Wednesday, December 05, 2007
Don't peg loonie to greenback, incoming Bank governor says
The Canadian Press
Wednesday, December 05, 2007
OTTAWA — Canada should resist the understandable appeal of pegging the loonie to the greenback or forming a currency union with the United States, the incoming governor of Bank of Canada said Wednesday at a Parliamentary hearing.
At an historic appearance by a governor-designate before the Commons finance committee, Mark Carney defended the Bank of Canada's management of monetary policy in the face of the recent surge — and just as sudden fall — of the loonie.
And while Mr. Carney said it was understandable that many would want exchange rate certainty to protect some industries, such as the manufacturing sector, he maintained that the cost would be too high.
“Although there is no target exchange rate for the Canadian dollar, the bank does care why the exchange rate is moving and what the potential impact will be on output and inflation,” Mr. Carney told the committee.
But it would be a mistake to peg the loonie to the greenback, he continued.
“It would mean that, de facto, Canada would adopt U.S. monetary policy, despite the reality that the structures of our economies are very different and, as a consequence, often require different types of adjustments in response to global developments.”
The Canadian dollar has been on a roller-coaster since it began it's steep climb in mid-August, peaking above $1.10 (U.S.) in mid-November, before beginning a steep decline to its current value of just over 98 cents.
The volatility has been difficult for Canadian manufacturers and exporters, Mr. Carney acknowledged, but he said the Bank of Canada should not interfere unless the repercussions are so severe as to seriously damage Canada's economic prospects.
The best action the bank can take, he said, was to keep inflation low, stable and predictable. He noted that Canada has experienced the second-longest expansion in its history beginning in 1991, when the bank and the government signed an agreement to set a 2 per cent inflation target.
“That's what we risk if we take our eye off the ball, and I assure you I will not take my eye off the ball,” Mr. Carney told the committee.
“Inflationary booms always end badly and they require Herculean efforts to put us back into the path we already have now.”
There had been suggestions before Mr. Carney's appearance — the first by a bank governor nominee — that he would face a respectful but pointed grilling from the MPs.
While the MPs cannot override the appointment that goes into effect on Feb. 1, they could at least dig into his past and delve into areas of potential philosophical differences between him and outgoing Governor David Dodge.
And some MPs tried, particularly Liberal Garth Turner, who repeatedly attempted to get Mr. Carney to admit he was behind the government's Halloween surprise last year to tax income trusts.
Aside from repeating the government's stated reasons for the decision, Mr. Carney would neither deny nor confirm he was the architect of the policy, saying his advice to Finance Minister Jim Flaherty is covered by cabinet privilege.
© Canadian Press
Friday, October 19, 2007
Breaking News from The Globe and Mail
Some day we'll wish for a permeable U.S. border
Friday, October 19, 2007
OTTAWA — Canada and Mexico do well, as nations, buying and selling things in the United States - as do Canadians and Mexicans who habitually cross national borders to play and to toil there. Canada and the U.S. traded more than $530-billion (U.S.) in goods and services last year, commerce at the rate of $1-million a minute. Canada's trade surplus with the U.S. last year was $73-billion. Mexico and the U.S. traded more than $330-billion in goods and services. Mexico's trade surplus with the U.S. was $66-billion.
For the two relatively small countries that live next door to the United States, you can round off the combined trade surplus at an invigorating - the fashionable word these days would be "robust" - $140-billion a year.
Canada now sells so much to the U.S. - $300-billion worth a year - that 37 states count Canada as their No. 1 foreign trading partner. (Take Texas. The two-way trade between Canada and Texas exceeds $20-billion a year. The Lone Star State hosts 886 Canadian-owned companies that directly employ 30,000 Texans and indirectly sustain another 500,000.) Mexico sells so much to the U.S. ($200-billion) that 22 states count it as either their No. 1 or No. 2 foreign trading partner.
And this merely measures the things that cross the two borders. The people who cross these borders are setting robust records, too.
In any given year, individual Canadians and Americans make as many as 200 million separate border crossings for business purposes, holidays, shopping, medical care or visits to friends and relatives - though some of them do so much more frequently than others. Sixteen million cars pass through the Windsor-Detroit border crossings each year; 10 million cars pass over the international bridges that connect Ontario with New York State.
