The country is divided when different people take different sides in a debate. The country is really divided when different people are having entirely different debates. That’s what’s happening on economic policy.

Many people on the left are having a one-sided debate about how to deal with a cyclical downturn. The main argument you hear from these cyclicalists is that the economy is operating well below capacity. To get it moving at full speed, the government should borrow and spend more. The federal government is now running deficits of about $1 trillion a year. Some of these cyclicalists believe the deficit should be about $1.4 trillion.

The cyclicalists rail against what they see as American austerity-mongers who resist new borrowing. They really rail against the European ones. They see François Hollande’s victory in France as a sign that, in Europe at least, the pendulum might finally be swinging from austerity to growth.

Other people — some on the left but mostly in the center and on the right — look at the cyclicalists and shrug. It’s not that they are necessarily wrong to bash excessive austerity. They’re simply failing to address the core issues.

The diverse people in this camp — and I’m one of them — believe the core problems are structural, not cyclical. The recession grew out of and exposed long-term flaws in the economy. Fixing these structural problems should be the order of the day, not papering over them with more debt.

There are several overlapping structural problems. First, there are those surrounding globalization and technological change. Hyperefficient globalized companies need fewer workers. As a result, unemployment rises, superstar salaries surge while lower-skilled wages stagnate, the middle gets hollowed out and inequality grows.

Then there are the structural issues surrounding the decline in human capital. The United States, once the world’s educational leader, is falling back in the pack. Unemployment is high, but companies still have trouble finding skilled workers.

Then there is political sclerosis. Over the decades, companies and other entities have implanted a growing number of special-interest deals into the tax and regulatory codes, making it harder for politically unconnected, new competitors, making the economy less dynamic.

These and other structural problems have retarded growth and wages for decades. Consumers tried to compensate by borrowing more. Politicians tried to compensate by reducing the tax bill, increasing deficit spending, ensuring easy credit for homebuyers and by helping workers shift out of the hypercompetitive, globalized part of the economy and into the less productive and more sheltered parts of the economy — mostly into health care, government and education.

But you can only mask structural problems for so long. The whole thing has gone kablooey. The current model, in which we try to compensate for structural economic weakness with tax cuts and an unsustainable welfare state, simply cannot last. The old model is broken. The jig is up.

Unlike the cyclicalists, we structuralists do not believe that the level of government spending is the main factor in determining how fast an economy grows. If that were true, then Greece, Britain and France would have the best economies on earth. (The so-called European austerity is partly mythical.) We believe that the creativity, skill and productivity of the work force matter most, and the openness of the system they inhabit.

Running up huge deficits without fixing the underlying structure will not restore growth. As Raghuram Rajan of the University of Chicago writes in the current issue of Foreign Affairs, “Since the growth before the crisis was distorted in fundamental ways, it is hard to imagine that governments could restore demand quickly — or that doing so would be enough to get the global economy back on track. The status quo ante is not a good place to return to because bloated finance, residential construction and government sectors need to shrink, and workers need to move to more productive work.”

Structuralists face a tension: How much should you reduce the pain the unemployed are feeling now, and how much should you devote your resources to long-term reform? There has to be balance. For my taste, the Germans are a bit too willing to impose short-term pain on the diverse national economies in Europe. But they are absolutely right to insist on the sort of structural reforms they themselves passed in the 1990s.

In the United States, there are almost no politicians willing to embrace the cyclicalist agenda, which would mean much larger deficits. Structuralists don’t have a perfect champion either. President Obama is too minimalist. He doesn’t seem to believe America’s structural problems are that big, making his reform ideas small. Mitt Romney and Representative Paul Ryan understand the size of the structural problems, but their reform plans are constrained by the Republican Party’s single-minded devotion to tax cuts.

Make no mistake, the old economic and welfare state model is unsustainable. The cyclicalists want to preserve the status quo, but structural change is coming.

< http://www.nytimes.com/2012/05/08/opinion/brooks-the-structural-revolution.html >

The Conservative cabinet is giving itself sweeping powers to rewrite the rules on whether Canadians on EI can turn down certain jobs without losing their benefits.

