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.