About a decade ago, Canada’s economy began heading in a distinctly different direction. The extraction and export of largely unprocessed natural resources became, not for the first time in our nation’s history, the primary driving force in our economic, political, and even environmental development.

Traditionally, Canadian policy‑makers were preoccupied with escaping our status as a supplier of natural resources and commodities. A series of proactive policy efforts aimed to allow Canada to overcome its role as a “hewer of wood, drawer of water,” and helping us emerge as a full‑fledged, diversified, industrialized economic power in our own right. And in the first decades after World War II, Canada made considerable progress in this regard. By the turn of the century, well over half of our total exports consisted of an increasingly sophisticated portfolio of value‑added products (including automotive, aerospace, and telecommunications equipment); and Canadian firms and tech‑nology were increasingly recognized around the world.

That historic trend was reversed, however, beginning around the turn of the century. Since then, driven by various factors (some global, some national), resource industries have become ascendant once again in setting Canada’s overall economic and policy direction.  Resource industries have grown (led by enormous expansion in the petroleum sector, centred on Alberta’s oil sands), and most of their output is exported in raw or barely processed form. Other export‑oriented sectors of the economy have contracted in both relative and absolute terms. In part, they have been “squeezed out” by the macroeconomic side‑effects of the resource boom. (Some economists call this “Dutch disease,” named after a similar reorientation that occurred in the Netherlands following the discovery and exploi‑tation of that country’s North Sea petroleum resources in the 1960s and 1970s.)

This structural shift is profoundly remaking Canada’s economy, our role in the world, and indeed our very federation. Yet apart from occasional bursts of rhetoric (such as followed the recent public exchange between the Premiers of Alberta and Ontario), it has been the subject of relatively little careful analysis. Moreover, while powerful market forces have certainly contributed to Canada’s increasing resource‑dependence, this remaking of the national economy is by no means inevitable or “natural.” Canadians should think carefully about the costs and benefits of this historic shift in our national economic direction, and make the most of our ability to influence the course of our own economic destiny.

A number of key economic indicators testify to this conclusion that Canada’s economy has been heading in a very different structural direction:

* Natural resource production and export has expanded strongly ‑ especially petroleum, and especially from Alberta’s oil sands.

* Manufacturing output and employment has sharply declined.  Some 600,000 Canadian manufacturing jobs have disappeared since the turn of the century.

* Canada’s currency has appreciated dramatically, rising 60 percent in value against its U.S. counterpart over the last decade.

* Canada’s overall trade balance has deteriorated. The growth of resource exports has been inadequate to offset the decline in other exports (such as manufacturing, tourism, and services).

* The economy has experienced a broad shift from tradable to non‑tradable sectors, so that exports in general constitute a significantly smaller share of total production than a decade ago.[1]  This both reflects, and reinforces, the deterioration in national trade performance.

* The shift to non‑tradable sectors, the loss of high‑productivity manufacturing jobs, and the structural deterioration in our exports have all contributed to the worst decade of productivity growth in Canada’s postwar history.

* Economic and fiscal gaps within Canada have widened considerably. In 2005, Newfoundland’s GDP per capita exceeded the Canadian average for the first time in history ‑ and the next year, Ontario’s fell below the national average, also for the first time in history. Since 2006, then, there have been three “have” provinces: those which produce oil (Alberta, Saskatchewan, and Newfoundland & Labrador).

All other provinces are “have‑not” provinces, and the erosion of national fiscal federalism (due to simultaneous reductions in federal social programs, transfers, and taxes) has meant that those interprovincial gaps are showing up increasingly in major differences in economic and social conditions.

The appreciation of the currency is both a consequence of this resource‑led reorientation of Canada’s economy, and rein‑forces the broad structural trend. International organizations (like the Organization for Economic Cooperation and Development [2]) estimate that the “fair value” of Canada’s currency is about 81 cents U.S. (according to purchasing power parity, or PPP, standards). In the 1990s, Canada’s currency traded for well under this level, making Canadian costs and the prices of Canadian‑made products and services seem highly attractive to international consumers and investors. As currency traders came to associate Canada’s currency with the price of oil (rightly or wrongly), however, this advantage was lost. The dollar began to rise quickly, shooting through its PPP benchmark, and reached par with the U.S. dollar by 2007, where it has fluctuated since. At that level, our currency trades at about 25% more than its PPP fair value ‑ which means that Canadian‑made products and services seem 25% “too expensive” relative to their actual value. This has negatively impacted manufacturing, but also every other non‑resource traded industry (including tourism, and tradable services like transportation and business servic‑es). Indeed, some non‑manufacturing export‑oriented sectors (like tourism) have been harder‑hit by the dollar’s overvaluation than manufacturing. Claims that the effect of overvaluation will disappear over time as companies ”adjust” (including by investing in more capital equipment) have not been borne out. Only resource industries have been largely insulated from the impacts of the dollar’s overvaluation. The dollar is the most important channel through which “Dutch disease” symptoms are felt, but it is not the only channel.[3]

Obviously, significant economic opportunities have been generated by the surge in resource extraction and export industries in Canada. The petroleum extraction industry directly employed 54,000 Canadians in 2011 ‑ up 18,000 since 2000. Directly, then, the oil and gas sector’s expansion offset only 3 percent of the net jobs lost in manufacturing in the same period. Indirectly, of course, there are other spin‑off opportunities ‑ concentrated most visibly in oil‑producing regions, but some of which are experienced more broadly across the country. Those opportunities, however, must be measured against the costs and consequences of the resource boom, including its economic, social, and environ‑mental side‑effects. Given the overall deterioration in labour market, productivity, and international trade indicators that has been associated with the resource‑driven restructuring of the national economy since the turn of the century, it is hard to avoid the conclusion that this overall trend has been negative for Canada as a whole.

The challenge facing policy‑makers is to maximize the long‑run, sustainable benefits to Canadians of resource development, and minimize its costs. This means leaning into the winds unleashed by powerful and profitable resource extraction op‑portunities, to ensure that these developments are managed in a manner consistent with Canadians’ long‑run economic, social, and environmental well‑being ‑ rather than simply endorsing the present, largely unmanaged trajectory as somehow optimal (and loudly condemning any critics of that trajectory as “unpatriotic”!). Many policy tools are available to tackle this task of managing the structural changes in Canada’s economy, in order to avoid Dutch disease symptoms, maximize the benefits of resource developments, and minimize their costs.

