Liberals and the Economy: Innovation and Efficiency

Over the last couple of weeks, I have tried to flush out what it means to be a Liberal. Often, I have talked about the strength of our institutions or underlying policy ideas and policy tools. Without doubt, my most practical policy idea has been use of a simple tool:  Understanding how we should protect “the Other”. Or put differently, all of our policies should reflect the pragmatic goal that fair treatment of all stakeholders is necessary. This pragmatic policy approach, in itself, limits our effective policy tools.

Just think about it, if we are dealing with environmental regulation, a Liberal Government needs to take into account labour rights, investors’ rights, various corporate entities, the ability of the State to enforce any rules and public or societal rights and obligations. This list, while not exhaustive, presents various challenges. For example, how can environmental regulation work for all involved? If we take into account the Other, Governments would have to respect investor’s expectation that profit can be made, while ensuring that workers in the project will not be adversely affected in the short or long term by processes investors and companies may wish to use to make profit. Furthermore, Environmentalists opinions need to be recognized as well.

From my point of view, in dealing with the example of environmental regulation, the solution is simple: all involved should want a high degree of environmental regulation. Think about it, investors, entrepreneurs, executives and corporate entities want to know that their profits cannot be clawed back by any entity of the state. That means investors, generally, do not want to be sued after the fact. This is why we have limited liability protection of investors and this is why investors hate to pay taxes or environmental charges that were applied retroactively. Investors want predictability. If that means they need to pay a little more for that they will. Extracting minerals, oil and other bounties of the earth is expensive in Canada. However, in Canada, corporations, investors and entrepreneurs know that what they earn is there’s. Unlike Venezuela, the history of property rights in Canada is clear. Unlike most of Asia and Africa, if a Canadian Government is going to expropriate your rights and/or land, those Canadian Governments are going to pay fair market price. That is why companies develop tracts of land in Canada. Those are traditions that we are bound by and I would not have it any other way.

However, how should a Liberal Government develop an economy in that light? This is what I am going to struggle with over the next couple of blogs. No doubt, I will get distracted at some point by the lastest issue that has been sent my way from the media, the Conservatives or our friends the New Democrats. With that being said, over time, there should be four posts. They will be about the Environment, Development and the Economy, Taxation, the place for Corporate Entities and more Governments role in helping to replace both private and public infrastructure. Accordingly, today’s piece is not the end, but it is an important being. So let me get it right.

Over the last couple of weeks, we have been subjected to the economic ideas of the Tories and the NDP. They both seem to be incorrect but for a couple of different reasons. Let us take the NDP. Mr. Mulcair has argued that Canada is undergoing a serious bout of “Dutch Disease”. While, I am an intelligent man, I had no clue what he was talking about, so I looked it up. So unlike “Dutch Elm Disease”, “Dutch Disease” is a concept that explains the apparent relationship between the increase in exploitation of natural resources and a decline in the manufacturing sector. The term was coined in 1977 by The Economist to describe the decline of the manufacturing sector in the Netherlands after the discovery of a large natural gas field in 1959.

Mr. Mulcair, to remind you of my point, has said that indicated that the Oil Sands are responsible for job losses in Ontario and Quebec.  As CBC Reported, on May 19, 2012, Mulcair “said that while shifting international trade patterns are responsible for some of the 500,000 manufacturing jobs that have been lost in Canada, ‘everyone concludes that more than half of them are being lost because we’re maintaining the Canadian dollar artificially high.’” (Is Canada suffering from ‘Dutch disease’?, By Mark Gollom, CBC News, Last Updated: May 19, 2012 10:22 AM ET )

CBC also noted that “following question period, Mulcair said the problem is how the government is allowing the oilsands to develop, ‘without applying basic rules of sustainable development, without applying the one rule of sustainable development, which is polluter pays.’

‘If you don’t include those costs, we’re doing the same thing as if we had a factory where we were pushing the garbage into a river in the back. It’s not the real profit, it’s not the real price. That’s driving the Canadian dollar up.”

Mr Mulcair seems to be backed up by two reports. One is from the Canadian Government. Canadian Press reported that The Harper government “funded research that argues Canada’s economy suffers from so-called Dutch Disease, an economic theory the prime minister and other senior officials ridiculed when raised recently by NDP Leader Tom Mulcair”. It turns out that Industry Canada paid $25,000 to three academics to produce the lengthy study, which is about to be published in a prestigious journal, Resource and Energy Economics. (Harper government funded study on ‘Dutch disease’: Study for Industry Canada found a third of manufacturing job losses due to inflated currency, The Canadian Press, Last Updated: May 18, 2012 7:12 PM ET)

Furthermore, there is a recent study by the Institute for Research on Public Policy (IRPP). The report, titled Dutch Disease or Failure to Compete: A Diagnosis of Canada’s Manufacturing Woes, concedes that Canada is suffering from a “mild case of the Dutch disease.” As reported by the Globe and Mail, it says it has caused “small surmountable problems for most manufacturing industries and larger challenges for the public finances of resource-rich provinces.”

