Its Springtime in Canada and the Election Promises Come Easy

 

The federal election has taken on a somewhat bi-polar ambiance alternating from existential dread in the face of Trumpian tariff and annexation discourse to the usual vote buying behaviour with what is ultimately taxpayer’s money no matter who wins.  Indeed, the election promises have been coming fast and furious popping up like spring flowers. One might have expected that Canadians were going to get thoughtful proposals on how Canada and Europe might come together in a new economic and security alliance, perhaps with additional links that included Australia, New Zealand and the UK in a new global partnership spanning the Atlantic and Pacific via the Arctic.  This after all is probably one of Canada’s more consequential elections ranking up there with 1911 and 1988 given the focus on our economic relations with the economic behemoth to our south.

For the most part, Canada’s party leaders are not painting a compelling vision of how Canada will make its way in a dangerous and shifting geopolitical world devoid of American leadership over the next quarter of the 21^st century.  For the Conservatives, the campaign has not gone the way they were expecting given their substantial lead has evaporated with the arrival of the new Liberal leader.  The Conservatives seem unable to move beyond the baggage of the Trudeau administration which correctly speaking is indeed also the baggage of the new Liberal leader.  However, the conversation has shifted away from the baggage at the rear of the train to the oncoming Trump tariff freight train and the Conservatives have not pivoted with it. 

The NDP have quickly evaporated with progressive voters shedding them and flocking to what is perceived as the next best progressive hope.  As for the Liberals, they have been saying all the right things in the face of the existential challenge and their leader looks the part but they are short on actual details.  Indeed, there is the contradiction of Mark Carney first intoning that the old relationship with the United States is over and then after a phone meeting with President Trump saying that we will be negotiating a new economic and security relationship with the Americans.  One wonders what kind of new relationship can actually be negotiated with a President and Administration whose positions change like the wind. Indeed, one wonders if the conversation about what will be negotiated was more substantial than revealed?

When the tariff issue heats up as it did last week, it dominates the campaign’s attention.  Come April 2^nd, if the tariffs are again put on hold or are seen as not as severe, the campaigns will again revert to business as usual for Canadian elections as tariffs move into the background.  When not slagging each other’s personal finances or perceived abilities for the top job, the party leaders are hard at work laying the groundwork for a new era of deficit financed election promises.  Along with increased spending, all the parties have apparently seen the light when it comes to tax relief and indeed, they are finally addressing the needs of the lowest income earners. 

The Conservatives have pledged to slash the lowest income tax bracket rate by 2.25 percentage points to 12.75 percent.  And of course, they promise to completely eliminate the carbon tax for both consumers and industry.  The Liberals are not as generous promising only a 1 percentage point reduction down to 14 per cent and taking away the carbon tax only for consumers.  

Not to be outdone, the NDP have gotten into the act by raising the basic personal exemption – for lower income earners only - and removing the GST from an assortment of essentials including diapers.  The Liberals and Conservatives however have their own GST reduction ideas geared towards making housing more affordable by taking the GST off new homes with the point of difference being whether it should apply to homes up to$1 million or $1.3 million – assuming a million-dollar home is in your price range of course.  But, as one famous past cabinet minister in days long gone once purportedly remarked – What’s a million?

All this tax relief will have revenue implications - that at least for the Liberal and Conservative proposals, have been estimated in the six-to-fourteen-billion-dollar range.  While tax relief is welcome, all parties are also promising a lot of other things which require spending more.  And all the right buttons are being pushed depending on the day of the week and the location.   If it’s Windsor, then it is assistance and training for automobile production and workers.  If in Hamilton, support for steel in the fight against tariffs.  Rural Quebec or Saskatchewan means that our price support and regulatory systems for food products are sacrosanct. 

And if in Northern Ontario, make sure to promise an end to the red tape and a $1 billion road to the Ring of Fire to unleash the mineral development potential that has been anticipated there since at least 2007.  Though unlike a certain provincial premier who shall remain nameless, none of the federal party leaders has yet to promise that development will occur even if they have to go up there themselves and ride a bulldozer.  And of course, everyone is going to spend more on the military and the Arctic as well as make sure that robust COVID era style spending supports are available to assist both businesses and workers who might lose their jobs. And we all know how that turned out the last time.

The choice facing Canadians this election is indeed important.  If this was a normal time without the existential threats and geopolitical shifts, the Conservatives would be facing a government that was fairly long in the tooth. The Conservatives would be riding the clamour for change with their mantra that Canada is broken, and that the Trudeau Liberals have given us a lost decade culminating in an affordability crisis.  However, as noted, the ground has shifted, not that things were really that simple before.

