Pollution, Productivity and Pundits: Giving Up On Competitiveness?

After years of decrying the productivity gap, Canada’s corporate elite and their media partners are starting to show cracks in their united front. In a remarkable guest editorial by Eric Lascelles, a senior economist from RBC Global Asset Management, we see a sharp reversal of a narrative that’s been spun for well over a decade.

The narrative has long been described as a problem (a poor record of economic productivity and competitiveness) with a reductionist solution (corporate tax cuts, especially to income tax). The problem is that these tax cuts haven’t worked. What we’ve seen in the last decade are massive improvements to the corporate bottom line, but little willingness to invest these profits. In April 2011, The Globe and Mail published an article that debunked the connection between productivity and corporate tax cuts. An examination

of Statistics Canada figures by The Globe and Mail reveals that the rate of investment in machinery and equipment has declined in lockstep with falling corporate tax rates over the past decade. At the same time, the analysis shows, businesses have added $83-billion to their cash reserves since the onset of the recession in 2008.

The official Corporate Canada response to this failed narrative is to remain perplexed. The article above, for example, admits that “there are no easy answers when it comes to measuring the impact tax rates have on job creation”. The TD Bank’s well-known study of productivity in 2010 shows a similar disorientation: “It is perplexing that substantive policy reforms moving in the right direction have been met by slowing business sector productivity growth”.

So, Lascelles’s solution is easy: don’t worry about it any more. Lascelles argues that “[t]here is very little that can be done about Canada’s gaping competitiveness shortfall” and, moreover, “Canada’s poor competitiveness just doesn’t seem to matter very much”.

Except, of course, that billions of dollars have now been removed from the federal government’s coffers… with little to show for it collectively except for rising inequality. One could argue that neo-liberal ideology has failed, but those tax cuts aren’t going to be given back (at least, voluntarily), so the purveyors of this ideological narrative are winners. Yes, they’ve already won, even though their central argument is a self-serving failure.

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Another interesting feature of Lascelles’s article is that it inadvertently bolsters Thomas Mulcair’s current fight with, well, the entire Canadian establishment over the negative effects of tar sand production. Lascelles opines that our productivity gap is unimportant because it is “the unavoidable consequence of being a nation endowed with resource wealth during a commodity boom”. The resource boom inflates our dollar, and therefore almost “three-quarters of the gap is due to the soaring loonie, which is out of our control”.

On one hand, this reinforces Mulcair’s central thesis that oil exports are a major reason for the climb in the loonie, a climb that consequently hurts our value-added manufacturing sectors. However, Lascelles also believes we can’t do anything about this. Yet Mulcair’s point is that we can do something about it, since Canada is choosing not to enforce the true cost of tar sand production costs, including “the cost of the greenhouse gases, the cleanup of the tar sands sites, and the cleanup of the lakes of poisonous residues and the waters of the Athabasca River”. These costs have never been “internalized into the final price of the product”.

I should also mention that Mulcair’s political and media opponents have twisted themselves into pretzels in order to attack his “Dutch Disease” argument. Some have simply flip-flopped their position. For example, Jeffrey Simpson – a long-time defender of the downtrodden Establishment – argues that “Mulcair should drop the ‘Dutch disease’ rhetoric”. Simpson agrees with Mulcair’s analysis “that pollution costs should be factored into the product’s final cost”. But then he decries Mulcair’s supposed divisiveness because Mulcair misunderstands the consequences:

To say, however, that Alberta and Canada are acting like Nigeria in regulating the industry is political nonsense. [Notice how Simpson doesn’t explain why this is nonsense, and is content with a “horse laugh”.] As is his wider critique that Canada is suffering from “Dutch disease,” whereby high prices for commodity exports drive up the Canadian dollar which, in turn, hollows out the manufacturing industries of Central Canada.

This “Dutch disease” analysis is simplistic in the extreme. Worse, for a potential prime minister, it deliberately targets one part of the country for special (and wrong) blame, which is not what a serious national leader should do in a highly regionalized country.

Of course, Simpson has no problem with the Dutch Disease thesis when it helps him bash Ontario Liberals and demand neo-liberal discipline:

For most of the past decade, Ontario’s growth rate lagged behind the rest of Canada. From being an economic motor for the country, capable of sharing its surplus, Ontario became a drag, incapable of sharing but still required to do so by the perversity of various federal-provincial programs.

Worse, Canada entered into a form of the dreaded “Dutch disease,” whereby the currency soars on the back of high commodity prices, thereby diluting the economy’s competitive position. Ontario has suffered from the Canadian version of “Dutch disease”: High oil prices and large oil exports keep the currency high, causing competitive problems elsewhere.

Simpson’s unmitigated hypocrisy is buttressed by the predictable straw man critique that Simpson and other corporate hacks love to use. They imply that Mulcair’s “simplistic” argument ignores other realities. In other words, Mulcair is blaming the entire problem on the tar sands, and this is easily refuted by Simpson:

The reasons for the strength of the Canadian dollar go way beyond the fact that Canada exports oil. It also exports natural gas, minerals, potash, forestry products and hydro, especially from Mr. Mulcair’s own province, Quebec. Those products (except maybe forestry these days) are in high demand, especially in Asia. When demand is high, prices tend to track demand.

But, as you might imagine, Mulcair doesn’t put the entire blame on the tar sands. He argues that it has a major role to play, but is not the only problem:

“The rapid expansion of the tar sands has contributed to a 40 percent increase in the value of the Canadian dollar since 2004, as an artificially high number of US dollars flow into Canada to purchase that heavy oil.”

Call me crazy, but “contributed to” doesn’t sound like the tar sands is Mulcair’s sole target.

In the end, I am enjoying the hornet’s nest that Mulcair has stirred up, and I hope he can continue to pursue economic policy as the NDP’s central agenda. We can learn a lot about our country’s tax policy, productivity and resource economy when progressive leaders are willing to confront the economic myths that have sustained Canada’s elites for too long.

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Here are some other good links regarding Mulcair’s “brouhaha”:

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