Wow!…Canada’s economy added twice as many more jobs in January than here in the US! 69,200 versus 36,000 respectively.
Granted this is only one months data but it is quite a feat symbolically considering Canada’s economy is only one tenth the size of the US.
And their unemployment rate remains significantly below that of the US…7.6% vs 9% here….and the strong loonie, one of the best bellweathers of their booming economy, continues to flirt with parity to the US $. Consistently throughout the economic crisis, the Canadian economy has outperformed the US.
In fact the more policy proactive and responsible Bank of Canada has been removing “crisis monetary policy”, getting ahead of the inflation curve and raising rates over the past year…three times…..no need for ZIRP and no QE 1 and 2….The Bernank take note!
So what’s going on up there in the Great White North that allows them to kick US economic butt and claim that the 21st century belongs to them?…Is it something in the water…Or the beer? How has their much vaunted cultural mosaic and laid back, conservative national character allowed them to morph into an economic dynamo? It can’t be their sacred cow (for the time being) single pay, aka “get into the que” health care system! Bilingualism?
Doubt it, although I do believe the history of the English/French cultural dichotomy does positively contribute to their diverse national identity and shows how a rising economic tide lifts all boats. But that’s a story for another day. How about their continued constitutional ties to the dysfunctional British Monarchy? Not! Or how about… Latent Hockey Puck Syndrome? its an aggressive sport. No…there’s still the lingering and deflating emotional curse of the Maple Leafs!
The popular opinion today credits Canada’s superior banking system with its’ stability and conservative culture that allowed them to dodge the real estate bullet with their stricter lending standards. Avoiding the housing bubble allowed the Canadian government to effectively direct stimulus funds into job creating infrastructure projects while the US government has been forced to divert trillions of borrowed dollars into bailing out poorly managed and over extended financial institutions. Lower Canadian corporate tax rates also add to the positive growth mix. OK…these are all important contributing factors. But they are not THE reason why Canada is emerging as a new economic global force.
No…for that we have to return to Canada in the early 1990’s when a new conservative fiscal foundation was laid. And on this point I hope US policy makers are paying attention. Canada in 1993, like the US now, was facing a fiscal crisis of serious proportions… there were fears of debt default, concerns about failures of Provincial debt auctions and credit ratings downgrades. The talk of IMF intervention was real as the Loonie was renamed the Canadian Peso. Government combined public debt had reached 53% of GDP in 1992 as the national debt had doubled from the early 1960’s. Government spending as a percentage of GDP had expanded to 23% from 15%…unemployment was rising. Canada was on the brink of a fiscal crisis.
Does all of this sound familiar? US government spending is approaching 25% of GDP and by recent estimates debt has breached 100% of it…we have municipal and state default risk rising and threats of a downgrade of federal debt. The debt ceiling which has more than doubled in the past few years…will have to be raised again in the Spring. The economy is languishing as the weak employment report showed today. Stagflation risk is rising. Experts say that if current government spending and fiscal trends continue they will lead to Club Med like debt levels and potential default within the next few years.
So what did Canadian policy makers do to get themselves out of their debt hole in the early 90’s? Did they announce more deficit funded stimulus spending on bullet trains, solar cells and the like? No! Did they take a politically charged and partisan, “my way or the highway” approach to handling their countries fiscal crisis? No. Did they refrain from asking for a shared public sacrifice as they moved toward austerity? No. The Canadian Liberal government took a more fiscally proactive and common sense approach and in a uniquely bipartisan way (funny what you can accomplish when it hits the fan), they focused on deep spending cuts. They cut in areas of social and defence spending including regional development, transportation and industry and they restricted transfer payments to provinces which forced the provincial governments to get on board and become more fiscally responsible. They also bit the bullet and cut the civil service workforce. And finally they had the courage to touch the third entitlement rail of politics and took steps to put the Canada Pension Plan on to a firmer fiscal foundation.
And the results? Well there was pain of course but it was a shared austerity across the country. And the fiscal improvement was tangible and happened quickly. In the next two years debt shrank and so did interest payments as government spending declined by almost 9% and the debt levels went down across the board. The deep spending cuts led to balanced budgets from 2000 to 2008 when the latest crisis hit. Canada was not exempted from the recession but it weathered it much better as the current government had greater flexibility to manoeuvre and wasn’t constrained by a banking crisis. Now all of the jobs lost have been replaced and the Conservative Government has targeted 2015 for a balanced budget…unfortunately here in the US we are far from meeting those benchmarks.
So here we are. Canada’s politicians have provided a play book and a real time game plan with concrete results for US policy makers to help them get out from under the debt overhang that has accumulated in the past few years. Will America’s policy makers swallow their partisanship and tear a few pages from the Canadians play book? I know the Canucks, as the US ‘s largest trading partner, are hoping they do. Or will it take an actual debt crisis to get them to move? If the tone of the recent SOTU and subsequent ongoing policy sclerosis and enhanced government spendathon is any indication, I am not optimistic. One thing we do know, to paraphrase the famous South Park Canadian parody song…if the US policy makers fail to get their fiscal house in order…we can’t “Blame Canada”…but they can blame us for the potential catastrophic global consequences of the their failure to act. Eh!
Peter D. Stock
Stock Investment Management