contractors and consultants to augment the federal headcount, provide for skills that don’t fit within the current pay bands due to their demand, and the usual second opinions in the endless game of “my ass is covered”. It’s probably not at all unreasonable to figure that a good 20% of every tax dollar goes into “administration” in this way.

That’s $1,380.00 a head, Canada. And what did we get for it?

Well, ostensibly we got programmes and services. Great chunks of the spending, of course, are simply transfers: take the money from here and send it to there, collect money from this and pour it into that. Papa knows best, and all that. Personally, I’m of the opinion that if some provinces are wealthier than others (i.e. pay more into this transfer agency that skims 20% off the top just for existing than they see back in “goodies”) that’s just a fact of life. At the time of Confederation the economic powerhouse of Canada was Nova Scotia, with New Brunswick close behind. Much of the twentieth century saw Ontario and Québec as the place to be. Early 2008, the money’s being made in Alberta, British Columbia, now Saskatchewan. In other words, the more productive corners of this large country keep shifting. It would no doubt be desirable if we could just keep the strength of each region and others grew up, but that’s not what happens in the real world. Power and population, economic models, etc. shift and change. Accept it.

Capital, in fact, goes where it receives the most respect (i.e. isn’t nibbled away endlessly either by erosion of the value of the currency or ever-changing fees, rules and taxes). Investment comes when a region has lots of opportunities to choose amongst, and where inflows to the region are sustained and sustainable: the timeframe here is not “to the next election” but measured in decades (and sometimes, centuries). Capital is not just financial: it is educational, human, dynamic. It can receive more respect with the right policies: the argument for a single payer health care environment (regardless of who delivers the care) is found in low cost and universality (I can take a risk as my care is not tied to my employer); the argument for low cost education with many options (no mandated curriculum) is the allowance for developing even more human capital. There are, in other words, some investments worth making to prime the pump. Others may facilitate sustainability: the infrastructure of urban areas, for instance. But if the total package isn’t right, or the take to do these things is too high, the capital will go elsewhere.

It shows how badly off we are when you realise that Dubai — a place with a beastly climate, close to one or more potential wars that could spill over and engulf it, little food-producing capability, etc. — is attracting the mounds of capital it is. But that capital isn’t going to multiply much: it’s being sunk into buildings. No real import substitution (as Jane Jacobs, in her works The Economies of Cities and Cities and the Wealth of Nations showed, this is the true engine of economic prosperity that lasts) will take place. If that is the best use of capital, it shows how much we have impoverished our own prospects.

So: get out of the redistribution game, the picking favourites game, the national champions game, the innovation agenda game, etc. Stop agonising and studying (even unto death) the locations of things. Allow — as the Finance Minister has hinted — province to compete with province for the shape of the future. Leave the bloody money in the hands of citizens to start with by lowering tax rates and eliminating whole taxes outright. Starve the beast. Remember, each dollar denied to Ottawa is actually $1.20 saved, thanks to the overheads of running the place.

As for the Canadian economy, the other thing that’s required is a strong and stable currency. A dollar saved — I care not whether in an ordinary account or term deposit, in an RRSP, an RESP or a TFSA — should still be worth a dollar in terms of its purchasing power years later. Inflating the currency, in other words, is destructive of wealth. Lowering our interest rates, as was done this month by our new Governor of the Bank of Canada, and promising to keep doing it “to keep matching the Americans” is a fool’s game, for they, foolishly, are outright destroying their economy and the US dollar. There is no need for us to follow them into the pit. Not doing so would make our corner of North America the one to invest in, to accumulate capital in, to build factories in to serve the entire NAFTA area. Why destroy our prospects and our own futures? To satisfy Garth Turner’s and Dalton McGuinty’s odes to twentieth century applied Marxist corporatism?

Ideally, of course, we would bite the bullet, take the transitional pain, and return to a backed currency. That means gold, once money and no doubt again as country after country follows Zimbabwe’s descent into wheelbarrows full of bundles of million-unit bills to buy what little there is. That is where the US is headed. So far Europe is trying to resist. Australia is resisting. We should, too — and take the power away to play games with the value of money in the process. The first country to get serious about the long-term value of their money will see a massive inflooding to boost their economic future. It should be us.

There is — just as there is with issues such as the environment — little likelihood that any of this will come to pass. Parties and party leaders positively thrive on siphoning off the future to bribe the voters today. But we can dream.

And when our children are impoverished and life is hard, we can tell them just how badly we screwed up, how we missed our chance to be great, and settled instead for a little more largesse.

Federal Budget Day a Yawner

Another Federal Budget has been brought down, and I must confess the whole thing was boring in the extreme. We might, of course, have had at least a frisson of excitement as to whether the Opposition would manage to combine forces and precipitate an election, but as we know Stéphane Dion, Follower of the Official Opposition, signalled his latest backing down from the electoral abyss even before the Finance Minister rose in the House. So we are left with a limp rag of a budget and a limp rag of an Opposition: hardly inspiring, although it does leave Opening Day free and clear on the horizon to enjoy another year of baseball.