One especially promising set of policy measures includes proactive efforts to support investment, employment, innovation, and exports in targeted high‑value sectors of the economy. This broad policy envelope is best described as “Sector Development Policy.”[4] The purpose of this paper is to consider the sorts of sector development policies that could be invoked in order to reduce the symptoms of Dutch disease which have become increasingly visible over the past, resource‑led decade.

The general goal of sector development policy is to attain a more desirable sectoral mix in the economy, winning a greater share of output and employment in identified high‑value or “strategic” sectors than would otherwise be the case. Sector development policy has been historically important in Canada, given our ongoing national challenge to escape the “staples trap,” and become more than just a resource‑supplier to other countries. We need more industries that add value to our resources (rather than exporting them in raw form); that generate more high‑income, high‑quality jobs; that embody technology and innovation; and that contribute to greater suc‑cess in world markets.

These policies, and the fiscal tools that could fund them, formed part of the 2012 Alternative Federal Budget (published in March by the Canadian Centre for Policy Alternatives). A stand‑alone paper describing the rationale for sector development policy, and the AFB’s proposals in that area, is available at http://www.policyalternatives.ca/publications/reports/cure-dutch-disease.

JS/kvcope343

________________________________

[1] Measured as a share of GDP, total exports of goods and services have declined by about one‑third: from 45 percent in 2000, to under 30 percent ten years later. This is an imperfect measure of export intensity (since exports are a gross measure, and GDP is a value‑added measure, hence exports double‑count the value of imported inputs embodied in them), but it is nevertheless a useful indicator of the broad trend.

[2] “Purchasing power parities for GDP: National Currency Units per U.S. Dollar,” Economics: Key Tables from the OECD, Table 11, January 2012,
< http://www.oecd-ilibrary.org.libaccess.lib.mcmaster.ca/docserver/download/fulltext/190200031x1t004.xls?expires=1331138560&id=id&accname=guest&checksum=F1BF43AD3605C62AF48C80A582B24CC2 >.

[3] Even without a fluctuating currency, a country could experience Dutch disease symptoms resulting from the rapid development of resource exports, through the workings of factor markets, price differentials (especially prices for traded and non‑traded output), and other mechanisms.

[4] In previous times it was called “industrial policy,” but that term implies an undue focus on heavy manufacturing industry, whereas the sorts of policies described here (and the sectors where they can be productively applied) cover a broader range of sectors, including some tradable services industries.

< http://www.caw.ca/en/10869.htm >

How refreshing it was to open Monday’s Globe and Mail and actually see good news from the Canadian manufacturing heartland. Greg Keenan reported on the expansion of Hitachi’s factory in Guelph, Ont., that makes enormous trucks for mining operations; the plant is doubling output and employment.

Ironically, while the Ontario-made trucks are sold to mining operations across the Americas, Europe and Africa, it doesn’t supply trucks to the biggest mining project in the world, right here in Canada: Alberta’s oil sands. Those super-sized trucks, unfortunately, are imported – from companies such as U.S. heavy equipment maker Caterpillar. It’s a lucrative business: Caterpillar’s Alberta distributor, Finning International Inc., reported record Canadian revenue of almost $3-billion last year (up 30 per cent).

But while Caterpillar makes billions from Canadian resources, the company just closed its only Canadian manufacturing facility: a locomotive factory in London, Ont., that it bought in 2010 from Electro-Motive Canada. Caterpillar is shifting the work to plants in Mexico and right-to-work Indiana. Apart from slashing labour costs, another factor in Caterpillar’s location decisions is the “Buy American” policy, which requires high U.S.-made content in federally funded projects (including rail transport).

Now, adding insult to injury, the United States will actually subsidize sales of Caterpillar’s American-made locomotives back to Canada. The U.S. Export-Import Bank (owned by the U.S. government) is providing preferential financing for the purchase of Caterpillar locomotives for an iron ore mine in Labrador.

The irony is painful. Canada is an increasingly important resource producer. Companies such as Caterpillar, which profit immensely from those resource developments, are under no compulsion to manufacture anything here. Fuelled by oil prices, our loonie trades 25 per cent above its fair value in purchasing power terms – making it all the more expensive to buy Canadian-made machinery for our own mines.

Our government, meanwhile, stands idly by while preferential policies in the U.S. and elsewhere reinforce the exodus of manufacturing jobs from Canada – including jobs in the production of high-tech equipment to extract our own resources.

So the faster we develop our resources, the more equipment we import to do the job. Canada’s trade deficit in specialized construction and mining equipment almost doubled over the past two years, reaching $7.3-billion in 2011. Canada should be a leader in mining equipment and technology, given our direct interest in that line of work. But, instead, we let others handle all that innovation and production. The resulting trade deficit represents a massive leakage of income and jobs, squandering much of the value of our non-renewable resources.

We need a national strategy to maximize Canadian content in Canadian resource developments. Canada, for example, could impose a “Buy Canadian” requirement on future mining projects, similar in spirit to the Buy American rules.

Companies wishing to extract Canadian resources would need to give something back to our national productive capacity: through direct purchases of Canadian-made machinery or inputs, or through “offsets” that met equivalent value-added targets. The federal and provincial governments have ample authority to implement such policies, using their powers over development, environment and transportation approvals as leverage. We’d also need a strategy to expand our own machinery industry at the same time.

Would this kind of strategy violate trade rules? That never stops the Americans from supporting their own industries. But, at any rate, trade agreements have loopholes for energy and environmental issues big enough to drive a Hitachi truck through – but only if governments are willing to use them.

If we limit our national economic ambitions to digging stuff out of the ground, all we’ll ultimately have left is a big hole in the ground. But if we’re thoughtful and pro-active about leveraging our resource wealth into all-round economic and industrial development, we’ll have much more to show after the resources are gone.

Jim Stanford is an economist with the Canadian Auto Workers union, which represents both the workers at the Hitachi factory in Guelph and the closed Caterpillar factory in London.

< http://www.theglobeandmail.com/news/opinions/opinion/how-about-buy-canadian-for-resource-projects/article2368348/ >

In the initial postwar decades, Canada’s economy experienced a historic leap forward, qualitatively and quantitatively. Strong business investment, rapid industrialization, and massive spending on public infrastructure propelled growth and productivity. We went from being poor cousins to our American neighbours to virtual equals: productivity in the business sector rose from 70 per cent of U.S. levels in 1946, to 90 per cent four decades later. And as Canada built a stronger social safety net and more equal income distribution, the quality of life for most Canadians surpassed U.S. levels.

