Canada's Economic Woes

Having missed out on much of the economic feast of the past decade, we enter the economic famine without much fat on our bones. We have one of the worst productivity records among advanced nations. Our standard of living and our dollar continue to fall compared to the United States.

The Bank of Canada has been doing what it can by cutting interest rates. But it’s pinned down by the falling dollar. When Canadian interest rates are low, investors are reluctant to hold Canadian dollars and our dollar tends to lose value.

The falling dollar makes our exports cheap but devaluation as an economic policy is disastrous. Companies can let productivity slip – as they have in Canada – because they are continually rescued by the ever-cheapening dollar. A low dollar also makes productivity-enhancing investment more expensive since we buy much of our capital equipment abroad, particularly in the United States.

The federal government is mulling over what it should do to mitigate our economic problems. Ottawa seems set on keeping our taxes high and, to stimulate the economy, may boost spending by several billion dollars – about $3 billion is being mooted – on top of the spending spree Ottawa unleashed in the lead up to the last federal election.

Fiscal health may soon be a thing of the past. Ottawa is using the crisis to return to form – spending lots of money.

Aside from the additional spending required by security issues, this policy turn would be devastating in the long run. It’s the reason we enter this recession in such bad shape in the first place. Why we don’t learn from the past?

In the late 1960s, Canadian policy shifted dramatically. Quickly, we went form a small-government nation to a big government nation; from fiscally prudent nation to a proliferate nation. From a surplus situation, Canada started building the debt millstone that still hangs around our collective necks.

When Ottawa stared down this road, our dollar was often above the U.S. dollar and our standard of living was equivalent. Now both are at least a third lower than in the United States. The only economic area in which we’ve risen significantly above the United States is our unemployment rate.

We don’t need a new era of even bigger government spending, which will inevitably – in a great Canadian tradition adopted by all parties – reward government supporters and government-held constituencies and leave the rest of us worse off.

If we want to stimulate the economy – and be fair so that all Canadians share the benefits – then we need to continue down the road of cutting taxes. That stimulates the economy and, more important, leads to good fundamental economic health.

Tax cuts can be designed for short-term stimulus. A temporary tax break on investment may quickly spur investment. But would valuable investment dollars be wisely spent or would there simply be a rush to take advantage of the temporary break? What happens to investment after the break ends?

A GST holiday could move forward consumer spending, but spending would fall off a cliff once the GST was restored.

Whether or not immediate stimulus is a good idea, we’ll be getting some anyway. Security spending will have to increase. This should not be an excuse to throw out buckets of money on another government party that will leave us with an awful hangover.

Ups and downs appear to be an inevitable part of the economy. The fundamental question is whether or not we design economic policies that will keep the economy healthy over the long term.

A temporary economic flu is a bad thing. A long-term debilitating illness is worse. It can turn the flu into an incapacitating disease. Things could get even worse if our economic doctors in Ottawa prescribe the wrong medicine.