Debunking McGuintonomics

So last week Alison Redford the Premier of Alberta asked Ontario’s Premier Dalton McGuinty to show some public support for the Oil Sands, currently facing a heap of criticism from environmentalists. No one knows what Mrs. Redford was expecting as a response, in any case the answer sounded a little bit like “If Alberta didn’t exists Ontario would be better off”. His conclusion was based on the popular belief that the Canadian dollar had become a ‘PetroDollar’ and that it’s meteoric rise had crushed Ontario’s manufacturing base. Now because McGuinty and his family seem to be career politicians we will pardon his ignorance of economics and try to fill some of his knowledge gap.

So McGuinty thinks a high dollar is bad. First mistake. Very broadly speaking a relatively high currency is a mark of wealth. Basically the World wants to buy our stuff more than we want to buy the worlds stuff. Okay so foreigners recognize that we are a nice country worth investing in and who’s products look alright, but if you still believe a high currency is killing jobs in manufacturing well that would seem like a mightily expensive accolade. However Ontario is not innocent in this. Unfortunately the worlds appreciation of fiscal virtuousness is quite lagged to reality by a couple crises. So when Canada starts supplying the World with all our AAA rated (and less well rated but ‘made in Canada’ stamped debt) in an environment where some of the deepest debt markets are not nearly as risk free as they used to be, obviously foreign investors gobble it up our debt greedily. What is the effect of that? well essentially the world values our debt more than our goods and services, so when that appetite for financial assets inflates the Canadian dollar, our exports will suffer (see the US current account deficit/reserve currency status/trade deficit quagmire). Now since Alberta doesn’t have any debt and hasn’t issued some for a while they can’t be guilty on that front. So who is exactly contributing to our soaring Looney from a financial assets trade perspective? The feds are! Alright since much of the stimulus package was spent in Ontario (G8/G20 summit spending, carmakers bailouts etc, etc…) maybe McGuinty should move to accuse the second biggest  new Canadian debt emitter… oh wait a minute, that’s Ontario, oops. So McGuinty’s spending problem is partly to blame for a high Canadian dollar not Alberta. Okay in all fairness international financial assets trade is not the only contributing factor to currency mouvements so let’s move on.

The gist of McGuinty’s argument was that Albertan energy sales are increasing the value of the CAD to the detriment of manufacturing. So he is implying that their is a a negative correlation between manufacturing exports and energy exports. That data does not support this claim one bit! When looking at seasonally adjusted and 2002 chained dollars (inflation adjusted) Canadian total energy product sales have risen by 24% since 2000 and total manufacturing (sum of statscan’s industrial goods, manufacturing and equipment, automotive parts categories) have gone down by 14% over the same periode would imply the Premier is right, However when looking at proportions the increase in energy sales is only of 40 billion yearly versus a 125 billion drop for total manufacturing. So basically if there actually was a one-for-one tradeoff between energy and manufacturing exports energy would only be responsible for ~32% of the decline. However when one looks at balance of trade in those subcategories and asks what percentage of net energy exports accounts for the decline of net manufacturing exports the answer is a measly ~4.5%. So to reiterate if there even was causality (which is not proven) it would be weak at best. Now that we’ve lain waste to McGuinty’s foolish idea that Alberta is guilty for his province’s hard times, let’s bring up one more point.

Ontario is now a have-not province. Ontario received upwards of 3 Billion dollars last year from equalization transfers. Alberta paid in over 8 Billion into equalization. Bottom line Ontario got some money from Alberta to pay for its social services. Methinks McGuinty owes Redford and Albertans an apology, don’t you?

Drummond to Ontarians with Love

Don Drummond ex chief economist at the Toronto Dominion bank, the second largest in Canada, came out this week with a report this week on how Canada’s most populous province could tackle its mounting deficit. since most of my friends are neither Ontarians nor Canadian economic history buffs I feel that the significance of this past week’s event merits a little historical context.

Now this context starts somewhere around the 1800’s but bear with me for a while it won’t be that long. At the inception of Canadian confederacy political and economic clout were concentrated mostly into the two most populous provinces, Quebec and Ontario. These provinces were the bedrock on which Canadian economic growth rested and the springboard for much of Canadian political development. Around the mid 20th century Quebec relinquished its place as a driver for Canadian development leaving Ontario as the sole anvil on which the expansion of Canada could be forged. Business and industry migrated from Montreal to Toronto leading the latter to surpass the former in terms of population, economic output and general clout around the 70’s. As Ontario’s population soared the province became the capital for the financial industry and the center of canadian manufacturing. With its growing presence Ontario played the part of the peace broker in Canadian politics funding welfare programs across the country. 

That’s when things started changing. In the 90’s the cut in transfer payments from the federal government coupled with the pan-Canadian drive for budgetary surplus led to the Harris Year’s at Queen’s Park (unofficial name of the seat of Ontarian government). These years were marked by fiscal consolidation and labour wars with unions. Although mostly recognized as sensible policy actions by most non-union circles, the Harris years created a backlash which ushered in the McGuinty years. This conciliatory leader brought in accrued social spending, bought labour peace and spent his way to three election victories from 2003 till present. This unloosening of the public purse however led to a gaping deficit following the recession of 2009-10. So in 2011 facing an upcoming election and with plenty of deficit and debt accumulation to justify McGuinty called on Don Drummond a well respected economist to propose ways of reforming government expenditure and services to enable the province to return to budget balance by 2017-18 without raising taxes.

A year later here we are, and with the McGunity in government reduced to minority status the Drummond reports has just hit the shelves weighting in at ~320 proposals and 540 pages. To most observers the report while impartially worded comes in as a heavy rebuke to the years of government largess. The headline proposals are to get rid of some of the Premier’s pet projects like supporting alternative energies, all day daycare reform if not get rid of most forms of corporate welfare and finally to steal a page from the Harris playbook and start playing hard ball with the Province’s largest unions.

Unfortunately this is not Italy and the credit markets have not yet come for McGuinty’s profligate head… yet. Hence This technocratic gem of a report will certainly not become law. The government has already announced it will preserve the expensive all day daycare program. Most observers agree the prescription no matter how impartial, how well crafted or how sensible are politically unpalatable for the Liberal Government. So don’t expect Ontario to resume its role of Canadian growth engine anytime soon, much to the contrary expect Ontario to continue to be the drag on confederation it has been for the last 3-4 years, eating up equalization payments instead of funding them.

The picture is gloomy the report itself states that economic growth will not exceed the 2% mark for the foreseeable future and has also stated the deficit isn’t expected to shrink before reaching an all time high and federally comparable 30 Billion C$. So here’s my prediction McGuinty doesn’t fix the finances but let’s them continue on their gradual slide into PIIGS style irresponsibility. So expect to see a Montiesque kind of technocratic government coming in within the next decade to fix Ontario’s rivalry with Quebec for the most shoddily run provinces in Canada prize.