The measure is contained inside the budget implementation bill and would give cabinet the power to change employment insurance rules later through regulation without the approval of Parliament.

Yet, even though the provision is currently before MPs, Human Resources Minister Diane Finley is refusing to explain its purpose other than to say further details will be announced over the coming months.

Under the existing Employment Insurance Act, the government already has the power to terminate EI benefits if a claimant refuses to take “suitable employment.” That’s a term that isn’t explicitly defined in the law, but numerous court rulings have said personal considerations must be taken into account, such as geography and experience. Essentially, an out-of-work scientist can’t be denied EI for refusing to dig ditches or pick fruit.

The budget bill contains a small section that allows cabinet through regulation to define “suitable employment.” Ottawa isn’t saying what it has in mind, but Immigration Minister Jason Kenney recently expressed his frustration that Prince Edward Island was bringing in temporary foreign workers to fill fish plant jobs even though many Canadians in the area are unemployed.

Although the reference to “suitable employment” in the budget bill is vague, EI experts who cross-referenced the section with existing legislation say the government is clearly planning to give itself more power.

“I strongly suspect that they plan on writing regulations that will increase their authority to require people – or at least penalize them under EI – to take jobs for which the government thinks they’re suited. That’s clearly the direction they’re going,” said McMaster economics professor Arthur Sweetman.

Jon Medow, a policy associate with the Mowat Centre for Policy Innovation, said this and other EI changes in the budget bill – which also include replacing existing appeals bodies with a single “Social Security Tribunal” – are of such significance that they should be studied independently.

“Treating it in the context of a standalone bill would provide a much better framework to discuss any changes that are happening to the program,” he said.

Neil Cohen, who has worked with unemployed Canadians for more than 25 years and is executive director of Winnipeg’s Community Unemployed Help Centre, said he’s deeply concerned by the extent of the EI changes in the budget bill.

“It’s always been up to the courts to determine what constitutes suitable employment,” he said. “This government is determined to reverse the course of 70 years of history … They’re really giving themselves broad, sweeping powers.”

Alyson Queen, a spokeswoman for the Human Resources Minister, repeated that further explanation of the EI changes will come over time. “We will be further connecting Canadians with available jobs. That aspect of the EI improvements will be forthcoming in the coming weeks and months. We’re still working on it.”

NDP MP Jean Crowder said the budget bill should be divided and studied independently by committees with the related expertise. “You don’t know the repercussions when you ram through stuff like this.”

< http://www.theglobeandmail.com/news/politics/budget-bill-gives-conservatives-broad-power-over-ei-rules/article2420742/ >

This is time of great ferment in the non-profit sector. Every week or so a new organization pops up that stretches the boundaries of charity, blends altruism with entrepreneurship or shows that community work can be self-financing.

Toronto is the hotbed of this activity. To those in the vanguard, it is exciting and creative. To those steeped in the tradition of selfless giving, it is unsettling, even threatening. To the rest of the population, it’s a blur.

The social enterprise movement wants to have a voice in the development of the city. It wants to put progressive ideas back on the agenda. And it wants to show political and business leaders that innovation isn’t confined to laboratories, universities and high-tech companies.

To highlight what’s happening and talk about what is possible, the Centre for Social Innovation — the nucleus of the city’s social enterprise culture — is hosting a brainstorming session this month. It will bring together the leaders of the movement — its own executive director, Tonya Surman; Tim Draimin of Social Innovation Generation; Anne Jamieson of the Toronto Enterprise Fund; Assaf Weisz of Venture Deli, and a delegation from a national group called Start-Up Canada — to “create a loud voice for social ventures in Canada’s entrepreneurial landscape.”

Unfortunately, the May 14 event is sold out. All the tickets were snapped up — mostly by insiders — within 12 hours of the announcement.

And there’s really nowhere else for those outside the tent to go for information. The proponents of social enterprise speak in abstruse language. (Here is an example: “Social innovation generation is about intentional exploration of the social innovation dynamic and the possibilities inherent in a deeply generative collaboration with the commitment to action outcomes.”) There are no clear guidebooks or user-friendly websites.

