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.