In the 1980s, Canadian policymakers became concerned with how to maintain that momentum. The famous Macdonald Commission, influenced heavily by market-oriented economic analysis, made two core recommendations in this regard. Canada’s social-welfare programs should be rationalized to reinforce labour market discipline. And we should pursue comprehensive free trade with the U.S., to expose our firms to the full force of competition and eliminate our remaining 10-percent productivity disadvantage. The proposals were fiercely debated, but in the end implemented. The Macdonald Commission’s 1985 report heralded a new era of economic rationalism; it might be less “compassionate” than previous policy frameworks, but would surely deliver the productivity goods via the invisible hand of a freed market.

But no sooner had the Macdonald Commission helped spur a historic turn in Canadian policy than Canada’s relative productivity began to fade. The more social programs were curtailed, the more we faced global competition, the more sectors were deregulated, and the deeper taxes were cut, the worse Canada’s productivity performance became. Today we’re back where we started: poor cousins again, with businesssector productivity equal to only 70 per cent of U.S. levels, and sinking.

In terms of innovation, our performance has been even worse: lagging far behind the U.S. and most of the industrialized world. As we focus on extracting and exporting evermore unprocessed minerals, our capacity to develop innovative products, services, and processes for the world has withered away. The current tribulations of Research In Motion (like Nortel before it) reflect much larger problems: The failure to develop a successful national innovation system, the failure to nurture Canadianbased global champions, the failure to penetrate global markets with anything other than what happens to be buried beneath our feet.

Market-oriented economists struggle to identify remaining residual “barriers” or “frictions” that must explain the failure of their whole policy approach to unleash promised efficiency. But what if the starting assumption of the “rationalist” model – namely, that the unconstrained operation of private markets is the most efficient, innovative way to organize economic activity – is not justified? What if, in fact, markets work more productively and creatively when they are guided, supported and constrained, rather than simply being unleashed? What if the best approach is to challenge and direct business to more productive and innovative outcomes, rather than coddling and privileging it?

< http://www.edmontonjournal.com/business/Free+market+rationalism+turned+Canada+from+champ+chump/6211182/story.html >

Professor Mike Moffatt presented a thoughtful analysis of the decline in Canada’s manufacturing sector in his commentary in Monday’s Citizen (“Where the jobs went”). He argues the downturn reflects the neutral and inevitable advance of technology. Since automation allows workers to produce more, in less time, it is normal and even desirable for fewer Canadians to be employed in manufacturing. “The real culprit is technology,” he concludes, in reference to the locked-out workers at the Caterpillar factory in London.

Technology is certainly important to the long-run evolution of manufacturing. The sector has more capacity than others to mechanize production and boost productivity. Indeed, this is one reason it’s so important to defend a healthy manufacturing base (contrary to those who wish to abandon manufacturing in favour of a “post-industrial” economy). Countries with bigger manufacturing industries demonstrate higher average productivity growth.

So technology can explain some of the job loss, but not most of it. It certainly cannot explain the disproportionate carnage in Canadian manufacturing, nor the all-out industrial warfare which now characterizes much of the sector (like the management lockouts at Caterpillar and Rio Tinto). The loss of 500,000 manufacturing jobs in Canada over the last decade was far more dramatic than most jurisdictions. Many factors contributed to this miserable record, including lopsided trading relationships, the volatile trajectory of Canada’s currency, and the unprecedented aggression with which business executives now do anything that boosts profit margins, without regard to community welfare.

Technological change applies to all manufacturing jurisdictions, so there should be no secular trend in Canada’s share of total manufacturing production. However, contrary to Moffatt’s assertion, our relative share of global manufacturing has indeed declined dramatically. As recently as 2001, Canada was broadly self-sufficient in manufacturing. Huge volumes of two-way trade entered and left, but at the bottom line we exported as much as we imported (about $300 billion each way). By 2011, however, this balanced position disintegrated into a massive manufacturing deficit of almost $100 billion, which explains 300,000 of the jobs lost since 2001.

That overall deficit reflects the sum of many bilateral deficits. Our manufacturing trade is precariously unbalanced with China ($40 billion in the red last year), Europe ($25 billion), and Mexico ($15 billion). We used to pay for those deficits through a huge surplus with the U.S., but no longer: a diminished surplus with America now offsets just a fifth of our massive deficit with the rest of the world. A petro-fuelled 60-per-cent surge in the loonie only accelerated Canada’s loss of market share.

The industry’s crisis, like the conflict at Caterpillar, is not really about technology. The Caterpillar workers in London possess unique, specialized skills (such as customized welding techniques). If it was simply a matter of negotiating how technology is introduced and managed, and adjusting head counts or work practices accordingly, those are attainable goals. The CAW and other unions have done precisely that, many times over. That’s why Canada’s auto industry, for example, enjoys a verified productivity advantage over its U.S. counterpart.

But Caterpillar’s demand to cut Canadian wages in half has nothing to do with technology. It reflects power: a global company’s ability to isolate and threaten workers, one factory at a time. And it reflects policy: an active decision by governments (like Canada’s) to let them do it.

In short, Moffatt’s faith that technological growth makes everyone better off is unjustified by recent history. Lopsided globalization, and the aggressive actions of business leaders, have severed the traditional link between productivity and mass prosperity. That’s why real wages in Canada are no higher today than a quarter-century ago, despite a 35-per-cent increase in labour productivity in the same time. And that’s why Caterpillar executives (who receive salaries worth tens of millions of dollars) feel entitled to demand enormous rollbacks from highly skilled Canadian workers, on pain of total disinvestment.

Governments must use proactive policy tools to defend Canada’s share of manufacturing, and to make sure Canadians get a fair share of the manufacturing wealth we produce. Others do that, and their manufacturing sectors are thriving — technology and all. Can you imagine the governments of Germany, Japan, or Korea tolerating what is happening at Caterpillar today: where a global giant buys an important and profitable industrial asset, no conditions attached, and then attacks so aggressively the well-being of domestic workers and the future of the factory itself? So long as our governments renege on their responsibility to support domestic manufacturing, the sector’s misery can only get worse.

Jim Stanford is economist at the Canadian Auto Workers, which represents the locked-out workers at Caterpillar in London.