For Torontonians who want to understand what’s going on and why it matters, here is a journalist’s simple primer:

Social enterprises are business-charity hybrids. They aim to do well in the marketplace in order to do good in the community.

The concept is not new. Long before anyone was theorizing about it, Maritimers were doing it. Dairy famers built co-op creameries to cut their costs and stabilize their communities. Fruit growers organized co-operatives to break the grip of exploitative middlemen. Townsfolk pooled their earnings to set up co-op stores. These grassroots initiatives were one of the best anti-poverty programs ever conceived.

In the 1920s, a group of visionary priests at St. Francis Xavier University added adult education to the mix, travelling from village to village teaching people crop management and literacy. Over the next 30 years, the Antigonish movement spread from Nova Scotia to New Brunswick and Prince Edward Island, then moved westward, incorporating the ideas of Quebec’s caisses populaires. In the ’60s, it petered out.

Today’s social enterprise movement is a digital, secular, urban renaissance of that tradition.

It is hard to pinpoint when it began, but the founding of Toronto’s Centre for Social Innovation (CSI) is as good a date as any. In 2004, architect and community activist Margie Zeidler took a 91-year-old plumbing equipment warehouse on Spadina Ave. and transformed it into a headquarters for 85 social fledgling social enterprises. (Two more followed; a CSI annex on Bathurst St. and a third site at Regent Park.)

Although today’s social entrepreneurs follow the same principles as the co-ops and credit unions of yesteryear, they operate differently — in a very different landscape.

• Now, unlike then, governments have primary responsibility for social and economic development. They pay non-profit organizations — there are 160,000 of them employing two million people — to deliver their programs. This has insulated these organizations from the grubby economics of the marketplace, leading many of their leaders to believe they are above that.

• Now, unlike then, social enterprises are hidden and often misunderstood. They talk among themselves and make room in the movement for other progressive people who want to turn their ideas into business, but they don’t reach out to the rest of the population.

• Now, unlike then, there is no crusader like Father Moses Coady of the Antigonish movement to spread the message and cut through “the pessimism that has so benumbed everyone that nothing has been attempted to break the spell.”

His modern-day heirs might have the right formula. But they need an articulate leader who can explain social entrepreneurship to Canadians and give them a stake in its success.

< http://www.thestar.com/opinion/editorialopinion/article/1171357–toronto-incubates-new-brand-of-business-charity-hybrids >

There is an implicit bargain in Canada regarding immigration. Canadians agree to welcome newcomers. In return, the government agrees not to use immigrants to drive down the wages of those already living here.

While never formally acknowledged, it’s a bargain that’s been in place since at least World War II, one that has prevented the kind of anti-immigrant agitation now roiling Europe.

And it is a bargain that Prime Minister Stephen Harper’s Conservatives are deliberately setting out to break.

Human Resources Minister Diane Finley made the break specific this week when she announced that Ottawa will now let employers pay temporary foreign workers less than Canadians.

The Conservatives talk a good game on immigration. Immigration Minister Jason Kenney speaks of rationalizing the complex system used to decide who comes to Canada and of bringing it in line with what he calls the needs of the economy.

In last month’s federal budget, Finance Minister Jim Flaherty said employers would have to make every effort to hire unemployed Canadians before they’d be allowed to bring in temporary foreign workers.

But in reality, the federal Conservative government’s entire immigration policy is geared to just one goal: lowering wages.

On Wednesday, Finley journeyed to Alberta to announce that Ottawa will make it easier — not harder — for employers to hire temporary foreign skilled workers.

More importantly, she said Ottawa will allow employers to pay such foreign workers 15 per cent less than the prevailing wage.

Up to now, employers had to pay temporary foreign skilled workers the going rate. If comparable Canadian workers in an area received on average, say, $20 an hour, foreign workers would have to be paid the same.

No more.

The temporary foreign workers program began as a stop-gap measure in 2000, specifically to deal with a shortage of software specialists. But under pressure from employers — particularly in the Alberta oil patch — it has vastly expanded.

