Wednesday, February 22, 2012

Fool's Game

On the subject of Ontario's finances, Tom Walkom -- who holds a PhD in economics --  echoes the argument Paul Krugman has been making for three years: This is no time to imitate Europe. Now is not the time to make draconian spending cuts:

Government workers are laid off to save money, which leads to higher unemployment. Higher unemployment reduces tax revenues, thereby widening fiscal deficits. Governments are forced to borrow more to cover these shortfalls, thus increasing debt.

We should have learned that lesson during the Great Depression. Our leaders, who lack long term memories, have forgotten it. There is one similarity, though, between Ontario and the Euro nations. Ontario is hobbled by a currency it can't control:

Spain for instance, is unable to make its exports more competitive through currency devaluation because it no longer has a national currency to devalue. Instead it uses the euro over which it has virtually no control.
In the same way, Ontario manufacturers are losing export markets because the currency they use — the Canadian dollar — is priced too high.

One reason why Caterpillar Inc. was encouraged to move its locomotive operations from Ontario to Indiana this year is that Canada no longer has a currency advantage in American markets.

Don't expect that to change anytime soon. The Harper government, which is fixated on selling tar sands oil, is presently engaged in what Jeffrey Simpson calls a "fool's game."  It's a fool's game because putting all of our eggs in the resources basket masks the problem of national productivity:

Canadians are so damn lucky. We just dig and pump and cut and ship, and we never seem to run out. We just hope commodities prices remain high.

All those resources can be a fool’s game. Pumping and digging and cutting can keep the country comfortable, but they do little to address the country’s biggest challenge – a sagging competitive position. All those natural resources soak up capital; they usually don’t require much innovation or processing.

After World War II, we invested heavily in industry, throwing off our traditional roles as hewers of wood and drawers of water. The Harper government -- as is true in so many ways -- wants to return us to the past. It exploits Canada's resources while it lets the country's industrial base atrophy.

Ontario's challenge is to reinvigorate its industrial heartland -- without help from Ottawa. It cannot do that if it makes draconian cuts now.

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