However, that same report also states that Canada’s problems are not due to “exchange rate causing these problems, as Mulcair suggests, but ‘sluggish productivity growth’ and a downturn in domestic and global demand.” So, if Canadians are honest with themselves, the real problem before us is sluggish productivity and not a high exchange rate.

Some in the Liberal Party might fear that answer. For the Harper Conservatives have been making that argument since 2006. At Davos 2012, Stephen Harper said that “broadly speaking the Canadian business side of the economy is not as innovative as it needs to be.” (Stephen Harper got it right in Davos: businesses aren’t investing enough in innovation, Thu Jan 26 2012, The Toronto Star). However, it is a problem that he has not been able to tackle.

In fact, it has been a problem that has been noted by Jean Chretien, Paul Martin and Brian Mulroney. No Prime Minister since Trudeau has been able to deal with this issue. For according to the Conference Board of Canada website, the productivity gap has existed since about that time.  Yet, with few exceptions, most of our trading partners have found ways of being more productive.

Some of these same strategies we have tried. For example, the GST was supposed to work.  As it was put in Julian Beltrame’s article, GST at 20: Mulroney has no regrets on Canada’s most hated tax (Toronto Star, Dec. 28, 2010), “The economic argument in favour of taxing consumption is that it allows governments to reduce income taxes, giving workers an added incentive to put in longer hours and seek higher-paying jobs, thereby increasing output.”

Furthermore, as Jeffrey Simpson noted: “The shift from income to consumption taxes is endorsed by most economists, because it encourages savings and investment. Last month, economists at the Organization for Economic Co-operation and Development issued yet another report urging a further shift toward consumption taxes, recommending ‘that countries consider raising additional revenues through broad-based taxes on consumption.’” (The GST, hated by many, stands the test of time, JEFFREY SIMPSON, Globe and Mail, Last updated Thursday, Jan. 06, 2011 6:00PM EST)

Then there was the argument that reducing taxes, especially corporate tax rates, would improve the situation. I have seen a number of articles including Chris Edwards’s “What policymakers can learn from Canada’s corporate tax cuts” (Daily Caller, March 13, 2012) and Canada Press’s piece called “Canada Corporate Tax Rate: Data Suggests Flaherty Wrong That Cutting Taxes Raises Revenue. (April 14, 2012)”. Different Economists are quoted including Jim Stanford and Jack Mintz. The only thing that they agree on is this: the tax rate has plunged from 38 percent in 1980 to just 15 percent by 2012.

With this being said, neither the introduction of the GST nor the reduction in corporate income taxes has made a difference to Canada’s productivity numbers. “Year over year, U.S. productivity also surged 3.7 per cent in the second quarter and unit labour costs continue to fall as companies do more with fewer workers. In Canada, annual productivity was up a mere 0.8 per cent in the second quarter from the previous year.” (Canadian labour productivity slips, Barrie McKenna & Tavia Grant, Globe and Mail, Sep. 14, 2010 9:13AM EDT) The problem is that that quote is not an isolated one.

So the question is what do we do now? My Argument comes down to two ideas: higher standards and more research. Arguing for higher standards is not easy. However, it does speak to my basic principle – “Respect for the Other”.  I think about both my dishwasher (i.e. A Miele) and my car (i.e. A Toyota). Both were purchased because they speak to the concept of quality. While one is German and the other is Japanese, both are global brands with plants in expensive regions of the world. Yet by respecting their workers and their investors, they were able to export their way to success. As Canadians, we should be able to do the same. Let us not try to develop companies which cheap quality goods in large numbers. For, in a fight over quantity, we will lose. For, the Chinese, Mexicans and Indians can do it more cheaply. Canadians need to create quality products and move up the food chain. Labour would love to work for efficient companies with International scope, while Investors would love to put their dollars into such companies.

Think of Bosch. They manufacture a number of products. 36% of their workforce is in Germany, while another 30% is in Western Europe. One of the reasons why a German company can make products in Germany is their productivity numbers. According to the Conference Board of Canada, when Canada had a rate of less than 1.5%, German productivity numbers were near 2.5%. While, in 2008 German productivity was at over 1%, while Canadian Productivity was at 1%. Or put in other words, for a decade and a half, Germany workers have been more productive than German workers. People are willing to pay for quality.