By 2011, there were some 300,111 temporary foreign workers of all kinds in Canada — 106,849 of them in Ontario. Unlike standard immigrants, temporary foreign workers have no guarantee of staying in Canada and are expected to leave when their papers expire.

While the program technically is supposed to address labour shortages in skilled trades, temporary foreign workers now do an assortment of jobs.

Some serve coffee in Alberta doughnut shops; others work on the assembly line in Maritime fish processing plants.

Employers could solve their labour shortages by offering higher wages or — in the case of skilled trades — by training Canadians to do the job.

But, if government is willing, it’s easier and more profitable to import cheaper, trained labour from abroad.

And this government has shown that it’s willing. It says that if Canadians don’t want to see jobs going to foreigners, they should quit whining and accept lower wages.

Which is why Ottawa’s answer to complaints made about temporary foreign workers is to toughen Employment Insurance rules.

Kenney has warned that unemployed workers who refuse to take low-wage jobs will have their EI benefits cut off. If Canadians agree to work for less, he explains, Ottawa won’t have to bring in as many low-wage outsiders.

All of this is a solution of sorts, I suppose, albeit a 19th century one. But it is a solution that threatens to bring with it the kind of agitation now seen in countries like France, Holland and Greece — where the racist right is on the rise and where far too many workers view immigrants as mortal enemies out to steal their jobs.

< http://www.thestar.com/news/canada/politics/article/1169568–walkom-ottawa-s-low-wage-immigration-policy-threatens-turmoil >

Immigration Minister Jason Kenney has always vehemently denied bringing cheap foreign labour into Canada. Employers had to pay foreign temporary workers “the prevailing wage,” he pointed out.

That indeed is what the rules said – until Wednesday, when Human Resources Minister Diane Finley quietly changed them. Employers will now be allowed to pay foreign temp workers 15 per cent less than the average wage.

“We are taking action to ensure that the temporary foreign worker program support our economic recovery and effectively responds to local labour market demands,” she said at a manufacturing plant in Nisku, Alta.

Kenney chimed in from Ottawa. “Going forward our government will consider additional measures to strengthen and improve the program,” he promised.

Business leaders, eager to recruit low-cost workers abroad, were delighted. Immigrant support groups, already fighting to protect temporary foreign workers from exploitation, were heartsick. And labour leaders warned that the wage cut would bring down the pay scale for all workers and make it harder for Canadians to compete for jobs in their own country.

Under the new rules, foreign temporary workers will still covered by provincial employment standards, meaning they must be paid the minimum wage. But in booming Alberta, the minimum wage ($9.40) is a far cry from the average wage ($26.03).

Despite her 15-per-cent wage cut, Finley expects the influx of foreign temporary to swell. She’s undoubtedly right. Employers will always be ready to find workers overseas who are eager to come to Canada and willing to work long hours for low pay. And under the Conservatives, boosting economic growth will always eclipse protecting workers’ rights.

Since Prime Minister Stephen Harper assumed power in 2006, the number of foreign temporary workers admitted into Canada has grown by 40 per cent. The temporary worker stream is now larger than the stream of permanent workers intending to set down roots and become citizens.

Foreign temp workers man oil rigs, serve coffee at Tim Hortons, harvest crops and work in fish processing plants.

When Canada introduced its temporary foreign worker program in 2002, the governing Liberals vowed never to adopt the European model route in which “guest workers” are paid less than nationals and treated as second-class residents.

But under Harper, the country is now moving in that direction.

If you’re a smart kid who wants to work hard and do well, one path to success has always been clear. You went to university, then chose a high-status profession and got your ticket punched. Law and medicine were tops. Six-figure incomes, nice houses and private ski clubs were all but guaranteed. If you were less bookish but had good sales skills, you could go into real estate, rack up huge commissions in a booming market and buy yourself a shiny BMW in no time.

Those days are over. The Great Reset has hit the professional classes too. Young professionals are facing a painful double squeeze. The cost of a degree has gone way up, and the economic benefit it confers has gone way down. Think twice before you encourage your daughter to go to law or med school, especially if she’ll have to borrow heavily to do it. On top of that, these young professionals are starting their working lives later than ever before. By the time they are credentialed and hit the work force, they’re in their early 30s.

