Friday, March 29, 2013

A Warning for Post-Mulroney Canada

The Conservative heavens aligned and brought us the magic of Thatcher, Reagan and Mulroney.   The Gang of Three then introduced us to the era of free trade, outsourcing and the wonders of the "knowledge economy."  In the new era we wouldn't toil with our hands any more but with our minds and endless riches would befall us.

Like all conjuring tricks it seemed to work well enough, for a while, but not forever.

America's manufacturing economy has been gutted, shelled out, lifted up and transported across the seas.   Easy money and low, low interest rates made it possible to extend the illusion of prosperity for decades as real wealth was transferred quietly out of the blue and white-collar middle class and to the richest of the rich.

New wealth did not come from foundries and shipyards and assembly plants but from computer entries and slips of paper passing back and forth.   New wealth was to be bubble wealth, grand illusions of immense prosperity.

Former Republican insider, Kevin Phillips, in his book American Theocracy explored how economic superpowers go through this process of crafting their own demise by outsourcing the manufacturing base that established their wealth and shifting, in its stead, to a knowledge economy, a FIRE (finance/insurance/real estate) economy, generating huge returns in the short and mid-term by using their wealth to grow their eventual successor's manufacturing economy.

In essence, the legacy of Thatcher/Reagan/Mulroney has been the utter selling out of their own nations in pursuit of a deeply flawed ideology.

Now Britain is discovering, quite painfully, that this ideology inevitably leads to a nation in decay.

Britain has been finding it difficult to recover from the financial crisis not just because of its austerity policy but also because of its eroding ability to engage in high-productivity activities. This problem is most tellingly manifested in the country's inability to generate a trade surplus despite the huge devaluation of sterling since 2008.

Compared with its height in 2007, the pound has been devalued about 30% against the dollar, 50% against the yen, and 20% against the struggling euro. Yet despite the huge incentive to export created by such devaluation, Britain is still running trade deficits because it has lost the productive capacity to respond.

Despite the devaluation, Britain's service exports have fallen – average annual service exports for 2008-11 were 8% lower than for 2005-07. This may be understandable, given the poor state of its financial sector – rocked by one scandal after another and hemmed in by a slow tightening of global financial regulation.

However, manufacturing exports, which were supposed to make up the shortfall created by the services sector, also fell by 8% after the devaluation. This is highly unusual. For example, back when South Korea had a devaluation of similar scale after its 1997 financial crisis (the won, its currency, was devalued by 35% against the dollar), the country's manufacturing exports were 15% higher (comparing the 1998-2001 average to 1995-97).

The only reason the British balance of payments situation has not been worse is the large increase in primary commodity exports – oil, minerals and food. These were on average 22% higher in 2008-11 than in 2005-07. In other words, since the crisis the British economy has been moving backwards in terms of its sophistication as a producer.

All of this means that, without addressing the underlying decay in productive capabilities, Britain cannot fix its ailing economy. To deal with this problem, it urgently needs to develop a long-term productive strategy through a broad-based public consultation involving not just the government and private sector firms, but trade unions, educational institutions and research institutes.

The strategy should first carefully identify the industries, and the underlying technologies, that will be the future motor of the economy and then provide them with the necessary support. This could be in the form of subsidies for R&D, loan guarantees for small firms, or preferences in government procurement, and should be targeted at "strategic" industries, although they could also be in the form of policies that are apparently not industry-specific.

For example, infrastructural investment needs to be co-ordinated with the broader industrial strategy. Infrastructure is by definition location-specific, so depending on the industries you want to promote, you will have to build different types of it in different places. Similarly with education and skills. Without there being some national strategy, it is difficult for educators to know what kinds of engineers or technicians to produce, and for potential students to know what professions to study for.

Now, ask yourself what is Canada's industrial strategy?   What are we doing to align infrastructural investment to a broader industrial strategy?  Where lies the future motor of our economy?

If you haven't got a clue, well, neither does Stephen Harper and the same goes for the Liberals and the New Democrats.   That much was obvious as far back as 2009 when the Harper Cons, supported by Iggy and the Libs, passed the farcical stimulus budget, the Pinata Budget.  Remember?  That was the one where the government and opposition, instead of focusing stimulus spending in support of a broader industrial strategy, recklessly squandered it on giving you tax breaks to put a new deck on the family cottage, putting the cost on the tab for your kids to repay.

A study by the Pembina Institute concluded for the mountain of borrowed cash Harper & Iggy tossed haphazardly into the Canadian economy, they could have (and should have) generated 238,000 jobs.  Instead they achieved just 84,000.

Like Britain, like the United States, Canada too needs a healthy industrial economy.  We've become reliant on fossil fuel exports.  We've seen how that has wracked Alberta's economy through boom and bust cycles.   Why would we want to import that vulnerability and instability to the national economy?   Yet that seems to be all Harper can come up with.   He can see no further and he doesn't even try.  He is the embodiment of the One Trick Pony.

Forget this nonsense that's been drummed into our heads about the evils of duties and tariffs.  As former U.S. deputy treasury secretary, Paul Craig Roberts, has pointed out in The Failure of Free Market Capitalism and the Dissolution of the West,  

"The U.S. economy did not develop on the basis of free trade.  If the costs that free traders attribute to trade protection are real, the costs did not prevent America's economic rise.   Indeed much historical research concludes that trade protection was the reason for America's rises as an industrial and manufacturing power."

It's now becoming increasingly accepted in America and in Britain that the way forward from here may be the way back.   


Owen Gray said...

An excellent summary of the last forty years, Mound. You would think that -- after all this time -- we would have cottoned on to the fact that we've been flim-flammed.

The Mound of Sound said...

I guess, Owen, it's the ultimate example of how we can get utter nonsense drummed into our heads enough that we come to accept it as fact.

Dana said...

All I've got to say Leonard Cohen already said.

The Mound of Sound said...

Killer pick, Dana, thanks.

bcwaterboy said...

Whilst we have a national manufacturing crisis on our hands, the only thing harper can do is muster up more "free trade" agreements. I find it most disturbing that closure after plant closure has occurred with dizzying frequency in Canada and especially the US and there is zero sense of urgency to address the problem. I experienced this phenomenon first hand in 2008 and not a single politician expressed any concern about the loss of 350 direct jobs in a small community, never to be replaced. Gordon Muir Campbell visited the area and consoled us with the statement the company's had to make business decisions so just suck it up. This crisis barely registers on our media's radar as they too are brainwashed by the "free trade" lies that have been drilled into our heads.