A part of Bosch’s advantage is that they have to deal with higher energy efficiency and quality standards in Germany. So when they export their products, all they have to do is find the right foreign markets – those markets with a need for quality items. In BRIC countries, that means selling to the upper class. In the West, a company like Bosch can sell products to the middle and upper class individuals. In either case, markets exist for those willing to find them.

Japan provides us with other examples of high standards leading to higher productivity. They have very few fossil fuel deposits. That is why they developed their Civilian Nuclear Generation Programme. With that being said, to ensure that they did not over-build, Japan also has very strict conservation laws. Consequently, most plug-in appliances have to be very efficient.  Unlike most of North America, many appliances in Japan cannot consume any electricity when they are turned off. This is different from Canada where electrical devices are allowed to consume a small amount of electricity.

While each device by itself may not consume much electricity, the combination of all of them within your household may easily consume the equivalent of two or three 60-Watt incandescent light bulbs left on all day and all night. Over the course of a single year this adds up to over 1 Megawatt-hour—in other words, it could provide enough electricity to power an entire energy-efficient house for up to 3 months. Higher Standards means the ability to sell more quality products to more markets.

We know that Bombardier and RIM act in a similar manner. They put a High Quality product in the market place:  A product that was developed to high standards because the Canadian Market needed it. Both RIM and Bombardier were able to export the product because it either matched or exceeded international Standards.

Then there is the issue of research. In 2009, Israel, Finland, Sweden, Korea, Japan, Denmark, Switzerland, Sweden and the US – all spent more than 2.5% of the GDP on Research and Development (Government of Canada, Statistics Canada). That is well above the OECD average and Canada’s R&D numbers. What is most interesting is one simple fact:  Japan, Sweden, Finland and the US have higher productivity numbers than us. This intersection cannot be just a fluke. There must be a reason why a country with 4.5 million people can be home to an international player called Nokia. There must be a reason why the US and Japan have so many technology related companies. For fifty years ago, Silicon Valley did not exist. Stanford donated the land and other government, public and private sectors contributed other resources. In hindsight, it was an accidental national project. That action created the advantage that the Americans continue to receive dividends on. Their advantage was to develop new products, idea and technology. Or one can look at other projects. The Internet was the outcome of an American Military/Civilian communications project and so is our development of Nuclear Technology. Japan is no different.

The reality is that in this new world; BRIC countries have an amazing labour advantage. They will beat us in mass production of cheap quality goods all the time. However, Intel is not worried about this. The American Microchip Giant makes it work form them. Intel’s lower quality/jobs are done in Asia. However, the important high quality ones are done in the US. This includes speciality chip production and Research and Development. Or put differently Intel takes advantage of Asia’s Muscle; while leaving the American Brain Power at Home. GE does the same and so do European Companies.

Therefore, our Party must accept that we cannot do everything. Labour, Investors and Corporations want one think: a good economy. Through research and tougher standards, we can improve our labour productivity and get that better economy. This helps all stakeholders. Companies will locate in Canada because of our advantages. An educated, multilingual and multicultural workforce coupled with productivity is an employer’s dream. Investors will follow companies and so will jobs. In fact, it sounds like the 1950’s and 1960’s, when more immigrants came to Canada because a set of Liberal Governments opened up the immigration system. At that time, we took on the world because we were efficient and because we were not scared to develop products. The Canadian Government was not scared to set the tone with increased regulation, nor was the Private Market scared to have higher standards. At the time, Canadian Companies like Massey-Ferguson exported their superior technology to other places in the world. The federal government, at the time, did not play with tax systems, it encouraged innovation and education.

This is what we need to do again. For example, our Party could champion the creation of government funded research organizations to develop technology. That technology, as I have indicated before, should be owned by the Crown. Corporations located in Canada – with foreign or domestic ownership – could pay the Crown a “development cost fee” to get access to the Intellectual Property (IP). While foreign firms not located in Canada could pay market price for access to Intellectual Property. This market solution speaks to the best ideals of the Liberal Party.

Today, our Party should be the champion the ideas of Laurier and Brown. We should once again promote an open market and an open system. However, we should also give it the tools to innovate and improve its productivity, so that all stakeholders can profit. As I have shown this happens from building and not from tearing down. A Liberal Government can be the first to fix this; that is as long as we have the confidence to try.