“There’s a real disconnect between the perception and the reality,” says one senior lawyer. “You have to be pretty creative when you’re thinking of law as a career choice.” Translation: If you think you’re going to land a $100,000 starting job on Bay Street, you’d better have Plan B. It’s more realistic to aim for association or government work – where salaries are a lot lower. (By the way, you’ll have to do your articling in Sudbury.) And even if you start out in the big time, the ladder to partnership is being pulled up. These days, it can take 10 years to become an equity partner in a major firm – if you make it. Most don’t.

Meantime, law-school tuitions have soared (the University of Toronto charges $25,000) and the competition to get in is ferocious. Three years of undergraduate work doesn’t cut it any more. Today, you’d better have an advanced degree (or two) if you want to get into a top school. All this adds up to more time in school and more debt. By the time your daughter is called to the bar, she may have $80,000 or more in debt, with income prospects that are far lower than she expected.

In the United States, where law schools are churning out two graduates for every job, the law-school bubble has become a dramatic bust. The situation is better here, but the big trends are the same. In Ontario, hundreds of articling students can’t find spots. Top earners at top firms are making more than ever, but everybody else is treading water. More and more lawyers are being treated as commodity service providers, and they’re being squeezed for volume discounts. Some are already being forced to compete with legal outsourcing firms (India does it cheaper) and computer technology, which can now perform sophisticated document searches more efficiently than human beings.

You’d think medicine would be better. After all, we can’t outsource brain surgery. And the demand for medicine – unlike the demand for legal services – is booming.

But young doctors face the same squeeze as young lawyers. Like law school, medical school is so competitive that today’s students need advanced training and graduate degrees in order to get in. By the time they qualify as doctors, they’re well into their 30s, with $180,000 in debt. And the expectations of medical students are also disconnected from reality.

The trouble is that doctors have just one big client – government – whose ability and willingness to pay is shrinking fast. The booming consumer demand for medicine doesn’t necessarily translate into jobs. Even though hospitals need extra surgeons, they aren’t hiring them because they can’t afford to expand operating-room time. Of all the general surgeons who finished medical school at the University of Toronto in the past two years, only 15 per cent have found work. The rest are pursuing further training, in hopes that something will eventually open up.

Yet in spite of all this higher training, doctors’ incomes, too, are heading down. Ontario has just announced a freeze on total funding for doctors, which means that new doctors will have to share the pot with existing ones. The Ontario Medical Association figures that over the next four years, the freeze will mean a total pay cut of 16 per cent. Another problem with the job market is that older doctors – like older lawyers – aren’t retiring. Their retirement savings have been hammered. They can’t afford to.

Oh well. There’s always real estate – isn’t there? Don’t count on it. The residential real estate cartel is long overdue for breakup. One of these days, real estate agents will go the way of travel agents and full-service brokers. The only reason they’ve been able to suck such high commissions from the pockets of consumers for so long is their ability to control access to the MLS. That has finally begun to change. Now Power Corp. has bought up a bunch of do-it-yourself real estate services and folded them together into an outfit called ComFree, whose clients can list their houses on MLS. ComFree is barely on the radar screen in most of the country. But it has captured a third of the market in Quebec City.

Old-line real estate agents should enjoy their Beemers while they can. And students who are thinking of becoming doctors or lawyers shouldn’t count on driving one. The professional classes can’t escape the gales of change that are ripping through society. They’ll adapt. But they’ll never be so comfortable again.

< http://www.theglobeandmail.com/news/opinions/margaret-wente/the-professional-class-bubble-is-bursting/article2416390/ >

They’re just whispers in the wind, but they’re getting louder and more frequent.

In the beginning, a few isolated voices — left-wing economists, academics, social activists, labour organizers, church leaders and corporate renegades — warned that Canada was becoming a highly inequitable nation.

They wrote earnest policy papers, produced credible statistics and occasionally attracted media attention. But they were ignored, dismissed or ridiculed in the corridors of power.

