Saturday, November 29, 2008

Things Fall Apart

Yes, it appears mere anarchy has been loosed upon Ottawa while I was traveling state-side this week for US Turkey Day. It may take a couple of posts to sort through this mess. Let's start with the non-stimulus package. The Canadian economy is naturally and through sound practice connected with the rest of the world. We do not aspire to be a hermit kingdom. Thus, while this economic crisis cannot be laid at the feet of Canadians or their government, the crisis has certainly breached our border. A response of some sort is appropriate. The nature of that response is a question for economists and policy experts to debate. However, some sort of response is expected. To simply sit and think that nothing has changed, that the policies that were introduced in anticipation of burgeoning oil revenues holding up a struggling manufacturing sector will continue to apply in a climate where oil prices have plummeted is simply unwise and illogical. The question is what to do. This is not an easy question. However, it does have answers.

It is true that we cannot respond the way our friends in the United States and the UK have responded. There is no need to bailout failing banks to restore solvency or liquidity to the markets. Our banks through the benefit of better regulation, and perhaps more importantly, better management, avoided the depths of the crisis which has imploded so terribly in other parts of the world. Our housing markets, while hurting, are not consumed by foreclosures. If Canadians start losing their homes it will be because they have lost their job not because their mortgage rate doubled overnight. Thus, the massive bailouts that have made all the news worldwide are not a Canadian solution. Nor, for the most part is a manufacturers bailout. Canada's manufacturing sector is dominated by the automotive sector. While there are steps we can take to ensure that jobs remain in Canada, it is neither possible, nor within the jurisdiction of the Canadian government to bailout the auto makers. They are simply not Canadian companies and are not really the responsibility of our government. If Frank Stronach or one of the other ancillary manufacturers were to ask for money, I think we should listen, but I don't that's really on the table. The issues above are the part of the landscape that justify the inaction we've seen from the Tories. However, it is nowhere near the whole picture.

The Canadian government, through years of fiscal restraint in discipline, finds itself well positioned in terms of debt to GDP ratio. Are we the best? No. Are we completely secure? Definitely not, but we are in a position of relative strength. The same cannot be said of Canadian infrastructure. The Obama administration planned infrastructure investments are as needed in Canada as they are down south. The Harper government could have announced new spending in roads, transit and electrical grids. This spending would not only improve crumbling infrastructure and provide jobs but have the ancillary benefit of reducing long term greenhouse gas emissions. While I am reluctant to advocate government deficits, I believe infrastructure is a worthy cause to do so. Conservatives often say that we should manage government like we manage our households and I don't think it is a terrible analogy. However, when your house needs a rennovation or repairs, you spend the money in order to reap the future rewards. You take out a loan (if you can get one) either through a line of credit or directly on your mortgage. It is sound management of a household and it is sound management of government. Infrastructure investments are also one time costs. In other words, you don't have to worry about escalating deficits year over year because once the subway track is laid, it requires little further investment. If you are going into deficit to pay for government services such as health care, you have a problem. An investment in infrastructure would not create that kind of systemic problem.

Stephen Harper, Jim Flaherty et al. are wrong to do nothing while the economy collapses. They have an opportunity to make their mark upon this country in a profoundly positive way, and they are missing the boat. Shame.


WesternGrit said...

A Liberal/NDP/Bloc coalition would most likely focus on infrastructure (roads, TCH twinning in BC and Manitoba, bridges, railways, light rail transit, rail and road links to the North, bridge to Vancouver Island, etc., etc.)...

AND - most importantly - use well-trained, accredited, ticketed union labor for all projects (limit PPPs to very minor - or no - projects)...

Anonymous said...

Western Grit, all of those projects would require local assessments, and environmental assessments, and where does that take the stimulus?

Years down the road....

Anonymous said...

Aaron - interesting series of observations on the coalition's strategy. Of interest to me are the economic and financial implications. Since I am, at present, unemployed, clearly the picture looks a little different to me.

You appear to criticize Harper for his inaction. Hmmm. I suggest that you have a long look at the economic team that Obama has introduced. For example Christina Romer (Chair of the Council of Economic Advisors), who has re-analyzed the economic studies of the Great Depression is crystal clear that neither the New Deal nor the war were responsible for facilitating emergence from the depression. In fact, in some respects the FDR programs were counter-productive. What did permit the emergence was expansion of the money supply. The primary expansionary techniques are not fiscal - they are monetary. As such, they would not appear in an economic update at all. In fact, Harper already took such measures. Point of fact, Volcker is the past master of manipulation of the money supply, and he is the chair of the Economic Recovery Advisory Board for Obama.

Larry Summers, while supporting a fiscal side plan because of its reduced time lag, is primarily a free trade globalization guy, and his focus will be on currency. Review his history of dealing with the international currencies - Mexico, Asia and Russia. Here's another clue - so is Geithner, and Rubin, who advised Obama's campaign.

In case you are not putting the pieces together, the US will likely expand the money supply by expanding credit facilities through the Fed to the banking system - and this is already underway. The second kick comes when sufficient deleveraging has completed, and the flight to US T-Bills (last month) and mid-term bonds (current) for 'Safe Haven' is over. The US currency will be driven down to improve comparative advantage and improve manufacturing competitiveness.

This is the threat to Canada. With a continued downward pressure on oil below the marginal cost of production in Alberta, and a RISING canadian dollar, we lose a competitive edge in the auto sector in trade with the US. The big 3 canadian operations will be scrapped under the terms of any bailout from US Congress, who will insist on protection of US jobs as priority.

In these circumstances, fiscal side stimulation will simply be pouring money down the drain. Canada will have higher inflation after the oil cost reduction works its way through, and a dearth of investment opportunities. Canadian interest rates will have to rise to deal with inflation, and to increase borrowing to fund fiscal measures. This will in turn further enhance the rise of the CAD, and further erode manufacturing competitiveness for export markets.

Fiscal side measures until Obama's tactics are clear is beyond foolhardy - it could well be catastrophic. The G-20 measures are appropriate for many other countries. They are NOT for Canada.

I could not care less which of the parties run Ottawa. They will either recognize the constraints and act responsibly, or Canada will be hurt a bit more, spend a fortune for nothing, and those parties will pay the price at the next election.

The liberals know better, they really do. (Not Paul Martin or McCallum who are simply non-entities in this sphere). They have enough friends on the street to know the impact of these issues. Sadly, it appears that they are letting their ambition blind them to the risks. If they follow through on their proposals, it will get kinda ugly in the private sector.

Anonymous said...

Forgot to mention... I don't buy that the determinative motivation for the coalition was the lack of economic stimulus in the economic update.. Does anyone actually accept that spin?

WesternGrit said...

That part of the sham was dropped this week. No, this is fully about the economy now.

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