New Bridge Coming to

The most populous province of Canada Ontario does not share a land border with the United States. From the Angle Inglet flowing into the Lake of Woods all the way to the St-Lawrence River near Cornwall, Ontario is continually separated from the Northeast States by the water system of the Great Lakes. This border’s particularity is surely a vestige from the 1812 war pitting the British Colonies of which Ontario was part of, against the expanding American republic headed by James Madison. Since that time relations have warmed significantly to fraternal levels. Joint participation in two World Wars, the signing of the Auto Pact between  Prime Minister Lester B. Pearson and President Lyndon B. Johnson, the signing of NAFTA between Prime Minister Brian Mulroney and President Ronald Reagan served as a few, among many milestones, on the way to developing one of the most important bilateral trade relations the World has ever known.

Today, this commercial and economic partnership is anchored by a set of infrastructures reducing the historical and natural barriers separating the foes of old. Eight bridges, one tunnel and a plethora of train tracks and hydrodames help connect the millions of Canadians and Americans separated by the Great Lakes water system. This connection is particularly embodied by the Ambassador Bridge. That privately owned crossing is the route by which 25% of cross border trade volumes transits. Much of the automobiles assembled in Michigan source their parts from Ontario and vice-versa. This symbolic and economically vital route is now clogged, bogging down vital trade and hurting both jurisdictions were it hurts the most; their respective manufacturing industries.

It would seem that the relationship has outgrown the infrastructure underpinning it. There have been vocal campaigns (mostly from but not limited to the Canadian side) to build a second bridge. Previous efforts by the Republican Governor of Michigan and various levels of Canadian government have been stymied by  the owner of the Ambassador Bridge Manuel “Matty” Moroun’s lobbying efforts.

The Ambassador Bridge effectively holds a monopoly on commercial truck traffic. Efforts to stop the construction of a competing bridge is the definition of rent seeking behaviour and crony capitalism. Using his leverage and clout within the State Congress of Michigan to try and legislatively block such a construction, including through state constitutional amendments while rational, is the summum of selfish and amoral commercial behaviour.

An announcement by governments from both sides of the St-Mary’s River is expect Friday, where the Canadian government is thought to renew its pledge to pay for the American shares of construction costs. Let’s hope a new bridge is on its way as the beleaguered World economy can use every bit of trade increase in can get.

End of a Monopsony, Beginning of a New Era?

Canada is getting rid of one of its oldest market distorting institutions, the Canadian Wheat Board’s monopsony. Since its inception in 1935 the Canadian Wheat Board has been the only buyer of albertan, saskatchewan and manitoban barley and wheat. True to its electoral promise the conservative government is voting away the CWB’s market exclusivity. Western Canadian grain growers will now be free to market and sell their own products or choose their own intermediaries. While the move is not universally approved not least of which by a majority of the affected agricultures, it remains well worth celebrating.

Before moving to unilaterally de-monopolize the CWB the conservatives had organized a plebiscite of the farmers to seek political cover. The plebiscite was marginally defeated by wheat farmers and soundly defeated by barley farmers. Hence the wait for a majority government to move forward with the plan. Armed with a majority government the Conservatives have moved legislation to de-monopolize the Wheat Board by August 1st, 2012. Farmers will effectively be able to sell their produce on the open market or contract the grain marketer of their choice.

With the Conservatives 2010 move to block the hostile takeover of Potash Corp of Saskatchewan using the Investment Canada Act and the Conservatives public endorsements of Canada supply management schemes for poultry and dairy products, faith in Canada’ openness to foreign investment was on the skids. However, recent musings by ministers have been more encouraging. The governments bid to join the Trans Pacific Partnership is a case in point. Canada has seen its bid to enter the multilateral agreement  blocked based on its intransigence with regard to its agricultural policies. Prime Minister Stephen Harper has however indicated a willingness to put “everything on the table” in order to join negotiations. The file of Canadian-European free trade seems to be moving briskly as well with negotiations on the Comprehensive Economic and Trade Agreement. CETA is speculated to open up Canadian municipal procurement. While a few unions and entrenched interest will cry foul as they always do, it remains obvious to most that more trade only means more wealth on average.

The move to open up western Canadian agriculture to more competition was an easy move politically, as the conservative vote remains quite entrenched in the prairie provinces. Opening up poultry and dairy industries to more competition however is a much harder sell. Most of the poultry and dairy industries are concentrated in Ontario and Quebec, provinces containing ~60% of the Canadian population and vote. Political backlash from well organised farming syndicates from these provinces has turned discussion of liberalizing agriculture into a taboo. While Canada has traditionally been a positive element and proactive participant in international multilateralism, its stance on agricultural trade has prohibited it from helping the Doha round of trade talks escape collapse. On top of giving Canada a bad rap internationally, these two industries who’s members don’t even represent a single percent of the Canadian workforce, have been gouging consumers for decades without pity.

So it is time that the federal government brought down the gavel of justice on the heads of these special interest. It is time for Canada to liberalize its trade relationships. It’s time for Canadian entrepreneurs to start exporting increasingly competitive products to the rest of the World. It’s time Canadians began enjoying the fruits of trade which are higher quality products from home and abroad at cheaper prices. It’s time Canadian municipalities began running budget surpluses thanks to better priced procurement products and contracts. It’s time Canada did its part in alleviating World poverty not by splurging more resources on fruitless foreign aid development campaigns but rather by opening up its borders to the labour, services and goods of all nations and peoples of the World. It’s time for Conservatives to live up to the esteem that Canadians have bestowed upon them based on a fleeting impression that the CPC represent good economic stewardship! Riding Canada of an inefficient monopsony was a first step towards greater competitiveness and wealth, let CETA be the second but not the last.

Cius,

Many thanks to the readers of this blog from Vietnam!

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.