The volume went up a couple of notches last fall when thousands of young people took to the streets chanting: “We are the 99 per cent.” With one simple slogan, the protesters crystallized the issue: The top 1 per cent of the population was skimming off most of the economy’s gains, leaving everybody else to scramble for the remains.

The Occupy Movement got the nation — including a few corporate executives and public figures — talking about inequality. It convinced Canadians that something was wrong.

But it had no solutions — not even any suggestions — to offer. Gradually it petered out.

There was another flurry of interest in early April when theBroadbent Institute, an Ottawa think-tank devoted to creating a more equal society, released a poll showing 64 per cent of Canadians were willing to pay higher taxes to preserve social programs and reduce poverty.

But the source — a research body created by New Democratic Party — caused many observers, even those sympathetic to the cause, to question the poll’s credibility.

Last week brought two developments that couldn’t be shrugged off or attributed to left-wing agitation.

The first was a shareholders’ revolt at one of Wall Street’s biggest banks. To the surprise — and dread — of corporate America, shareholders rejected the pay package awarded toVikram Pandit, CEO of Citigroup.

The vote was not binding. But it would be folly for the bank’s board to ignore a rebuff from institutional investors (pension and mutual fund managers) whose clients are fed up with excessive executive compensation.

“This is a shot across the bow of every corporate boardroom in America,” said Robert Reich, former U.S. Secretary of Labor.

The reverberations were felt in Canada, too. Pandit’s $15 million pay package is in the same ballpark as those routinely approved by the boards of Canada’s top banks. Ed Clark, CEO of Toronto-Dominion, for instance, took home $11.3 million for the same period. His Scotiabank counterpart, Richard Waugh, pocketed $10.6 million and Gordon Nixon at the Royal Bank got $10.1 million.

Political strategists got a surprise of their own the next day. A survey of 1,084 Ontarians — with no partisan or ideological links — found 78 per cent backed NDP Leader Andrea Horwath’s call to impose a surtax on individuals with incomes above $500,000. “It’s hugely popular,” said Lorne Bozinoff, president of Forum Research, the country’s largest polling firm.

This undermined the long-standing assumption that voters were dead set against any tax increase and would punish any politician who raised the possibility.

None of this means a change of direction is imminent.

There is still strong resistance at all levels of government to raising taxes. Premier Dalton McGuinty, who acquiesced to Horwath’s demand this week to keep his minority alive, made his reluctance clear. He vowed to get rid of the surtax within five years.

Likewise, there is strong resistance in corporate boardrooms to reining in executive compensation. High-flying CEOs and their hitherto compliant boards will be watching nervously to see what shareholders do at the Bank of America’s annual meeting on May 9.

But restive stirring is in the air. Once-passive investors are beginning to challenge the notion that corporate CEOs deserve 300 times as much pay as the average worker. Once-tractable voters are beginning to question the notion that raising taxes is unthinkable.

The pendulum, stuck at the far right for a decade, is beginning to shift.

< http://www.thestar.com/opinion/editorialopinion/article/1167476–greed-loses-its-glamour-even-on-wall-street >

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

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[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 >

That Germany is an oasis of prosperity amid the economic wreckage of Europe is no secret. That the world’s fourth-largest economy, and by far the largest in Europe, is outperforming the U.S. and Canada, as well, has been a topic of a fascination that would be more pronounced if only we weren’t understandably preoccupied with austerity-driven riots in Athens, across Britain, and in a Madrid where the jobless rate is 20 per cent and youth unemployment is running at 40 per cent.

Germany’s economy will grow this year, while most of the rest of Europe has slipped into recession. German civil servants received a bonus last year, while governments at every level across North America and Europe are cutting government jobs – many of them essential-service jobs – or slashing the pay and benefits of those still on the payroll and forced to do the work of their laid-off colleagues.

Germany, an export-driven economy like Canada, retains its export prowess to such a degree that both Volkswagen AG and Daimler AG posted record profits in 2011, despite a slump in the European auto market. The German jobless rate is about 5 per cent, compared with 7.2 per cent in Canada, and 8.2 per cent in the U.S.