< http://www.ottawacitizen.com/opinion/Policy+technology+killing+Canadian+manufacturing/6038414/story.html >

When it comes to Canada’s lousy record in productivity and innovation, the standard prescription of economists is both clear and predictable. They believe unregulated markets are the best way to allocate resources and determine the composition of output. Therefore, to improve efficiency and innovation, simply improve markets: Eliminate “distorting” taxes. Eliminate regulations. Sign more free-trade agreements. Cut “red tape.” That will unleash the full potential of the private sector to innovate and optimize, and Canada will become a northern tiger.

Canadian economic and social policy has been generally following this advice for a quarter-century. Taxes are lower, globalization is embraced, labour markets are unforgiving, business is freer (and more profitable) than any time in our history. Ironically, however, the more vigorously we pursue the holy grail of self-adjusting markets, the worse our productivity and innovation has been.

Over the last decade, Canada ranked 30th out of the 34 countries in the Organization for Economic Co-operation and Development in annual labour productivity growth. Relative to our neighbour and biggest trading partner, our record has been even worse. Since 1984 (when the Macdonald Commission recommended comprehensive free trade with the U.S., precisely to boost our productivity to their levels), productivity in Canada has faded from 90 per cent of U.S. levels to 70 per cent. The promise of free trade, tax cuts, and deregulation to spur productivity (and deliver trickle-down benefits to the rest of us) has been utterly broken.

This seeming contradiction between Canada’s business-friendly policy environment and the failure of the resulting empowered private sector to deliver innovation and productivity growth puzzles economists who advocate market-driven approaches. They search for some remaining imperfections or residual market impediments to explain the failure of Canadian productivity and innovation to take off.

But what if the starting assumption of their model – namely, that unconstrained private market forces always produce the most efficient, innovative economy – is not justified? What if, in fact, markets work more productively and creatively when they are guided, supported, and constrained, rather than simply being unleashed? What if the best approach is to challenge and direct markets to more productive and innovative outcomes?

International experience reinforces my skepticism of market-driven policy. The successful state-led industrialization experience of several Asian and Latin American economies in recent decades, where policy was proactive and interventionist, suggests that innovative, productivity-enhancing growth does not occur spontaneously as a result of market forces. Instead, the “visible hand” of government intervention, manifested in a wide range of forms, is more strongly associated with qualitative and quantitative economic progress. Targeted subsidies, strategic trade interventions, active industrial strategies in high-tech industries, domestic procurement strategies, and even public ownership of key firms have all been more effective in promoting innovation and export success than Canada’s hands-off approach.

Canada’s poor performance, from this viewpoint, is a consequence of our liberalization – not a paradox. Of course, large government by itself is no more a guarantee of productivity success than small government: Interventions must be smart, efficient and disciplined. But experience shows clearly that market forces on their own cannot be relied on to guide the economy to its innovative, efficient potential.

To meaningfully address and reverse the continuing failure of Canadian innovation and productivity, therefore, we need to adopt a more open-minded approach to economic policy. We must set aside our knee-jerk assumption that private-market forces produce optimal, innovative outcomes. Instead, we should view effective public interventions and leadership as a key asset in nurturing investment and growth in the most desirable industries of the future.

This approach has been derided as “picking winners” by a generation of market-worshipping economists, who believe that only the private sector can pick winners. (In fact, the private sector cannot pick winners … as any mutual fund investor can attest!) But we cannot continue to wait for the forces of unregulated private competition to develop Canada’s economy in a sustainable, diversified manner. If we want to maximize Canadians’ potential for innovation and productivity, we will have to collectively step into the fray and make it happen.

Jim Stanford is an economist with the Canadian Auto Workers union.

< http://www.theglobeandmail.com/report-on-business/economy/on-productivity-the-invisible-hand-lacks-visible-success/article2245357/ >

What do banks actually DO? Create credit out of thin air.

Were Canadian banks bailed-out? Absolutely, to the tune of $200 billion. And they are still protected and subsidized more than any other sector of the economy.

What must be done with these banks? Tax them, control them, and ultimately take them back.

Those are the “take-aways” from a short talk on the banking system that I was honoured to give as part of an Occupy Toronto rally last weekend at the corner of King and Bay in downtown Toronto. Several folks have asked for the written version of my speech, which is posted below.

A video is available here: http://www.youtube.com/watch?v=QoOKY5kH9cc&feature=youtu.be. I freestyled it in places, so there are differences between the written speech and the video (as they say, “check against delivery”!)

************

Well, here we are on Bay Street again, amidst all these gleaming towers, and all this luxury, and power, and affluence.

And what an amazing community we have formed here.

On behalf of the CAW and the CCPA, let me begin by thanking all of you for what you are doing. What you are building. The political and moral space you have opened up through the Occupy movement these past few weeks.

There’s no better place than right here to talk about what’s gone so terribly wrong in our society.

About the enormous and immoral contrast between what we see here on Bay Street, and what things are like where most Canadians – the 99% of Canadians – live and work. Down on Main Street.

You already know that, that’s why you’re here. All this nonsense I’ve heard in the last two weeks about the Occupiers being naïve and confused, is so wrong. I have a Ph.D. in economics, and I can assure you that the people in this crowd today know more about economics – more about real economics – than all the stock brokers in these tall towers put together.

You know about work. About production. About sharing. And about sustaining.

They stand around throwing darts at the dartboard, to pick the next stock they’re going to buy.  Proving every day that while government may or may not be able to pick winners, they can’t be any worse at it than the stock market is!

Work. Production. Sharing. Sustaining. That’s the basis of real economics, the real job of improving living standards and protecting the environment.

Not throwing darts. Not rolling dice. Not placing bets.

I often think about what goes on inside these towers. The plush offices, the oak paneling, the fine art on the walls, the private dining areas, the clubs and bars.

Not everyone down here works like that, of course. Most of the real work is done by hardworking office workers, who work hard for not much money.

But the ones who call the shots down here, and call the shots for our whole economy, they do very well. Every now and then I get to step inside one of those towers, in the course of my job.  Into one of those investment banks. Those private dining areas. Those boardroooms.

The meals, the furnishings. And of course the compensation. Immoral, offensive compensation.  All of it tax-deductible.

Then I compare all that to the generally shoddy state of public institutions and facilities in this city. Like the rec centre in my neighbourhood, out in Parkdale. Or the public schools where my kids go to school. Fine, wonderful schools. But underfunded and dingy, to be sure.

