Historically, Canadians and Americans have held differing approaches to the role of government, which are suggested in the terms "peace, order and good government" in the British North America Act and "life, liberty and the pursuit of happiness" in the Declaration of Independence. Even in the present economic turmoil, our differences here probably still mean a less skeptical attitude towards government intervention among Canadians than Americans. In the case of financial services regulation, for example, Canada's approach appears to be serving our population better and as a result our banks enjoy much more solid balance sheets than many of their counterparts in the United States.
One economic issue examined in Uneasy Neighbo(u)rs, my co-authored book published last year, is how Canadian and American prosperity have re-enforced each other, especially since WW2. Virtually all of our bilateral trade now--one million dollars a minute 365 days a year, as we just heard from Canada's Consul General in Buffalo, with millions of jobs created from it--is relatively friction free. Perhaps 90-plus percent of the bilateral political focus on trade, however, comes from the matters of disagreement.
This country depends on trade now more than virtually all of the world's developed economies. In the most recent year for which co-author David Jones and I had statistics at the time of writing (2004), our exports of goods and services comprised 38.2% of our GDP; imports, 34%. About sixty percent of our exports were finished industrial products, machinery and automotive products, with thirty percent of our merchandise items being energy, commodities and forestry products. Americans that year consumed almost 85% percent of our exports and almost a quarter of all American exports were bought by Canadians.
In short, about 40 percent of Canada's national income comes from American customers and we do more trade with the U.S. in a week than we do, for example, with China, in a year. No Canadian should ever forget how dependent many of our jobs are on American buyers of our services and products. If U.S. consumers reduce their buying because of reduced confidence in their employment prospects, housing, equity and other market futures, Canadians are going to catch worse than colds.
Rebuilding consumer, Main Street, and other confidence in virtually all world economies today— but especially in the American one where this crisis began—is essential to turning around a lot of important problems, most notably job prospects, home mortgages, so many of which are now under water, and all the other economic matters, which are ultimately dependent on people recovering their belief in a better future for themselves and their families.
Uneasy Neighbo(u)rs notes that Canada is rapidly becoming an energy colossus. Our country's proven oil reserves were officially upgraded in 2004 by the responsible agency of the U.S. government from 4.9 billion barrels to 178.8 billion. In reality, the total amount of oil trapped in the Alberta oil sands is estimated to be 1.7 to 2.5 trillion barrels, with the smaller figure reflecting only the part which is economical to extract with today's technology.
As an Edmonton M.P. for almost 27 years, you'll forgive me for suggesting that virtually any amount of additional oil and gas can probably be sold to our southern neighbour at world prices under NAFTA in its present form. We know that presidential candidate Obama voiced concern about some features of NAFTA, so it was good to hear America's Consul General in Toronto confirm moments ago that President-elect Obama indicated last June that NAFTA has benefited both our countries and his concern is about labour and environment standards in trade agreements with developing economies only.
President-elect Obama—for whom by the way, according to a recent Economist magazine survey of its Canadian readers, about 90% of us would have voted had we cast votes in the U.S.-- is no doubt aware of this trade reality. He'll also know that Canada is the only stable rule-of-law democracy among the top ten countries in terms of oil reserves. There are, of course, serious related climate change issues. One encouraging sign was the proposal by one current producer for its next oil sands expansion not to use any comparatively green natural gas in the conversion of bitumen into synthetic crude oil. Another is to sequester carbon gases underground rather than release them into the air, which would help significantly in combating global warming effectively.
Permit me now to speak about the current economic crisis in much of the world and to suggest a couple of ways Canadians, Americans and others might achieve some relief from it as quickly as possible.
One of the best analyses I've seen is by the Scottish economic historian Niall Ferguson in last Saturday's Globe and Mail. Ferguson is one of very few persons who actually predicted the crisis. He thinks that to avoid an even worse downturn it's essential that all governments, which still have some financial means, avoid large scale failures of the world's banks. He favours creating a World Capital Organization, which would have the authority to identify independently when a country's banking regulations are being run like a Ponzi scheme.
Ferguson thinks capitalism is the "worst financial system, apart form all the others that have been tried from time to time." He foresees two possible scenarios. The bright one has the Obama administration coming up with workable remedies to the banking, housing, auto industry and other problems. The “nasty one” has it not able to cope; nothing works and the US crisis becomes like the Japanese one over the past decade, with Keynesianism, monetarism and everything else failing the deleveraging and deflation phenomena currently well underway. Happily, he thinks the first is more probable.