German industry is no less productive and innovative than its top peers, including Korea, Japan and the U.S. Yet organized labour in Germany has long had a significant role in corporate governance, as members of corporate supervisory boards. And Germany has long required employers to provide mandatory five-week vacations to workers.

Germany’s public finances are as sound as those of Canada and Switzerland, and the envy of a U.S. and Britain that are struggling with their public indebtedness. Yet Germany is an unapologetic welfare state, with a social safety net more elaborate than any outside Western Europe.

It has seemed to me, in more cynical moments, that a North America so hard-hit by the Great Recession has not been entirely unhappy that the U.S.-originated global meltdown migrated elsewhere, specifically Europe. Misery does like company. And if Europe, the world’s largest economy, was later to get a taste of the brutal austerity that has swept the U.S., in particular, since the Wall Street meltdown of 2008-09, here was proof for conservative ideologues that the European welfare state was untenable once deep recession struck.

Yet Germany’s current experience repudiates that nonsense. Austerity measures imposed by London, Madrid, and the U.S. Congress and American state capitals, among others, are sapping still more demand from economies whose chief ailment is lack of economic activity. Germany, by contrast, has not attempted, simplistically and foolishly, to slash its way back to robust health. Indeed, that Germany remains in robust economic health is a vindication of the social-welfare state.

Germany continues to be hectored to relax its demands for austerity among rescue candidate-nations. And to be resented for this. It seems not widely appreciated that what Germany is exhorting others to adopt is what has worked so well for it. Not austerity for its own sake, but as the necessary precondition to living within one’s means in a way that has served Germans so well.

George Soros, the billionaire speculator, unburdened himself last week of his opinion that Germany will be the death of Europe if it doesn’t relent on its demands for austerity among rescue-fund beneficiaries.

Nicolas Sarkozy, in a tough re-election campaign for the French presidency, has found a convenient distraction for the shortcomings of his own government by lashing out at Germany for its unrelenting demands that Europe’s supplicant nations get their fiscal houses in order. In Athens, newspaper cartoonists for months have been depicting Merkel in Nazi garb.

It is true that Merkel has been a fiscal hardliner in attaching austerity measures to its benevolence. (“Punitive” was Dublin’s view of the high interest rates for its first bailout, until a second, less punishing, rescue package was offered.) And it’s true that Germany has greatly benefited from a euro of lower value than the old Deutschemark, making its goods more price-competitive in eurozone markets.

But it’s also true that in the main Germany has been showing us how to run a country that can take care of its people in good times and bad, and help rescue others as well.

Much as I agree with many of those calling on Germany to try harder to recognize and accommodate the very different cultures of its European neighbours, it would be wise, I think, to take a step back and examine how it is that Germany works so well. Germany holds invaluable lessons for us that for now are obscured by its odium, deserved or not, as a rescuer determined to ram austerity down the throats of beneficiaries of its assistance.

< http://www.thestar.com/business/article/1164402–olive-why-economically-troubled-nations-should-emulate-germany?bn=1 >

For Stephen Harper, Dalton McGuinty, Jean Charest and our other first ministers, the temptation when public finances are bad is to think small.

Let’s cut a little here, trim back our vision there, and eventually things will be okay.

But Confederation provides a stirring example of why thinking big is exactly what we need to do in the face of public debt.

The 1860s were a stomach-churning time for Canadian colonialists, one of the most unsettled and exciting periods in our existence. The world was bending into shapes previously unimagined, and British colonists in North America needed to think bravely or collapse.

Forcing our hand, the British were changing from doting imperial parents to neglect.

Canada’s early colonies grew up with the privilege of British mercantile policy. In other words, Canadians had privileged access for our goods to the largest, wealthiest market in the world: the United Kingdom. Just about everyone else on the planet – American, French, Argentina – faced steep taxes on their products if they were sold in London.

With the advent of free trade and responsible government, the age of infant Canada ended and our colonial forbearers had to face the cold hard world on their own.

Losing our privileged access to Britain, Canada entered into a free trade agreement with the United States beginning in 1854. We wanted access to the American market, now that the British one no longer gave us preference.