Rob Ford said he went to City Hall to stop the gravy train. When I compare public institutions in this city, to these towers here on Bay Street, I know that Rob Ford missed his target by about 3 blocks. He was 3 blocks too far north.

Want to stop the gravy train, Rob Ford? Come down here to stop the gravy train! A gravy train that’s funded with the proceeds of what, ultimately, is just gambling.

Ever since the Occupy movement came to Canada – even before that, actually – there’s been an enormous myth propagated that these guys here on Bay Street – the Canadian banks – did nothing wrong.

Our banks are strong and safe, they say. They were prudent. And they weren’t bailed out.

They pat us on the head, and they say: “Go to Wall Street to have your little protest. But don’t bother protesting here. Because we didn’t do anything wrong.”

Well that’s simply a lie. It’s a bald-faced, empirically refutable lie.

In the first place, Canadian banks were bailed out – and in a big way. Check the record:

At the end of 2008, and the beginning of 2009, Finance Minister Jim Flaherty and other federal officials moved heaven and earth to help Canada’s banks. Flaherty implemented a new program called the Extraordinary Financing Framework. Or “EFF” for short.

You know, I could think of another meaning for the acronym “EFF.” Elitist Friggin’ Financiers!  That’s the real EFF.

It consisted of many different ways to help the banks – these powerful, prudent banks – during their hour of need.

Buying back mortgages in order to inject cash into the banks’ coffers. Providing huge loans, at near-zero interest rates, from the Bank of Canada, when commercial lenders wouldn’t dare.

Providing other lines of credit, including in U.S. dollars. And backing the whole thing up with very weird forms of collateral – or sometimes with no collateral at all.

For example, the Bank of Canada was willing to accept asset-backed commercial paper, or ABCP, from the banks to back up some of these emergency loans.

Remember the ABCP debacle in Canada? That sophisticated, but highly unstable market totally froze up in Canada, even before the global meltdown.

If you owned ABCP as an individual, you couldn’t spend it. It was just paper in your pocket.  But the banks held ABCP, and they were able to convert it into cold hard cash, courtesy of the Bank of Canada, when they needed it.

In total, various federal agencies offered the banks up to $200 billion in cash and short term ultra-low-interest loans, at a point in time when the banks could not attain this financing from normal commercial sources because of the global crisis.

They needed it. They got it. It was a bail-out, pure and simple.

It was a smart thing to do. The banks have paid the money back, with interest in some cases.  (Not much interest, since the interest rates were near zero.)

But that doesn’t mean it wasn’t a bail out.

So for the banks and their executives to lecture Canadians, and our governments, about the need to be prudent and fiscally responsible and tighten our belts, is the most offensive thing we could possibly hear.

If it weren’t for Canadian governments and taxpayers, they would quite possibly be out of business.

We’re in this together. Let’s start acting that way!

So the banks were bailed out, pure and simple. And moreover, they continue to be coddled and protected and subsidized by the state. Our government is indeed a “nanny state,” where high finance is concerned.

They are protected against foreign takeovers.

Tell me, if we can protect our banks against foreign takeovers, why can’t we protect our land, and our resources, and our factories, and our jobs against foreign takeovers? Why is it protectionist to protect people, but not protectionist to protect banks?

They are protected against crises of confidence by an extensive public deposit guarantee system, and a public mortgage insurance program that eliminates most of the risk of their lending.

And they receive enormous subsidies delivered through Canada’s distorted tax system.

Here’s just one example. Capital gains taxation. If you make money by buying and selling an asset, your speculative profit is called a “capital gain.”

In Canada, you only have to declare half your capital gains income on your tax return. It’s called “partial inclusion.”

If you flip hamburgers in a hot, greasy fast food restaurant all day, you have to declare every penny of your hard-earned income on your tax return.

But if you flip stocks and bonds all day in one of these towers, you only declare half.

That’s immoral. It’s inefficient: because it encourages gambling over real production. But most of all it’s offensive, when these subsidized fat-cats lecture the rest of us about tightening our belts.

Same goes for across-the-board corporate tax cuts. The federal CIT rate has been cut almost in half since 2000, from 29% to 15%. Tell me, have any of you had your tax rates cut in half since 2000? I didn’t think so.

But these banks have.

Those cumulative tax cuts (along with provincial rate cuts) have saved the financial sector over $10 billion per year. Just the new tax cuts that the Harper government implemented since 2006 alone (cutting the federal rate from 21% to 15%), put another $3 billion per year into the pockets of the banks.

Tell me, looking around Canada today, and all the problems we face. Is further enhancing the after-tax profits of the financial industry, really the top priority? Really the most important thing for Canada to spend $3 billion on per year?

Of course not. But in our society, it’s not priority that determines where money is spent. It’s power.

So banks are protected and subsidized, and bailed out when needed. But what do banks actually do, in return for all that money?

What is their actual economic function?

Let’s cut through the mystification of high finance, and ask that simple question: What do banks do? What do bankers actually produce?

The practical answer, in concrete terms, is simple: nothing. They produce nothing.

In that, the banks are different from the real economy, where hard-working people like you and I produce actual, concrete goods and services that are useful.

Banks, and the financial sector more generally, don’t produce goods and services that are useful in their own right. They produce paper. And then they buy and sell paper, for a profit.

Here’s a little economic lesson. You can’t live off paper. You need food, clothing, and shelter to survive – not paper. And since we are human beings, not animals, we need more: we need education, and culture, and recreation, and entertainment, and security, and meaning. Those are the fundamentals of economic life. Not paper.

What is paper actually good for? You can wallpaper your house with it. You can line your birdcage with it. In a pinch, you can wipe your butt with it.

But other than that, paper is just paper. It is not concretely useful in its own right.

How do banks create that paper? Let me put it bluntly again: They create it out of thin air.

It is not an economic exaggeration to state that the private banking system has the power to create money out of thin air.

Not cash. Not currency. Only the government can produce that.

But most money in our economy – over 95% of money in our economy – is not currency. Most money consists of entries in electronic accounts. Savings accounts. Chequing accounts. Lines of credit. Credit card balances. Investment accounts.

In that electronic system, new money is created, not by printing currency, but through creating credit. Every time a bank issues someone a new loan, they are creating new money.

It’s like a big magic machine, creating money out of thin air. And it’s called the private credit system.

One of my favourite economists, John Kenneth Galbraith, put it this way: “The process by which private banks create money is so simple that the mind is repelled.”