The Canada is broken motif is somewhat of a stretch.  Millions of people do not normally immigrate to broken countries; indeed, the converse is usually true.  However, the actual handling of immigration over the last five years can be pinned on the incumbent Liberals.  While not broken, Canada could definitely have worked better on a number of fronts over the last decade particularly when it came to resource sector investments and productivity in general.  And the housing sector affordability and health care crisis has been aggravated by immigration amounts that were not accompanied by adequate investment in those critical areas.

The lost decade motif really depends on what you think has been lost.  If you are of progressive bent and favour government involvement in daily life and the economy and on social issues, then the last decade has not been lost at all. It has been a glorious aspirational triumph that has seen an expansion of the federal civil service, new permanent income supports for children, increased health transfers, school lunch programs and dental services.  On the other hand, if you were hoping for a productivity agenda that boosted business investment and generated rising per capita GDP, efficient management of public services including better health care, then it has been a lost decade.  You can see that there is a pretty strong difference of opinion here.

Of course, as has been wisely noted in this election, it is always easy to criticize and find fault especially if one is devoid of real-world experience like say an ivory tower academic might be.  On the other hand, what do we mean by real world experience?  Do a career politician or maybe even a finance guru - who all are removed from the nuts-and-bolts world of factory floor manufacturing production or a construction site – actually have real world experience?  Our politicians often portray themselves as being experienced with real world issues but in the end their primary skill is being politicians.  And they do not like informed critics, they like cheerleaders.

Even without real world experience, one can still fathom that a sudden mania for tax reductions combined with the ramping up of spending on a plethora of initiatives that have not been vetted for value for money is a harbinger of fiscal danger ahead.   Given the parallel nature of spending and tax initiatives across the major parties, combined with a lack of detail on the Trump tariff file, one is left with the realization that none of the parties probably really know what they are going to do after April 28^th.  How can they, given the mercurial volcano that is Trump? This makes the job of voting this time around even more difficult.  One sometimes envies the voters in Quebec who if faced with unpalatable choices across the three main federal parties, can always opt for the Bloc. 

Somewhere, there is an alternate reality where Canadian voters can vote for a party that combines the NDP spending and social agenda that provides a never-ending cornucopia of public goods, with Conservative managerial rectitude to ensure value for money and a reassuring Liberal technocratic global influencer as Prime Minister.  Alas, we are living in a quite different reality. A lot of spending and tax promises are being made in the heat of this springtime election.  While the easy and hopeful promises of a springtime election are palatable now, the reality is that spring and summer are short in Canada and winter always comes.

 

 

Is Donald Trump Thorstein Veblen's Economic Saboteur?

 

A lot of energy has been expended on trying to make heads or tails of what President Donald Trump is trying to achieve with his political and economic disruption. The constant flurry of pronouncements has been dizzying and have created a great deal of uncertainty particularly for businesses.   As well, a lot of people are probably feeling substantial trepidation and anxiety in the face of 24/7 media coverage of the constant spate of edicts and trolls emanating from the White House.  It is hard not to feel like one has been trapped by evil cyborg villains and rendered helpless and unable to escape from a really bad science fiction movie.

Nevertheless, there are economic changes afoot. The gyrations in international financial and stock markets have been quite large in the face of tariffs and other decisions and while such fluctuations entail losses, they also entail buying opportunities for those with the necessary resources to take advantage of drops.  And its not just financial markets.  While disruptions in production as supply chains founder in the face of tariffs will lead to shortages and unemployment, they will also drive-up prices for whatever stock is available to get to market and raise profits. Perhaps, what is going on here is what an economist of the Institutionalist school named Thorstein Veblen (1857-1929) once chronicled – namely, business people as economic saboteurs rather than producers of wealth.

Veblen was an American economist in the late 19^th and early 20^th centuries who is best known for his book during the gilded age titled The Theory of the Leisure Class which brought into common parlance the term ‘conspicuous consumption’.      Veblen was an able though radical and occasionally bizarre scholar who had some difficulty holding down academic appointments but nevertheless was quite brilliant in his insights. Veblen was a critic of neoclassical economic theory and criticized its status as a “science” as well as what he saw as its static rather than dynamic analysis of how the economy functioned including its views of people as being utility maximizers.  Veblen felt that neoclassical economics did not consider the role of habits and institutions in shaping economic behaviour and that probably explains why in the long run he was embraced more by sociologists rather than economists.