I’m not about to whinge about the Liberals. They are as entitled as anyone to make fools of themselves in public, and I must say that I think, along with Jeff Jadras of A BCer in TO and many other Liberal bloggers, that this is one opportunity missed too many. How, really, can anyone take any bluff or bluster out of the mouths of the chicken pen seriously after this? Why, indeed, even listen to it, other than habit? Steve V of Far and Wide this morning asks the key question, which is that if this was about simple lack of readiness to compete then why not just admit it and head onward to mid-October 2009, when the fixed election date comes up, and no more snorting and pawing the ground only to tuck tails between legs one more time. When even the columnists of the Liberal Party’s House Organ, the Toronto Star, start questioning why we should care, as reported in Blogging a Dead Horse, I think the answer is clear: we shouldn’t.

Yet there were reasons for disappointment with this budget, and they’re not the ones laid out by Garth Turner. From the point of view of the twenty-first century, as opposed to the twentieth, not dumping money on dying industrial models is a good thing. Yes, in Ontario times are tough. All the money that’s been sloshed at the extended automobile industry over decades, however, hasn’t protected that economy, those jobs or the affected families. The industry - as with any industry - is prepared to take any hand-out on offer, and then do exactly what it was going to anyway. Border constraints imposed by the US Department of Homeland Security make just in time inventory processes that cross the border inefficient and unpredictable. We will end up with other marques prospering that source parts not made in Canada from outside North America, and American marques dying unless there are exceptional reasons to deal with that border. Slopping money is simply filling up the pig-trough and not solving the real problem - which is essentially beyond a Canadian solution in any case.

It’s what isn’t being done by what is ostensibly a Conservative government that bothers me, as I suspect it bothers Aaron Wudrick of the Wudrick Blog when he comments on just how “Liberal” our Conservative Government is. Oh, well, as Joanne of Blue Like You points out, there are political implications, and perhaps we should be satisfied with the opportunity for yet more self-immolation on the Red(-faced) Team’s side of the aisle. But I am not.

There is so much slop in the system already - programmes for every two-bit cause known to mankind and every supplicant under the sun, delivered through Industry Canada, the regional economic expansion arms (ACOA, WD and the rest of the handout brigade), dribbles from Heritage, pork pie from HRSDC, a bit of IRAP money from the NRC here and some CANARIE droppings there (I defy you to find the year or two you’ll need to sort through the many layers of “beg and receive” set up over the years by previous governments) - and really, after two years in office, there is little excuse for this continuing. Then, too, the whinge from the more hawk-like Liberals is that “we left you guys a whopping surplus and you’ve handed it out all over the map, so now you get to flirt with the danger of not breaking even”. True enough, but the problem isn’t with the GST reductions, the income tax changes, the new tax saving account, or the child care money. The problem is with all the other new programme spending on top of all the existing programmes, most of which have carried on blindly and blithely spreading their steaming droppings onto the Canadian economy, distorting it. Why, indeed, would anyone in VC land actually think about the size of investment needed to make the company they’re interested in successful when they know there are all those programmes out there to pick up their slack? Why would managers care to invest in their own business’s future out of earnings, or worry about whether their products have a viable market, when there’s all that money slopping around to go prop things up, or build a new product that can attract the cash but has no proven market applicability?

All this largesse, in other words, has created a Canadian entrepreneurship good at complaining, good at buck-passing, and good at form-filling and report writing, but not one that cares to get down and do the hard work of scratching out a living the old fashioned way: earning it.

A Conservative government ought to be expected to, at the very least, challenge the 400,000+ civil serpents who are busy running this national slush account in its many forms. If they wanted to keep certain types of programme - perhaps they, too, have some sort of Chrétienite “Innovation Agenda” - then at least they could clean them up, rationalise them, sweep away the programmes hanging on for the last 1% of the job they originally were specified to carry out that will never finish, and the like. But no: we just add to the pile, and the Canadian taxpayer and productive business person groans under the load.

After all, if Conservatives won’t bring fiscal order to government, who will? The “never met a handout for Québec I didn’t like” Bloc? The “there’s airtime and the pretense of relevance in asking for money” New Democrats? The “none of you are doing enough” Greens? Or the “hey, you’re being Liberal enough for us” Liberals? Don’t make me laugh.

But we’re stuck, aren’t we? It’s much more fun to hand it out than to clean it up, and it always will be. The notion that taxes are an impost (and hence an imposition) on taxpayers is long dead: the question is now put as “how much will taxpayers be left with” as opposed to “how little should we take”. The notion that programmes should have a defined end-point and then be shut down is long gone in favour of perfection, “finishing the job” (which is never done, and always expanding). We as a nation will be sucked dry - although what’s been done to this point is precisely why Ontario is dying, Québec and the Atlantic provinces died and the West - the country’s last bastion of productivity and growth - is at risk.

It’s the being stuck that made Flaherty’s budget yesterday a yawner, not the items in it.