How do they do it? They start out with some capital. Let’s say a billion dollars. Then they lend it out. Then they lend it out again. And again. And again and again, 10 or 20 or 50 times over.

Each new loan, is new money. The economy needs that money, let’s be clear. Without new money, we wouldn’t be able to pay for the stuff we make. So we’d stop making it, and we’d be in a depression.

So the creation of new money (or credit) is as essential function for the whole economy. It’s like a utility. But we’ve outsourced that crucial task to private banks. We’ve given them a legal license to print money – and the freedom and power to do it on their own terms.

Their goal is not providing the economy with a sensible, sustainable supply of the credit we need. Their goal is using their unique power to create money out of thin air, to maximize the profits of the banks, and the wealth of the shareholders.

How does this system work, creating money out of thin air? It only works if:

Number 1: Not everyone comes to the bank to withdraw all this imaginary money, in the form of real cash, at the same time. And if…

Number 2: The banks keep lending to each other, which is essential to make sure each one has the cash it needs for withdrawals.

We can immediately see that this system is inherently fragile. Banks create new loans many times larger than their capital, profiting off the interest they earn. But the money was created out of thin air. It’s not actually there, if people want it at the same time, and if the banks won’t help each other out.

So Canada’s banks are fragile, too. True, our banks only lent their capital out 20 times over, not 50 times like the Europeans did. That’s because Canadian regulations capped the leverage at 20.  But they’ve still got 20 times more loans out there, than they actually have money in the bank.

Confidence is essential to the stability of the whole system. But confidence is intangible and impossible to predict. If confidence went south, Canadian banks would collapse as surely as Lehman Brothers or Dexia did.

Now, what do the banks do with all that money they created out of thin air? They lend it out.  Some of it flows into the real economy, to pay for homes and cars and capital equipment. But not enough goes there. That’s why our real economy is stuck. That’s why there are 2 million Canadians unemployed, official and unofficial.

What about the money that doesn’t flow into the real economy? Unfortunately, the banks use enormous amounts of it to place bets, enormous bets, buying and selling the paper assets that are created and traded in these towers. It’s gambling, not production. It’s legalized, subsidized gambling, all protected by the state.

The interaction of the private credit system, together with the speculative motive, that creates such turmoil and destruction, with each successive financial bubble. Without massive injections of new credit, the asset bubble could never expand so far – whether it’s sub-prime derivatives, dot-com stocks, or rare earth futures.

If speculators had to spend their own money on these asset bubbles, the prices could never rise to such precarious and destructive levels.

Now, there are two key problems with the operation of this private credit system, and its interaction with speculation, that we must understand in order to fight for change.

First, the flow of credit – created out of thin air by these banks – is like a roller-coaster, all depending on the mood swings of the bankers.

When their greed overwhelms their fear, they will lend to anyone with a pulse. But when their fear overwhelms their greed, and they want to hoard every penny possible against the feared run on the bank, they pull back loans even from their most reliable customers.

This roller-coaster, called the “bankers’ cycle,” is an inherent and destabilizing feature of the private credit system. And since the whole economy depends on the flow of new money, the flow of new credit, we are forced to follow the same roller-coaster.

The second problem is that there’s nothing underpinning the paper valuations of financial assets, when they’ve been pumped up by the combination of speculation and irresponsible credit creation.

Then, when speculators’ moods switch polarities, the whole thing comes crashing down.  Quoting Galbraith again, “A popped balloon never deflates in an orderly manner.”

And then we all pay the price for a crisis we didn’t cause. And we all suffer the hangover from a party we weren’t invited to.

This cycle of paper expansion and contraction, euphoria and panic, is hard-wired into the DNA of the deregulated private financial system. The cycle has happened before. And it will happen again. The current crisis was no unfortunate accident, no “perfect storm.” This crisis is simply par for the course, for a system that values speculation over production – and that gives the private credit system free reign to throw gasoline on the fire, through unlimited, unregulated credit creation.

It will happen again and again, until we change the rules of this pointless, destructive game.

So what do we do?

First, tax them. That’s the idea behind the Robin Hood Tax, that we are fighting for today. Make them pay a little bit, with every pointless, unproductive transaction, to help clean up the mess they left behind.

A transactions tax alone won’t solve the problem. It won’t stop the process. But at least it will support the public services that we need, all the more so in the wake of each financial meltdown.

Same goes for corporate tax cuts. Let’s reverse them. Put the federal rate back to 18% for the financial sector alone, and we’d raise $1.5 billion per year for essential public services.

Taxing the banks is important. But taxing the banks is not enough.

So, second, we must control them. Put in place rules that require them to use this immense power, the power to create money out of thin air, to use it sensibly and productively. Prohibit the gambling. Make sure loans are aimed at sustainable, productive purposes.

The new measures being promoted internationally by Mark Carney are a step in the right direction. But a tiny, tiny baby step. We need more powerful restrictions.

And friends, even controlling the banks is not enough.

What we ultimately have to do is take them back. There’s nothing magical about creating credit out of thin air. There’s no special technology or knowledge needed. Just the legal power.

We can create credit out of thin air, just as well as any private bank can. Ultimately, we need a public, democratic, accountable banking system. One that serves the Canadian economy, not the wealth of those who own banks.

If we can create money out of thin air to buy and sell sub-prime mortgage bonds, then by god we can create money out of thin air to pay for affordable housing that could end homelessness.

If we can create money out of thin air to buy short options on Greek sovereign debt, then we can create money out of thin air to invest in a green energy system to stop global climate change.

If we can create money out of thin air to speculate on international currencies, we can create money out of thin air to buy needed medicines to prevent hundreds of millions of needless deaths from disease in the Third World.

There’s no magic to it. These ideas are prudent and rational and economically sound. Because like we said at the beginning, it is work and production and sharing and sustaining that supports our real economy. Not gambling with paper.

These towers look powerful. But ultimately they are built on paper.

We’ve got the real power, with our ability to work and produce and share and sustain. We’ve got the power to build something new. We’ve got the power to replace these towers with a system that works.

And that’s exactly what we’ve started to do with this movement. Thank you for what you are doing! And let’s get on with the job!

< www.caw.ca/news/factsfromthefringe/index.asp >

Stephen Harper’s government has interpreted the rule of law rather flexibly in the arena of labour relations. In just six months in power, the Conservative majority has intervened three times to end or prevent work stoppages.

