|Montreal, August 16, 2003 / No 127|
by Harry Valentine
Several recent news stories regarding Canada's economy seem to indicate that while a short-term economic recovery may appear to be under way, the nation may in fact be on the long road to stagnation.
During June 2003, several news stories focussed on Canada's trade with the USA, specifically, that it accounts for up to 87% of Canada's exports. The increase in value of the Canadian dollar against the US dollar, together with the general slowdown in the US economy, was adversely affecting Canadian exporters. During August, several stories about government investment practices reached the news media.
One TV news story revealed that 85% of the budget of the EDC (the Export
Development Corporation) was allocated to one single politically-favoured
company, while another story published in The Ottawa Citizen revealed
that only 3% of the $1.5-billion invested in high-tech loans were paid
back to the government. The Globe and Mail carried a story about
Ottawa allocating $1.7-billion to global warming and Kyoto-related initiatives.
A month earlier, two scientists from Ottawa (one from Carleton University,
the other from the University of Ottawa) published a research suggesting
that the location of the earth's solar system in the Milky Way galaxy was
the dominant factor causing the global warming phenomena. A common theme
running through all these stories, is the propensity of government to malinvest
Unwanted government action
The slowdown in the US economy was a result of the US Federal Reserve keeping interest rates artificially low during the early to mid 1990's. This resulted in the high-tech boom, followed by the high-tech malinvestment boom which was caused by misleading market signals being precipitated by the artificially low interest rates. In Canada, government loans and even grants for high-tech companies, including start-up companies, was easy to come by. Several high-profile Ottawa high-tech companies such as Nortel and JDS Fitel were candidates for partnerships between government and industry. At their peak of operation, JDS Fitel employed over 10,000 people in the Ottawa area alone. Now they employ fewer than 600. Many Canadian high-tech and information sector companies closed their doors during the high-tech bust, as the market corrected itself. To survive economically, several active American and Canadian high-tech companies have moved parts of their manufacturing operations offshore, to China.
Ottawa's chances of recovering much more than 3% of the $1.5-billion allocated to high-tech sector may be doubtful. Originally, the government's most likely source for this funding, directly and indirectly, were large numbers of other mainly low-profile, non high-tech businesses in the economy. Government not only taxes these businesses directly, it does so indirectly by taxing their customers, mainly private citizens. Money that these citizens, in their role as consumers, would have spent on items and services supplied by unspectacular and low-profile businesses, was instead spent by government on a variety of state run programs, including loans and grants to the politically favoured businesses. Indirectly, it is large numbers of small, low-profile, mundane and unspectacular business enterprises, their employees, suppliers and customers, who ultimately carry the economic burden of government malinvestment in politically-favoured businesses.
Following the government's taxation and malinvestment (partnership) charade, these low-profile businesses have less money to upgrade their products or improve their services, so they delay or abandon new wealth creation projects that could otherwise have created new, potentially long-term employment opportunities. Their customers may forfeit access to new operating methods or technological advances that would otherwise have improved their production efficiency. Even their suppliers may forfeit new business opportunities due to state re-investment of revenues. State intervention in the economy in the form of transferring resources from one sector to another, has the potential not only to adversely affect large numbers of low-profile companies directly, it can indirectly also adversely affect both their customers and their suppliers in the long term.
The massive loss of jobs in the high-tech sector indicates that government action and partnership created large numbers of short-term jobs in politically-favoured sectors of the economy, at the expense of long term wealth creation and long-term jobs in the more mundane and low-profile sectors of the economy. The total job loss to the economy then includes the loss of potential long-term jobs that were prevented from coming into existence. A few high-profile companies benefited over the short term, at the long-term expense of large numbers of low-profile companies. Since these "minor" losses were spread out over very large numbers of relatively small companies, it easily avoids attracting negative news media attention, maintaining the illusion that the partnership between government and industry may actually yield some benefit. The benefit occurs in the short term only.
Recent changes in the American economy indicate that a new round of state-precipitated malinvestment may be imminent. The American government is presently running its highest deficit in decades, while the occupation of Iraq is costing some US$4-billion per month. The grand total of this escapade may run anywhere between an estimated US$600-billion to US$1.5-trillion. To stimulate some new life into the near dormant US economy, the Federal Reserve has lowered interest rates to a 45-year low. This action was simultaneously intended to stave off the threat of "deflation," popularly defined as a general drop of prices in the economy. But deflation is a form of market correction that liquidates malinvestment, favouring efficient producers at the expense of inefficient (and often politically-protected) producers. Liquidating the malinvestment of the previous boom will now be put on hold, while a new economic boom may get underway.
Since Canada is very dependent on the US economy to purchase Canadian exports, low American interest rates may not only lead to a new round of malinvestment in the American economy, there is high risk that it will also bring a new round of malinvestment in the Canadian economy, compounded by a new round of ill-conceived partnerships between government and industry. Unlike the 1990's boom which lasted for several years, the new boom(s) and subsequent slowdowns may rapidly follow each other. When an economy has not liquidated the malinvestments of a previous boom, a prolonged central bank policy of below-market interest rates could result in a phenomena where connecting the midpoints of the peaks (booms) and troughs (busts) of future stock market values, would likely reveal a straight line indicating a long-term downward trend in the stock market and in the economy. This phenomena was suggested as a possible future scenario by Australian investment analyst and free-market economist, Dr. Frank Shostak ("Has a New Bull Market Begun?", Mises.org, June 11, 2003).
Since the Canadian economy is so heavily intertwined with the American economy, the expected long-term downward trend would likely include Canada. It is very unlikely that a Paul Martin government would deviate from past strategies of government guiding the economy through (more) regulation and state investment. Ottawa would more than likely "participate" in the economy during the expected booms through loans and partnerships. The needed revenues would again be obtained mainly by direct and indirect taxation on large numbers of low-profile businesses, adversely affecting them. In the long-term future, both the US and Canadian economies could stagnate in a way similar to Japan's decade-long period of economic stagnation. That debacle was precipitated by massive state malinvestment, including massive spending on public works projects. Both the US and Canada are likely to follow the same road to long-term economic stagnation.
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