Having driven past the vast Ford assembly plant at Oakville on the way here, and having been in New York City and Washington over the past several days, I hope you'll not mind if I now focus on financial regulation and auto industry issues in our two countries.
American and Canadian
The depressed housing prices in much of the United States, which are creating so many other problems, were caused in large measure by irresponsible mortgage practices by banks and mortgage insurer institutions. The insurer Freddie Mac evidently lost $15 billion over the past quarter alone because of asset write downs. The largest American bank, Citygroup, just announced that it will lay off 53,000 employees because of $20 billion in mortgage and other losses it experienced over the past year.
A Long Island resident, who formerly sold home mortgages, explained to me yesterday that traditionally financial institutions would provide pre-approval of mortgages, as in Canada, up to a certain amount, based on factors such as family income. About four years ago, he said they began to approve much higher purchase price limits because the responsibility for ensuring repayment had by then effectively passed to mortgage insurers and/or holders of credit derivatives. A family who formerly might qualify to buy a $400,000 house was now approved for an $800,000 one. Many homes across America are now being foreclosed upon families who simply cannot afford their mortgages.
The real culprit of these financial difficulties, however, was the absence of transparency and accountability on the part of managers of financial institutions driven by the pursuit of wealth rather than the interest of consumers and aided by inadequate regulations.
In contrast, Canada's banks have done much better than their American counterparts, especially those who have avoided credit derivatives, because of more responsible regulation and practices. For example, our banks are required to maintain reasonable capital reserves in case of shocks. They cannot leverage their assets nearly as much as American banks were able to before the recent collapse.
Auto Industry Assistance
The North American auto industry, once all powerful and symbol of pride for much of both our economies, is now facing the real threat of collapse and with it the loss of millions of jobs in North America. Many of us watched with amazement when the Big Three Auto CEOs were confronted about the use of their private jets on their trip to Washington for rescue handout. The larger issue is that for many years leading up to the current predicament, these companies acted in a less than accountable manner toward their customers. (For a different point of view, see “Six Myths about the Detroit 3” under World Economic Problems at www.david-kilgour.com).
According to yesterday's media, the CEOs of the Big Three Detroit auto makers face heavy weather in Congress on their request for $25 billion from the Bush administration's $700 billion economic aid package. Most of it is hopefully legislator posturing. In reality, the incoming Obama administration cannot allow a vital manufacturing industry in America, on which approximately three million families depend for their livelihoods, to fail, especially given the reality that more than four million manufacturing jobs in the U.S. have been lost over the past decade alone.
How could much of the $700 billion be available for Wall Street, Freddie Mac, the AIG insurance giant and others, and none for the millions of Americans in the auto sector? I do understand the hesitation to move without seeing first an industry plan to restructure.
I strongly favour strategic assistance to the Canadian auto sector as well--even up to the proportions the three companies hold of the entire North American car market. If that comes to several billion dollars in all, it is a great deal of money, but the sector is vitally important to Canadians too. I’m pleased that yesterday’s Throne Speech committed the Harper government to help. The McGuinty one will no doubt pitch in too.
Any financial aid provided should be given with more and stronger strings, including, no more gas guzzlers. Let’s ask them for greener cars, including hybrids, and perhaps the adoption of some of the best practices of their foreign competitors.
Finally, and in stressing that I’m not advocating trade protectionism which greatly worsened the human suffering worldwide when adopted in many national capitals more than a half century ago, permit me to recommend new legislation or administrative practices for Canada which will achieve the following:
- All of our trading partners must refrain from illegal export subsidies and currency manipulation and abide by the rules of the World Trade Organization. For currency manipulation, Canada will define it as an illegal export subsidy and henceforth add it to other subsidies when calculating anti-dumping and countervail penalties;
- Adopt a 'zero-tolerance' policy for anyone who sells or distributes pirated or counterfeit goods. All trade partners must respect intellectual property;
- Adopt and enforce health, safety and environmental regulations consistent with international norms; provide decent wages and working conditions; and ban the use of forced labour;
- Defective and contaminated food and drugs must be blocked more effectively by measures which make it easier to hold importers liable for selling foreign products that do harm or kill people or pets;
- Develop policies and programs to reverse the 'race to the environmental bottom'. Require all trading partners to compete on a level playing field and to reduce acid rain and smog affecting peoples abroad. All bilateral and multilateral trade agreements should henceforth include strong provisions for protection of the natural environment.
In short, in order to get out of the current economic crisis, we need to restore confidence among Canada’s consumers, Main Streets, and other communities. Enhancing accountability in favour of the public interest will go a long way in restoring such confidence.