In one U.S. study of foreign travellers, published this year, statisticians calculated that Canadians spent 120 million "person-nights" in the U.S. in 2006. They spent 2.8 million person-nights in the Capital Region (Virginia, Maryland and Washington, D.C.) alone. Although 70 per cent of Canadians who make casual cross-border excursions say they're in the States primarily for shopping, more than 40 per cent report that they also visit friends or relatives.
Forty per cent of Americans live in states that share a border either with Canada or Mexico.
Ninety per cent of Canadians live within a couple of hours of the border, where crossing - until 9/11 - has always been easy. No visa required. No paperwork either.
Mexicans have simply made themselves at home in the U.S. More than 42 million Mexicans (or Americans of Mexican descent) live and work in the United States, 12 million of them illegally. When you cross the Mexico-U.S. border - through the multiple traffic lanes, say, at San Diego - you could swear that all of them commute. More Mexicans live in the United States than Canadians live in Canada.
From a historical perspective, of course, proportionately more Canadians have crossed the border and stayed in the U.S. than Mexicans. Back then, though, the border was simply irrelevant. Canadians were free to live anywhere in North America that they wanted.
Call it an almost perfect example of labour-force mobility rights. Between 1860 and 1910, Canada's population grew from 3.5 million to 5.5 million. In these same years, by some estimates, 2.8 million Canadians migrated to the States - most of them without asking permission from anyone. More than 900,000 of these were French-speaking Canadians. Had these border-crossing migrants remained in Canada, we would now have almost twice the population that we have.
Canada's border with the U.S. acquired a mythic dimension - and deserved it.
Though often hampered by misguided tariffs, the economic integration of three North American neighbours proceeded apace in a natural way - however disorderly and, occasionally, illegally. (The undefended border worked perfectly through Prohibition.)
The word now used to describe this border phenomenon is "porous." A better term would be "permeable," which eliminates the pejorative implication of "porous."
It was 9/11, of course, that made an impermeable border inevitable. In the months after the terrorists struck, the U.S. proposed a North American security perimeter that would have gotten rid of the anachronistic border crossings. The choice for Canada was simple. Canada could position itself inside a North American security perimeter - or remain outside it. In one of his very worst mistakes, former prime minister Jean Chrétien decided that Canada would remain outside.
The Americans are now building an impermeable security fence around the United States. In years to come, Canadians will remember nostalgically the border that didn't work and will thoroughly curse the new one that does.
© The Globe and Mail
Tuesday, February 13, 2007
By Edmund S. Phelps
(Copyright (c) 2007,
Dow Jones & Company, Inc.)
The nations of Continental Western Europe, in the reforms they make to try
to raise their economic performance, may prove to be a testing ground for the
view that culture matters for a society's economic results.
increasingly admitted, the economic performance in nearly every Continental
country is generally poor compared to the U.S. and a few other countries that
share the U.S.'s characteristics. Productivity in the Continental Big Three --
Germany, France and Italy -- stopped gaining ground on the U.S. in the early
1990s, then lost ground as a result of recent slowdowns and the U.S. speed-up.
Unemployment rates are generally far higher than those in the U.S., U.K., Canada
and Ireland. And labor force participation rates have been lower for decades.
Relatedly, the employee engagement and job satisfaction reported in surveys are
mostly lower, too.
It is reasonable to infer that the economic systems on
the Continent are not well structured for high performance. In my view, the
Continental economies began to be underperformers in the interwar period, and
have remained so -- with corrective steps here and further missteps there --
from the postwar decades onward. There was no sense of a structural deficiency
during the "glorious years" from the mid-'50s through the '70s when the
low-hanging fruit of unexploited technologies overseas and Europeans' drive to
regain the wealth they had lost in the war powered rapid growth and high
employment. Today, there is the sense that a problem exists.
What could be the origins of such underperformance? It may be that the relatively poor job satisfaction and employee engagement on the Continent are a proximate cause --
though not the underlying cause -- of the poorer participation and unemployment
rates. And high unemployment could lead to a mismatch of worker to job, causing
job dissatisfaction and employee disengagement. The task is to find the
underlying cause, or causes, of the entire syndrome of poorer employment,
productivity, employee engagement and job satisfaction.
attribute the Continent's higher unemployment and lower participation, if not
also its lower productivity, to the Continent's social model -- in particular,
the plethora of social insurance entitlements and the taxes to pay for them. The
standard argument is fallacious, though. The consequent reduction of after-tax
wage rates is unlikely to be an enduring disincentive to work, for reduced
earnings will bring reduced saving; and once private wealth has fallen to its
former ratio to after-tax wages, people will be as motivated to work as before.
