Who would have thought that an arcane economic concept – interesting to weirdos like me but generally boring to the general population – would become a leading national issue?
We can thank NDP leader Thomas Mulcair for doing this with his elevation of the “Dutch Disease” to high prominence as a political wedge issue and the source of a new regional war within Canada.
In short, Mulcair argues that high energy export prices for Western Canadian oil is responsible for the Canadian dollar surging, and that hurts manufacturing in Quebec and Ontario. His suggested answer to the problem is to create a federal “environmental” tax on oilsands production. That would hamstring the growth of the oilsands, weaken Canadian economic growth, weaken the loonie, and boost ailing eastern manufacturing industries.
No doubt the tax money extracted from the West would be dumped out in the east, perhaps in the form of lower tuition fees in Quebec, or something like that. Here is the manner by which Mulcair appears to be trying to inherit the legacy of Pierre Trudeau.
Fortunately there is an excellent report on the Dutch disease and whether Canada suffers from it, authored by economists including the University of Saskatchewan’s Richard Gray, who is a highly-regarded agricultural economist that the Western Producer has often quoted. He has unquestioned credibility. I interviewed Gray about this a couple of days ago and am doing a story on the report for next week’s paper. The report is is top-rate economic analysis and good reading if you’re at all interested in economics. Go here to read it.
Basically, the conclusion is that Canada suffers from a mild form of the Dutch Disease, and that policy makers should ensure that imbalances caused by surging commodity prices don’t create future economic problems. This could be by a revival of structures such as Alberta’s Heritage Fund, which siphoned off some of the windfall profits of oil production and put it into long term savings. This lowers the inflationary response during good times, and offers the ability to patch over periods of weak commodity prices. Unfortunately Alberta and Saskatchewan haven’t been doing this during the current commodity boom, so there is a danger there of huge imbalances developing that will lead to problems when the commodity bull market inevitably ends. As anyone who reads this benighted blog knows, I’m endlessly pondering the long run commodity bull market and trying to assess when it’s likely to end. When it does end, hopefully we don’t have super-high debts and obligations that can’t be met by the next 20 year period of low commodity prices.
Interestingly, Gray et al found that the surge of the Canadian dollar in the 2000s (the report uses data up until 2007) only hurt – often to a small degree – about one third of Canadian manufacturing industries, and those tended to be low-end, labour-intensive, low-skill industries like textile production, which were already under enormous pressure from the opening of global trade in textiles to countries like China and Vietnam. Ontario’s auto industry was not, apparently, affected at all.
This all makes sense to me. The Manitoba hog industry is a manufacturing industry that exports most of its production to the United States and is terribly vulnerable to increases in the Canadian dollar. When the loonie surged, the hog industry here suffered. It didn’t help that there was a cyclical downturn at the same time and discriminatory border blockages in the form of Country of Origin Labelling. But after a few years of adjustment, the industry here is doing fine, has adjusted and has increased its efficiency.
The answer to the Dutch Disease for industries affected by it – including crop farming – is to mechanize, automate and embrace economies of scale. That’s what farmers have done by buying super-efficient equipment and expanding their acreages. That’s what any industry can do. That’s what Quebec’s and Ontario’s industries are doing. And that’s really what Mulcair could best focus on, if he wants to improve the plight of the eastern rust belt.
But he’s jumped on this idea of nailing Western oilsands production and having the federal government gobble up the money. So I wonder: Why is he doing this?
I wonder if he’s actually crazy, perhaps ruthless, maybe right, or just a bit sleazy.
Let’s think about this:
1) Is he crazy? I’ll never forget when I saw Mulcair on Newsworld just after the last federal election when Evan Solomon asked him for a quick reaction to the pictures perhaps-to-be-released of the body of Osama Bin Laden, who had just been capped by U.S. Special Forces. “I don’t think, from what I’ve heard, that those pictures exist,” he said, confusing everyone and seeming like a bit of a loon. I saw this live, as I sat in a hospital room, and I’ll never forget the weird feeling of that couple of minutes. Mulcair later explained that he was exhausted after a long election campaign and didn’t clearly make his point, whatever the heck it was. This seems plausible to me. He hasn’t seemed crazy since that event, and his Dutch Disease crusade seems well-calculated rather than paranoid or demented. As a newspaper reporter I’ve dealt with a few loons, and he doesn’t seem like one.
2) Is he ruthless? Apparently Stephane Dion was told that he could curry Quebec and Ontario favour if he targeted Western resource production. He refused to do this because he thought it would be bad for the country to pit region against region. His carbon tax proposal would have hit any carbon emitter, regardless of source, be it resource production factory production or transportation. So it wasn’t a divide-and-conquer political approach. Has Mulcair ruthlessly decided to embrace divide-and-conquer, to win Quebec and Ontario votes by saying “your problems are caused by the people in the West”? I don’t cover politics, so I don’t know, but it’s certainly plausible.
3) Is he right? Gray’s group concluded that Canada suffers from a “mild” case of the Dutch Disease, so it’s not that it’s not a factor. But his study concludes it is not the fundamental cause of the problems in Quebec and Ontario industry. That’s more due to flagging demand from the U.S., the dominant market for eastern exports. There is certainly a Dutch Disease threat, Gray’s group concluded, but that’s to the West itself. So Mulcair has a nugget of truth that he seems to have smelted into a crude iron club.
4) Is he sleazy? Starting a region-vs-region war in Canada might be considered by some to be a rather sleazy way to gain political advantage. But it all depends on whether or not he believes the tale he’s peddling. If he really believes it, then it’s not sleazy to be pushing it. You’ve got to speak the truth. But if he knows he’s misrepresenting the economic reality, then the sleaze factor crawls in. I don’t know what’s going on behind Mulcair’s beard and furrowed brow when it comes to the Dutch Disease any more than I was able to know what he was trying to say about Osama Bin Laden’s killing.
I don’t know if or how well Mulcair has read the IRPP report. If he hasn’t read it and pondered it, he should. It could make some good summer reading for him if he takes a break. You should read it too. Go the link above and read it. You don’t have to accept my gloss on the issue. It’s a pretty important issue, so it’s worth getting informed.