The first instance was in June, when Labour Minister Lisa Raitt announced, after less than one day of picketing, that she would forcibly end a strike by Canadian Auto Workers members at Air Canada. The two sides settled, sending one outstanding item, pensions for new hires, to arbitration. She established what we could call Raitt’s First Principle: Even at private non-monopoly companies, government can ban strikes.

Later that month, Ms. Raitt waded into the Canada Post dispute. It was management (not the union) that locked everyone out and closed the doors. But that was enough pretext for Ms. Raitt to legislate the posties back to work, imposing wages lower than what management had already offered. Raitt’s Second Principle was established: Government can explicitly dictate wage settlements.

In October, she pushed the legal boundaries even further, calling in the labour board to pre-empt a CUPE strike at Air Canada, laughably worrying about the “health and safety” of the travelling public. (Too much airport coffee in the tummies of stranded passengers?) She also invoked her government’s “strong mandate” from May’s election, when the Conservatives won 39.6 per cent of the vote. Raitt’s Third Principle is actually a blank cheque: Government can simply prohibit any work stoppage it wants to.

Each case represented an audacious willingness to intervene in labour-management relations, even at private companies. Each case moved the goalposts a little further. And now Ms. Raitt has speculated about amending the labour code so that the economy itself is defined as an essential service. That would codify Raitt’s Third Principle, giving government the explicit right to ban any work stoppage it deems damaging.

Of course, which work stoppages are or aren’t prevented will remain a matter of judgment. Imagine if all work stoppages were prohibited – lockouts, as well as strikes. All disputes would then be settled by binding arbitration, as currently occurs with true essential services, like police and hospitals. But employers don’t want that approach, fearing that arbitrators may occasionally side with the union. The arbitrator in the Air Canada-CAW case did exactly that, sparking a bizarre decision by the company to appeal his “final and binding” judgment to the courts (an appeal since abandoned, wisely).

When employers hold the better cards, as they do in today’s unforgiving labour market, they happily go for the jugular – work stoppage or not. Consider another epic dispute that ended last month: the 50-week lockout at the United States Steel Corp. factory in Hamilton. The company starved out the union with far-reaching demands to gut pensions and other long-standing provisions. The economic cost of that bitter, lopsided dispute didn’t slow the company, nor did it spur any level of government to action.

I estimate that the direct loss to GDP resulting from the lockout in Hamilton was four times larger than the effects of a one-week full shutdown at Air Canada. Indirect spinoff losses made the steel lockout even more painful. If government were truly concerned with “protecting recovery,” why didn’t it intervene? True, steel falls within provincial (not federal) labour jurisdiction. But Ottawa had plenty of leverage if it wanted to act – not least U.S. Steel’s galling violation of the production and employment commitments it made when it took over the former Stelco Inc.

In Hamilton, where workers held little power, the government stood idly by. It seems it’s only when workers have some leverage that it acts powerfully to “protect the economy.”

There’s no doubt Ms. Raitt’s actions were popular with many. And there’s no doubt work stoppages cause inconvenience and disruption. But because something is unpopular or inconvenient hardly gives government the moral authority to take away rights, making up the law as it goes – even if it does hold a majority of seats in Parliament.

Jim Stanford is an economist with the Canadian Auto Workers union.

< http://www.theglobeandmail.com/news/opinions/opinion/raitts-three-principles-for-labour-relations-only-run-one-way/article2221394/ >

It’s the political puzzle of our times: Why, in the wake of the most spectacular failure of free-enterprise in 80 years, was it the global right that became stronger, not the left?

In the 1930s, the last time capitalism failed so destructively, radical opposition movements won the day: Demanding both immediate aid for the Depression’s suffering, but also bigger structural changes in the economy. Pressured by these radical forces, governments’ response went well beyond “stimulus.” Instead, government was given powerful, countervailing powers to offset the skewed dominance of business and wealth – everything from unemployment insurance to stronger regulations (aimed especially at finance) to union-friendly labour laws.

This time around, in contrast, the stronger political response to crisis has come from the other direction. Justified by deficits that were the consequence of the meltdown (not its cause), tough-love conservatives have so far seized the offensive. For every socialist out denouncing the failure of capitalism, there have been 10 Tea Partiers on the streets demanding a purer, harder incarnation of it.

The financiers who pushed us over the edge in 2008 are back in business, as profitable as ever. Most of us, meanwhile, can barely keep our heads above water. That teetering imbalance should be a recipe for left-wing revolt. So where is it?

Judging from the spirited, friendly, and optimistic crowds at this weekend’s occupation protests, perhaps that sleeping radical giant has finally been awakened. I joined the event in Toronto, with a couple of thousand others who marched through downtown and set up camp on the eastern fringe of the financial district. Nearly a thousand similar events happened around the world – further adding to the surprising momentum sparked by Occupy Wall Street.

Many have noted the diverse, spontaneous, unfocused feel of the protests. Yet the organizers still pulled together all the basics: Porta-Potties, a medical tent, food. Other details will come together with time. If it lasts, the occupation will become a place for the activists to build stronger networks, and a sharper political program.

Most importantly, the occupations may become a symbol of the moral authority that is a precondition for successful social change movements. Despite the carnival-like assemblage of people and causes, they are strongly unified behind an accurate and legitimate single complaint: Namely, that economic and social policies have enriched the 1 per cent, at the expense of the 99 per cent, and that must change. Their activism has been further unified by a constructive, cooperative and peaceful attitude – disarming those who’ve tried to demonize and criminalize protest in our harsh post-9-11 political culture.

In retrospect, the radicalism of the 1930s didn’t exactly charge out of the gates following the 1929 crash. It took years of trial and error, in the context of the continuing failure of the economy to fix itself, before the left really got going. So perhaps the current occupations will come to constitute, for this decade, something like the 1935 On to Ottawa March was to the 1930s. It started out as a small, rag-tag expression of frustration over years of human hardship. It came to symbolize a powerful, broad demand for change, influential far beyond its numbers.

It’s telling that, like the 1930s, the impetus for the current upsurge of protest did not come from the established institutions of Canada’s left: unions, social service groups, or the NDP. These groups have been mostly preoccupied with repelling ongoing attacks from the ascendant right (big spending cuts, attacks on labour rights and more). Thus hunkered down, they haven’t found the mechanisms or the messages to tap into widespread (if so far latent) anger over the growing imbalance of society.