An indictment of entitlements has to focus on the huge "social wealth" that
the welfare state creates at the stroke of the pen. Yet statistical tests of the
effects of welfare spending on employment yield erratic results. In any case, it
is hard to see that scaling down entitlements would be transformative for
economic performance. (Indeed, some economists see increased wealth, social plus
private, as raising the population's willingness to weather market shocks and
helping entrepreneurs to finance innovation. I am skeptical.)
In my thesis,
the Continental economies' root problem is a dearth of economic dynamism --
loosely, the rate of commercially successful innovation. A country's dynamism,
being slow to change, is not measured by the growth rate over any short- or
medium-length span. The level of dynamism is a matter of how fertile the country
is in coming up with innovative ideas having prospects of profitability, how
adept it is at identifying and nourishing the ideas with the best prospects, and
how prepared it is in evaluating and trying out the new products and methods
that are launched onto the market.
There is evidence of such a dearth.
Germany, Italy and France appear to possess less dynamism than do the U.S. and
the others. Far fewer firms break into the top ranks in the former, and fewer
employees are reported to have jobs with extensive freedom in decision-making --
which is essential at companies engaged in novel, and thus creative, activity.
Further, I argue that the cause of that dearth of dynamism lies in the sort
of "economic model" found in most, if not all, of the Continental countries. A
country's economic model determines its economic dynamism. The dynamism that the
economic model possesses is in turn a crucial determinant of the country's
economic performance: Where there is more entrepreneurial activity -- and thus
more innovation, as well as all the financial and managerial activity it leads
to -- there are more jobs to fill, and those added jobs are relatively engaging
and fulfilling. Participation rises accordingly and productivity climbs to a
higher path. Thus I see the sort of economic model operating in the Continental
countries to be a major cause -- perhaps the largest cause -- of their
lackluster performance characteristics.
There are two dimensions to a
country's economic model. One part consists of its economic institutions. These
institutions on the Continent do not look to be good for dynamism. They
typically exhibit a Balkanized/segmented financial sector favoring insiders,
myriad impediments and penalties placed before outsider entrepreneurs, a
consumer sector not venturesome about new products or short of the needed
education, union voting (not just advice) in management decisions, and state
interventionism. Some studies of mine on what attributes determine which of the
advanced economies are the least vibrant -- or the least responsive to the
stimulus of a technological revolution -- pointed to the strength in the less
vibrant economies of inhibiting institutions such as employment protection
legislation and red tape, and to the weakness of enabling institutions, such as
a well-functioning stock market and ample liberal-arts education.
part of the economic model consists of various elements of the country's
economic culture. Some cultural attributes in a country may have direct effects
on performance -- on top of their indirect effects through the institutions they
foster. Values and attitudes are analogous to institutions -- some impede,
others enable. They are as much a part of the "economy," and possibly as
important for how well it functions, as the institutions are. Clearly, any study
of the sources of poor performance on the Continent that omits that part of the
system can yield results only of unknown reliability.
Of course, people may
at bottom all want the same things. Yet not all people may have the instinct to
demand and seek the things that best serve their ultimate goals. There is
evidence from University of Michigan "values surveys" that working-age people in
the Continent's Big Three differ somewhat from those in the U.S. and the other
comparator countries in the number of them expressing various "values" in the
The values that might impact dynamism are of special interest
here. Relatively few in the Big Three report that they want jobs offering
opportunities for achievement (42% in France and 54% in Italy, versus an average
of 73% in Canada and the U.S.); chances for initiative in the job (38% in France
and 47% in Italy, as against an average of 53% in Canada and the U.S.), and even
interesting work (59% in France and Italy, versus an average of 71.5% in Canada
and the U.K). Relatively few are keen on taking responsibility, or freedom (57%
in Germany and 58% in France as against 61% in the U.S. and 65% in Canada), and
relatively few are happy about taking orders (Italy 1.03, of a possible 3.0, and
Germany 1.13, as against 1.34 in Canada and 1.47 in the U.S.).