However, the American Civil War exposed Canadians to the full terror of total war to their south, and the growing American imperialism of the 19th century was no longer aimed at Mexico but squarely at subsuming the vast territory of the North-West between the tiny British Columbia colony and those in the East.

Free trade with the Americans was a dangerous game, and one that the Americans were increasingly unwilling to play.

British footsie with the Confederates turned Northern attitudes against Canada, and calls for invasion were not rare. Irish-American raiders were marauding across the border to wreck and plunder. The Americans began to erect tariff walls against Canadian goods, ending free trade for a hundred years.

Worst of all, Canada lost the race to open the new markets in the American Midwest, and practically went bankrupt in the attempt.

As Rotman lecturer and colleague J.C. Bourque recently noted, the Rowell-Sirois Report from 1940 includes a fascinating chapter on Canada’s pre-Confederation economic origin as a collection of over-extended debtor colonies.

Commercial interests in Montreal pressed to create a seaway along the St. Lawrence River that would allow the Great Lakes to serve as the highway to the American interior. With free trade, our passageway would become the transit point on the future North American economy, creating vast wealth and opening up our own landlocked farmers to the global economy.

It would be Montreal, they thought, not New York that would be the new port to the world, a glittering financial capital growing fat on cargo and credit.

Instead of this vision, New York beat them to the punch. First the Erie Canal from Buffalo to the Hudson River opened up the Midwest to the port of New York. Then the railways consolidated the Empire State’s hold on global trade from the American interior even further.

As Rowell-Sirois state: “Successive colonial governments had been inspired by this dream with the result that government policy and public finance had been harnessed to the grandiose conception of the St. Lawrence as a trade route. In ambitious but always futile efforts to realize this great plan, the Province [of Canada] had accumulated a set of public works and a crushing public debt, both too massive for an economy limited by its own boundaries.”

Compounding the problem were a succession of expensive railway failures in the Maritimes and Upper and Lower Canada that spread this financial catastrophe across the British colonies in the East.

“The attempt at commercial integration with the interior of the continent had irretrievably failed and left behind it a burden of debt which weighed oppressively on the economy.”

The colonies were stuck.

Saddled by debt, they could have thought small and pulled back into their individual interests, allowing the Americans to open up the lands of the Hudson’s Bay colony and leaving BC an isolated naval outpost of the British Empire.

Instead, Canadians made a bold leap.

They doubled-down in betting on themselves and united the British colonies in North America into one country with the financial strength to beat the Americans into the North-West.

The decision was financially risky and not without its costs. Confederation and the National Policy of high tariffs and East-West trade increased prices and lowered our ability to compete. But it was the crucial decision that developed a new nation, separate from the United States and eventually wealthy beyond the dreams of our founders.

Now is not the time for a new National Policy, per se. Canadians have built the infrastructure that links us together and are willing and able to take on the world.

But our current financial challenges should be viewed as an opportunity to think that big.

Canada needs an Asia strategy, both to hedge our economic bets with the Americans and leverage our own cultural ties to Asia to find new markets.

We need a coherent pan-Canadian foreign direct investment strategy to maximize our attractiveness as a job creation and investment hub for global capital, involving the federal government, provinces, municipalities and business.

We need to encourage entrepreneurialism and venture among Canadians, find ways to bridge the investment gulf between start-ups and lenders, and get our corporations to put less cash on their balance sheets and more into productivity enhancement.

We need to confront the pockets of hopeless poverty in our cities, rural areas and reserves, collapsing outdated social programs that aren’t working and finding new ways to end intergenerational privation.

We need an innovation strategy that promotes excellence in our universities, investment in R&D by our companies, and makes rock stars of our leading researchers.

Canada has proven in the past it can buck the odds and build despite debt.

Let’s follow the example from Sir John A. Macdonald, George Brown and Etienne Cartier and take a gamble on ourselves again.

< http://www.theglobeandmail.com/news/politics/second-reading/andrew-steele/harper-and-mcguinty-should-look-to-sir-john-a-on-debt/article2399576/singlepage/#articlecontent >