Let’s see if these traditional progressive forces can catch up to the new tweeting generation of activists. If their policy and organizational know-how were combined with the enthusiasm and moral credibility of the occupiers, together they’ll constitute a force that could indeed challenge the Tea Party … and perhaps beat them.

Jim Stanford is economist with the Canadian Auto Workers.

<  >

Just in time for the “Occupy Bay Street” protest this weekend, Canadian Business magazine has come out with its annual listing of the richest 100 people in Canada. So in honourof the protestors and their noble cause (demanding more attention to the 99%, instead of the 1%), let’s peruse together the sordid details of Canada’s ultra-rich.

Indeed, if there wasn’t already a grass-roots surge of outrage against the excesses and privilege of the wealthy, this magazine alone could spark one. It is so unselfconscious and uncritical in its slavish reporting of the wonders of wealth, that one wonders if Canadian Business’s editors have any awareness whatsoever of how most human beings actually live.

For example, there’s a special spread on the latest trends in ostentatious consumption by the super-rich, including their penchant for buying entire towns (like the recent purchase of picturesque Buckskin, Colorado by the infamous Koch Brothers), and yachts over 200 feet in length (which are now distinguished from plain ordinary superyachts by a new term “gigayachts”).

A few pages further along is another offensive feature: a fawning article, illustrated in oak-paneled hues, about the benefits of setting up your own “family office.” The rich, it seems, actually need a “family CFO” to manage all their wealth and investments. “Taking care of wealth is a business in itself,” the article writes in wonder. That’s why you need a “personalized C-suite,” with multiple staff, to keep track of all those zeroes. (And who said they just sit around clipping coupons?)

Of course, it’s not just this obsequious magazine that fosters an unquestioning idolation of private wealth and privilege. It’s imbued throughout the entire popular culture of neoliberalism. And in some ways, features like this accurately reflect the true patterns and priorities of today’s distorted economy. Consider, for example, the headline on the front page of the business section of today’s Globe and Mail: “As economy stalls, luxury car sales surge.” It’s true, luxury car sales are surging, so don’t shoot the messenger on this one. More dispassionately than Canadian Business, the Globe is simply reporting on the economics of plutocracy.

Now let’s get to the main attraction: the Canadian Business ranking of the richest 100 Canadians. The list provides the magazine’s estimate of the current financial wealth of each, along with some invariably flattering little snippet of information about them: their best deal, their biggest influence, their gutsiest move, their most “noble act” (ie. charitable donation).

Indeed, the magazine’s sycophantic reporting on the charitable activity of billionaires is especially galling for its absence of perspective on the contrast between the privilege of this tiny group of individuals, and the enormous needs of the vast majority of society. Let’s take just one example: Canadian Business warmly applauds Hal Jackman for establishing a family foundation that’s given $13 million over two decades to arts and education organizations. Relative to his $1.06 billion wealth, therefore, his foundation gives out an average of about 0.06% of the current value of his wealth each year. (I have no doubt that Mr. Jackman, a highly committed philanthropist, donates more than this to a wide range of other causes, all of them worthy… but I am just using the magazine’s own numbers.)

If I apply that same “giving ratio” to my own modest accumulated net financial wealth, I would only have to give $75 in charity per year. (In practice I give 50 times that much.) An impecunious single mom who spends $2 on a chocolate bar for her child’s school fund-raiser, has

given more of her wealth to education than Mr. Jackman has. So when will Canadian Business commend the rest of us for our own “noble acts”? The complete disregard by the media (not to mention by the recipients of this benevolence) for the social context of billionaires’ charity, aims to coat the whole endeavour with a filmy veneer of humanism. But it doesn’t remotely legitimate the precarious and painful imbalances that are reshaping society around us every day.

Hence the OccupyWall Street moment.

OK, let’s cut to the numbers. Drooling over all that cold hard financial data on the super-rich is why we pay the special issue’s price ($6.95 plus HST). I will limit my commentary to those on the Canadian Business list who need 10 figures to measure their wealth: that is, the billionaires.

 There are 61 Canadian billionaires on the list. That represents under 0.0002% of the national population (are smaller than the 1% targeted by the protesters).

 Their combined wealth is $162 billion. That is approximately 5 times as large as the federal government’s 2010 deficit (which was just reported this week at $33.4 billion for fiscal 2010-11).

 Those 61 individuals own about 6% of all personal net worth in Canada (which totalled some $2.8 trillion in 2010). In contrast, the bottom 50% of Canadians owns about 3% of all personal net worth, according to the most recent survey on the distribution of wealth (which was conducted in 2005). Those 61 individuals therefore own twice as much wealth, as the bottom 17 million Canadians. (Source: Statistics Canada CANSIM Table 378-0051, and Catalogue 75-001 December 2006.)

 Almost half the billionaires live in Ontario. That puts a slightly different spin on Ontario’s new status within Canada as a “have-not” province!

 Average billionaire wealth (across the 61, unweighted) grew by 8.4% in the last year. That’s over three times as fast as the 2.5% increase in average hourly earnings for Canadian workers in 2010. (Source: Statistics Canada CANSIM Table 281-0030.)

 The average wealth of billionaires increased (on a weighted basis) by just under $100 million each in the last year. In contrast, average household net financial wealth per capita in Canada grew by $524 in 2010. (Source: Calculated from Statistics Canada

CANSIM Table 378-0051.) So while the average billionaire became $100 million richer in 2010, the average Canadian became $524 richer. (And that is the national average, which is unduly pulled up by those enormous gains at the top end. We’d need a more detailed breakdown to estimate how the typical Canadian fared on that score. )

 The biggest winner on the Canadian Business list this year was Chip Wilson, owner of Lululemon, whose wealth more than doubled (to $2.85 billion). The biggest “loser” (if you can even be a “loser” in a club of billionaires!) was RIM’s Jim Balsillie, whose wealth (consisting mostly of RIM shares) plunged 39% in the year, to $1.11 billion.  (Given recent events, sadly, he’ll be right off the list by next year.)

 It would take 8.7 million person-years of employment, working at Ontario’s current minimum wage ($10.25 per hour) to produce $162 billion: the same value as the combined wealth of the 61 billionaires.  That’ll give us something to chew on tomorrow morning, as we meet up at the corner of Bay and King, and hundreds of other privileged street corners around the world, to demand a new way of running things.

< www.caw.ca/news/factsfromthefringe/index.asp  >