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6 thoughts on “Liberals and the Economy: Innovation and Efficiency

  1. The most pragmatic solution to environmentalism is stronger property rights.People need to be compensated for damages to their property. This would be efficient because the parties involved can come to a speedy resolution through arbitration without the need of courts and legislators. This would allow things to be accepted or denied a lot faster allowing development to move forward faster. One thing that we have to stop doing is looking at our policies in relation to the policies in other countries. There are many countries that are faltering right now, we don’t want to be them. Also, how would a nation that is in first place stay in first place, surely it would not be in adopting the policies of those below them. I don’t want to go on a rant but politicians are terrible when it comes to making plans that are supposed to be one size fits all. We need to allow for the parties that will be affected by the outcomes to tailor their own solutions for the most part. As far as the manufacturing goes, the answer is pretty simple. If it is profitable then people will do it, it’s that simple. There are many bright people in Canada that could come up with the next greatest whatever. What barriers are in their way and how much are they willing to hurdle. We need to make production a walk in the park and a hurdle. There is also a lot of restrictions on investment in this country. Industry grows from investment. We need to avoid using government money to spur industry, this often ends in waste.

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    1. Actually, I tend to disagree with that viewpoint. Stronger Property rights means that most environmental costs are actually downloaded to society. Or put differently, if you are a business owner, you would tend to put off environmental clean-ups as long as is legally possible. The problem is that eventually every business will cease to exist. Take Nortel as an example. The link provided will show that Nortel, at the time it went bankrupt, had various outstanding environmental issues. While, in their case, Nortel could pay for it, Nortel tried to get out of paying for those costs. This issue has been repeated many times, companies go out of business only to leave their waste behind. In those cases, it is government and taxpayers that pay the price.

      While Government is not always be the most desirable body, it is the only thing that we have that allows society to continue. Governments over time have spurred the railways, air flight, cars, computers and nuclear power. In fact, I once argued that most modern tools and inventions only became marketable after government involvement through regulation, purchases or marketing. Markets, themselves, require governments to provide courts, rules, measurements and other common agreed upon standards. Therefore, Government is necessary but we all must give our input to ensure that regulation is smart and not excessive.

      http://www.mondaq.com/canada/x/174318/Environmental+Law/Nortels+Environmental+Obligations+Dont+Withstand+CCAA+Restructuring+Proceedings

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      1. Stronger property rights would mean that these companies can not put off these environmental costs. They would have to deal with them as they arise. The problem is you look only at the primary actor, you forgot to take into account those affected by the externalities. With stronger property rights those affected would have an easier time being compensated for damages done. Companies would then have to minimize any sort of environmental impacts because they do not know what the amount the compensation would add to. This unknown would be an effective manner of regulating the actions of these businesses without having to have the government oversight that is now required. So not only will it be cheaper, but more effective. I do not disagree that there are some things that are desirable for the government to do, but these things are few.

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      2. Dear Leon The Liberal,

        What u r talking about is free-ridership. It is a simple concept where people or companies will try not to pay a cost that they should be paying. For example, one can think of a driver who chooses not to pay for automobile insurance or a company who pollutes instead of properly disposing of a substance.

        In theory, stronger property rights might insure that companies might not have to put off environmental costs; but the reality is very different for two reasons. As long as companies are legal entities, the costs of clean up rests with the company. However, as we have seen environmental disasters can bankrupt companies. If the companies go bankrupt or cannot continue on, the public retains the costs of clean ups. The same problem can happen when financial caps (ie. limits to distributions/penalties) are applied to environmental disasters. Think of the BP disaster in the Gulf. BP was not obliged to pay the full cost of the damage, because of Legislative Caps.

        The other problem with a stronger property rights, as a solutions, comes in the cost of defending one’s rights. For example, the former MP for Etobicoke Centre, Mr. Borys Wrzesnewskyj, paid more than $200,000 of his own money to challenge his 2011 election defeat. To date, two courts have found for him that his rights were abridged. However, the Present MP is contesting the election. Both of them are within their rights to do so. However, my point is simple: the defence of rights is difficult and expensive. If we were to have stronger property rights – as a way to have enforce environmental laws – one would have to have a cheaper legal system. More public defenders would have to be hired as a start. Since Government’s, on the whole, have been cutting back on the existing system, one would think that they would not want a growing industry of litigation.

        Therefore, a government mandated environmental system is both cheaper and more productive at this time, then a system of strong property rights. That is a part of the trade-offs of governing, which is why I am a Liberal.

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    1. Mr. Sowell has an interesting point of view. While he has some good points, I must admit that I feel he is off the mark on a number of items. However, since I want conversation and dialogue, I ask everyone to look at it.. and make up your own mind.

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