 

Veblen also criticized the neoclassical theory of the production and the firm.  Whereas neoclassical theory saw the producer as striving to meet the demands of the consumer by producing goods and services, another of Veblen’s books titled The Theory of the Business Enterprise portrays the businessman as the 'saboteur' of the economic system. Late nineteenth society was in the throes of industrialization and becoming more mechanized and increasingly dependent on technicians and engineers.  Veblen argued that engineers and technicians concerned themselves with managing 'industrial capital' and were preoccupied with producing goods.  Indeed, this was the concept of modern society and the economy being run by technocrats and a technocracy.  Business owners, on the other hand, were only concerned with what Veblen termed ‘ceremonial capital' - that is, they were interested purely in profits and the gains from financial speculation.  As a result, since business people were only interested in money and profits, they sought to manipulate supplies and cause breakdowns in the flow of output so that windfall profits could be realized. 

Fast forwards to the second quarter of the 21^st century and one finds ensconced in the White House an erstwhile business tycoon and deal maker accompanied by an assortment of other tech lords and business oligarchs who seem hell bent on breaking things and creating their vision of a brave new world.  One wonders as these disruptive edicts and decisions are made that interrupt production and drop stock markets, whether windfall profits are being made in stock and financial transactions as well as by knowing what might be in short supply as tariffs halt or disrupt production.  Far fetched?  As we scratch our heads and eliminate what seems to be one failed rational explanation after another, what are we left with?  Borrowing from Sir Arthur Conan Doyle’s Sherlock Holmes, once as other explanations have been eliminated, what you are left with however odd or improbable must be the truth.

 

 

Canada's Trade with the USA Has been Shifting for Some time

 

NAFTA and its successor CUSMA have been instrumental in growing Canada’s trade and its economy by helping us find markets that have grown our export sector.  These agreements have helped cement an economic relationship with the United States such that by 2024 “ the combined value of Canada's imports and exports of goods traded with the United States surpassed the $1 trillion mark for a third consecutive year. In 2024, the United States was the destination for 75.9% of Canada's total exports and was the source of 62.2% of Canada's total imports.”  (Source: Statistics Canada, https://www150.statcan.gc.ca/n1/daily-quotidien/250205/dq250205a-eng.htm)

However, interestingly enough, the importance of the United States as a merchandise export market has actually declined somewhat and the composition of our exports to them has shifted also.  Since 1999, the total value of Canadian merchandise exports to the United States grew by over 90 percent but the value of our merchandise exports to all other countries aside from the United States grew by nearly 280 percent.  As a result, the US share of our exports declined from 87 percent in 1999 to 76 percent at present.  As well, there has been a compositional shift. 

In 1999, 30 percent of the value of our merchandise exports to the United States was motor vehicles and parts but this share declined to 11 percent by 2022.  The greatest growth in the value of our merchandise exports to the United States since 1999 was energy products, followed by metal ores and then farm, fish and food products.  Over the period 1999 to 2022, the energy share of our exports went from 9 to 34 percent, metal ores from 1 to 2 percent and farm, fish and food products went from 2 percent to 4 percent.  On the other hand, the share of forestry products declined from 13 to 8 percent, electronic and consumer goods declined from 8 percent to 3 percent, aircraft and transportation products from 3 percent to 2 percent.  In many respects, the long-term effects of NAFTA/CUSMA appear to be a decline in our export share of value-added manufacturing products and an increase in less value-added resource products.

This is of course all rather odd when viewed in the context of the Trump Administration’s desire to impose tariffs on Canadian exports.  If the goal is to move auto manufacturing out of Canada, it’s importance as a Canadian export driver has already been in decline.    If the goal is to make Canada hewers of wood and drawers of water to the American so to speak by having it specialize in resource inputs to the American economy – that is already happening.  While there have been some increases in Canada’s exports of consumer goods, metal products and industrial equipment, by far the largest increase has been in energy products.   

President Trump seems hell-bent on tariffs and applying them to everything - including energy.  Why the Americans would subject such an important input into their economy to tariffs seems rather incomprehensible.  Given our share of their energy needs, one suspects their demand is quite inelastic meaning  that energy tariffs will have few output and employment effects in Canada and the tariff will be borne primarily by the American consumer.  There may be an incentive for Americans to try and negotiate energy prices downward to compensate for the tariff impact on their consumers  but that essentially means that Americans want to have cheaper Canadian energy and use tariffs on our energy as a revenue source and ultimately have us pay for both these goals.   Why Canada would want to subsidize American energy consumers in this manner is an interesting question.  It will be crucial for Canada to quickly find alternate energy markets to forestall such a scenario.

