Saturday, May 30, 2009



Last Tuesday I commented on the updated projections from our illustrious Finance Minister regarding the deficit.

Canada has gone from a $15 billion surplus in 2006 to a $40 billion deficit in 2009-10. This represents the most rapid and intense deterioration of national finances in the country’s history, a swing of more than $50 billion in a year.

A key component of that stunning swing in finances: the auto sector bailout of Chrysler and GM. Just how much money are we ploughing into this automotive black hole?

It works out to... wait for it... almost $1.5 million dollars per job saved.

That's right a mil and a half per job saved.

The government says it is a transitory debt we are occurring and that we will likely be out of it in two years.


There is no way they can believe that and they are fools if they think any of us believe it. Transitory deficits are small ones that are incurred in extraordinary circumstances to deal with a short window of time. These deficits the Conservatives are creating will not be transitory deficits.

We are dealing with an economic problem that will be anything but short term. The circumstances of the auto bailout are certainly not extraordinary, those businesses have been foundering for years. And finally... this deficit is huge, it's not small.

$50 Billion this year and perhaps $40 Billion next year mean this so called 'transitory deficit' will quickly become a structural deficit. Remember how long and how difficult it was to overcome the $44 Billion deficit left over from Mulroney?

Yesterday we talked about Creative Destruction.

The term creative destruction was popularized by Austrian economist Joseph Schumpeter in 1942. It describes the process whereby constant innovation sustains long-term economic growth through improved productivity. This process of creation effectively destroys old products, companies and industries that are unable to compete with the new.

Creative destruction is not unique to recessions; it is a constant driver of capitalism. However, the destruction side of the theory becomes magnified in recession as low demand squeezes out companies which, in theory, are less competitive.

Steven Davis, a professor of international business and economics at the University of Chicago Booth School of Business, said the solid employment and productivity performance of the United States of the past 25 years has been driven to a considerable extent by America's success at 'creative destruction'.

Prof. Davis said the U.S. was particularly successful at evolving in the face of an economic shock because it had flexible labour market policies and low regulation in some markets, such as retail.

"This is why, after the major oil price shocks of the 1970s and the global downturn of the early 1980s, the U.S. recovered in terms of unemployment and economic growth much more rapidly than, say, continental European countries did," he said.

America had the ability to maintain productivity by slashing its workforce, this is crucial to allowing your country to be one of the first to recover from a recession.

The easier it is to fire people, the more willing and the less stressful it is for employers to decide to hire people. In the U.S., if you get a couple of big orders, you start hiring people because you know that when you don't need them you can lay them off again. It all sounds rather callous. But an efficient economy is one where the devil sort of does take the hindmost.

Canada has historically underperformed the United States in productivity. In 2008, Canadian productivity fell 1.3% compared with growth of 2.9% south of the border. In 1996-2000 U.S. productivity grew an average 2.5% a year compared with 1.6% in Canada.

Pedro Antunes, director of national and provincial forecast at the Conference Board of Canada, said solid productivity growth is crucial to maintaining a strong economy.

"The reason it's crucial is we are competing with the rest of the world and if we want to pay our salaries and have a real increase in wages, we need to ensure that productivity growth is over and above that. Otherwise, we are eroding our competitiveness."

The auto bailouts are nothing less than a giant anvil around the necks of all Canadians, and Central Canada in particular.

We need to embrace the creative destruction process, which means allowing for the destruction side as well as facilitating the creative side, of the economy.

$1.5 million per job pumped into the systemic failure of GM and Chrysler are funds which we can ill afford and which deprive, penalize prevent the creation of something better in its place.

It folly, plain and simple.


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