would be willing to take it for granted that the spirit of stimulation,
problem-solving, mastery and discovery has impacts on a country's dynamism and
thus on its economic performance. In countries where that spirit is weak, an
entrepreneurial type contemplating a start-up might be scared off by the
prospect of having employees with little zest for any of those experiences. And
there might be few entrepreneurial types to begin with. As luck would have it, a
study of 18 advanced countries I conducted last summer found that inter-country
differences in each of the performance indicators are significantly explained by
the intercountry differences in the above cultural values. (Nearly all those
values have significant influence on most of the indicators.)
of these values on the Continent is not the only impediment to a revival of
dynamism there. There is the solidarist aim of protecting the "social partners"
-- communities and regions, business owners, organized labor and the professions
-- from disruptive market forces. There is also the consensualist aim of
blocking business initiatives that lack the consent of the "stakeholders" --
those, such as employees, customers and rival companies, thought to have a stake
besides the owners. There is an intellectual current elevating community and
society over individual engagement and personal growth, which springs from
antimaterialist and egalitarian strains in Western culture. There is also the
"scientism" that holds that state-directed research is the key to higher
productivity. Equally, there is the tradition of hierarchical organization in
Continental countries. Lastly, there a strain of anti-commercialism. "A German
would rather say he had inherited his fortune than say he made it himself," the
economist Hans-Werner Sinn once remarked to me.
In my earlier work, I had
organized my thinking around some intellectual currents -- solidarism,
consensualism, anti-commercialism and conformism -- that emerged as a reaction
on the Continent to the Enlightenment and to capitalism in the 19th century. It
would be understandable if such a climate had a dispiriting effect on potential
entrepreneurs. But to be candid, I had not imagined that Continental Man might
be less entrepreneurial. It did not occur to me that he had less need for mental
challenge, problem-solving, initiative and responsibility.
It may be that
the Continentals finding, over the 19th and early 20th century, that there was
little opportunity or reward to exercise freedom and responsibility, learned not
to care much about those values. Similarly, it may be that Americans, having
assimilated large doses of freedom and initiative for generations, take those
things for granted. That appears to be what Tocqueville thought: "The greater
involvement of Americans in governing themselves, their relatively broad
education and their wider equality of opportunity all encourage the emergence of
the 'man of action' with the 'skill' to 'grasp the chance of the moment.'"
The most basic point to carry away is that the empirical results related
here lend support to the Enlightenment theme that a nation's culture ultimately
makes a difference for the nation's economic performance in all its aspects --
productivity, prosperity and personal growth.
It was a mistake of the
Continental Europeans to think that they expressed the right values -- right for
them. These values led them to evolve economic models bringing in train a level
of economic performance with which most working-age people are now discontented.
Perhaps the way out -- to go from unsatisfactory performance to high performance
-- will require not only reform of institutions but also a cultural shift that
returns Europe to the philosophical roots that put it on the map to begin with.
Mr. Phelps, a professor at Columbia University, is the 2006 Nobel
Laureate in economics.
Friday, February 09, 2007
Monday, January 22, 2007
Friday, January 19, 2007
North American unity is an important issue, and it will make Manifest Destiny a valiant call again. But first the population must understand what is at stake. Without integration the United States, Canada, and Mexico will suffer economically. There is strength in unity - of resources, of people, and of values. Let free markets and liberty prevail and great wealth will come to our land. Yes, there will be cultural growing pains with this communion of people - all brought together in the spirit of the Union. But the fear of differences must be overcome by our commonality. Just as our North American nations have thrived thanks to generations of immigrants who came to this distant and strange land, the union of North American peoples will unleash new hope for all. Isolation is not an option. Borders are chains on our prosperity.
Thursday, January 18, 2007
The idea of continental harmonization of trade and security is seen as threatening to nationalists who seem less concerned about prosperity through increased trade and security. Prosperity only comes through the attainment of security and the growth of trade. Short of choking off trade with our continental neighbours, there is no way to secure our borders without harmonization. North America must come to terms with its diversity and develop institutions of inclusion that allow the growth of economic liberty. Borders restrict that liberty. It is highly encouraging that our leaders recognize this. Let us hope that they can enlighten the population and deter the kind of fear-based reaction represented by this bill.