 

 

 

Trump, Tariffs, The Economy and (Northern Ontario)

 

If tomorrow indeed brings the onset of US President Donald Trump’s tariffs on Canadian exports, there will be an impact on Canada’s, Ontario ‘s as well as northern Ontario’s economy.  Ontario’s trade and investment profile shows that it exports hundreds of billions of dollars accounting for 36 percent of Canadian exports and of those the lion’s share – 85 percent go to the United States. The largest exports are motor vehicles and gold with the two in 2021 representing 20 percent of Ontario’s exports.  Indeed, resource-based goods as a share of Ontario exports have grown over the last twenty years and account for about ten percent of Ontario’s exports. 

 

Lumber, pulp paper and allied products are of course well-known traditional regional exports and the remains of the industry that weathered the forest sector crisis continues to export much of its output to the United States.  Approximately two-thirds of Canada’s lumber is exported and of that, over 80 percent goes to the United states.  Gold, along with nickel, palladium and nickel are mined in northern Ontario with major markets in the United States also.  The United States imports about half of Canada’s nickel production and Ontario accounts for nearly 40 percent of Canada’s nickel production.  And aside from the large resource producers, an array of northern Ontario business in general also export to the United States.  At least one somewhat dated survey of northern Ontario businesses found that half of business sales were outside northern Ontario.  Of those sales, half in turn were to the rest of Ontario while about 12 percent of sales (or just over 20 percent of exports outside the region) were to the United States.

 

It stands to reason that a broad-based tariff on those exports will have an impact on resource production and activity in the region.  For Canada as a whole, there are any number of alarming estimates.  For example, the Canadian Chamber of Commerce has estimated that a 25 percent tariff across the board on all US imports could “push Canada’s economy into recession” by shrinking GDP 2.6 percent. Scotiabank has estimated that:

 

“U.S. GDP could decline by roughly 0.2% for each 5% increase in tariffs, while Canada could see sharper declines of up to 1.1% with full retaliation or 0.8% with no retaliation. These losses of economic activity are higher the higher the tariffs are. Under 25% tariffs, albeit we don’t think this a plausible scenario, the loss of U.S. GDP could increase to up to 0.9%, and up to 5.6% in Canada with full retaliation or 3.8% without.” (Perrault et al., Rules of Thumb for Estimating the Impact of U.S. Tariffs on Canada, Scotiabank Nov 28, 2024).

 

 However, the extent of employment and income impacts from a fall in our exports depends on the size of the tariffs, the sectors affected, the effects on the value of the Canadian dollar (a depreciation would counter the tariffs effect on exports but also make our imports from the US more expensive) and most importantly, just how vital those exports are to the United States in terms of their elasticity of demand.  If the tariffs are across the board, then all US imports will rise in price given that cheaper substitutes will not be immediately available.  If the goal is to favour domestic US producers, it will take time to ramp up their production capacity and in the case of resource products, if they are importing half of their oil from Canada and large proportions of their other mineral and energy requirements, it is because they are unable to meet their own needs.  And of course, there is the possible political push back from US consumers if the price they pay on goods with a large Canadian export content goes up dramatically.

 

 In the case of northern Ontario, the short-term effects will be mitigated by public sector activity.  For example, in major urban centres like Thunder Bay and Sudbury, a lot of employment is already either directly public sector or is based on economic activity from government contracts.  For example, Thunder Bay is in the midst of a construction boom driven by government housing money and a new provincial jail, and its transit car manufacturing just received another government funding boost.  The long-term is another matter if the country and province go into recession.

 

So, we will have to wait and see what the ultimate impact will be. The more curious question is why President Trump is so set on such tariffs given the damage they will inevitably inflict on the economy of America’s closest ally and trading partner as well as the American consumer in general.  My guess is he is gambling that Canadian exporters may lower their prices to maintain competitiveness and market share in the face of American tariffs thereby sparing American consumers much hard ship. Combined with this will be the inevitable further depreciation of our dollar that will also make our exports to the United States cheaper.  The tariff revenue is probably expected to compensate for the drop in income tax revenues given that Trump wants to implement  income tax cuts. And, inevitably with tariffs, more companies will relocate their operations from Canada and Mexico back to the United States thereby creating jobs for Americans. 

 

Is this indeed Trump's master plan? We shall see.