Thursday, December 11, 2008

The security pinch grows

An article in the National Post today reports that the United States is deploying new surveillance technology along the U.S. borders with Canada and Mexico. This new technology includes the use of unmanned drones that will monitor the vast terrain from above.

It is understandable that America is moving to secure its borders. Given the threats of both terrorist activity and illegal immigration, the current North American framework gives the U.S. government little options. However, this is very damaging to the interests of both Canada and Mexico. It is also damaging to the long-term interests of the United States.

The costs of maintaining a security perimeter around the U.S. will only grow - both in terms of technology and personnel. But more importantly, the disruption of legitimate and productive cross border traffic will hamper economic growth in all three countries. Trade is an integral part of the North American economy. Few will argue this. It seems, though, that few are standing up to seriously address the competing forces at work here. Security and trade will only work efficiently if borders are eliminated.

The implementation of a broader security perimeter around North America is the only way to facilitate the contradicting agendas of increased trade and security. Here it is important that the governments of both Canada and Mexico show leadership and forethought in addressing specific needs of the U.S. Harmonization of security measures and trade issues should be a priority.

There are those that would chose not to make compromises that infringe on national autonomy. But these instincts are a dangerous impulse. The sooner North Americans work together to become a larger and more connected family, the better. The strains of global economy will be felt more acutely if Canada and Mexico do not proactively nip this unfortunate impulse in the bud. North Americans need each other.

Article rank
11 Dec 2008
National Post
National Post
New eyes on border

A U.S. drone delivered to North Dakota will soon begin northern patrols

Sitting on the tarmac at a North Dakota Air Force Base is the future of U.S. northern border security: an unmanned patrol airplane similar to ready-to-fire aircraft used in Afghanistan, identical to drones scouting above the U.S. border with Mexico and the first of its kind ready to fly along the Canadian border, in search of drug runners, illegal immigrants and terrorists heading south.
The Predator B Unmanned Aircraft System, a plane with a thin, cylindrical body, three wheels and no cockpit, was delivered to Grand Forks by U.S. Customs and Border Protection authorities last weekend and will be launched on patrol missions above the western Prairie landscape early next year. The US$10million, remote-controlled craft is equipped with video equipment and heat sensors capable of spotting people crossing the border illegally by avoiding ports of entry.
Once heralded as t he world’s longest undefended border, the thin line of security between Canada and the United States is now viewed by many Americans as a sieve, capable of being exploited by terrorists, and a major concern for national defence in the post-9/11 world.
In recent years, U.S. Customs and Border Protection and the Department of Homeland Security have upgraded security measures making documents such as passports mandatory for visitors from Canada, increasing the number of agents and screening measures at border ports and installing extra cameras and motion detectors along undefended portions of the line.
The idea of a physical security fence running along the Canadian border, similar to one found along the Mexican border, is still an option being endorsed by some state governors.
The use of unmanned aerial vehicles were first proposed in the 2005 Secure Border Initiative as part of a “virtual fence” that also includes fixed towers and mobile radars. The aircraft went into action along the U.S.-Mexico border immediately, but this will be the first one will take flight along the United States’s northern border.
According to a statement from border protection’s air and marine assistant commissioner, the aerial patrol with help “identify and intercept potential terrorist or illegal cross-border activity” while supporting Canadian and U.S. law enforcement agencies.
Border patrol officials say they make about 4,000 arrests and intercept about 18,000 kilograms of illegal drugs each year along the Canadian border.
Juan Munoz-Torres,
a spokesman for border protection’s ai r and marine operations, said the CanadaU.S. border poses significant security concerns because of the distance between checkpoints and a geography which is often hard to reach by land. Aerial patrols will help close those gaps while answering questions about how many people are slipping into the country between checkpoints.
“We don’t know what we don’t know so I can’t tell you what we will find or what we won’t find. As we begin operations, we will see what type of activity is taking place and we will then start working in order to stop that activity,” he said.
Three mo r e Predators are expected to join the pa tro l along Canada’s nearly 9,000kilometre border. For now, Federal Aviation Administration authority will only allow the aerial patrol along a 480-kilometre stretch along North Dakota and Minnesota.
Senator Kent Conrad, a North Dakota Democrat who has been working for four years to shore up security along the Canada-U.S. border, said the Predator’s arrival is the beginning of a secure border.
“It is vital to America’s security that we protect our borders, particularly the northern border,” Sen. Conrad said.
“ The Grand Forks Air Branch plays an essential role in helping shut the door on terrorists who want to sneak across remote border points to strike on U.S. soil.”
Colonel John E. Michel, commander of Grand Forks Air Force Base, told the Grand Forks Herald the base will eventually house more than 20 unmanned aerial vehicles, at least six of which will be used for surveillance.
Similar aircraft have patrolled the country’s southwestern border since 2005, leading to the confiscation of more than 8,000 kilograms of marijuana and the arrest of 4,000 illegal immigrants flowing from Mexico.
Similar versions of the unmanned aircraft, equipped with missiles, are being used in reconnaissance missions in Afghanistan and Iraq. Those to fly along Canada’s border will be unarmed, equipped instead with Raytheon electro-optical sensors and a synthetic aperture radar that can help document natural changes to the area.
The Predator is 20 metres long and weighs more than 4,500 kilograms. It will patrol at an altitude of 15,000 metres. It can fly 418 kilometres per hour and stay aloft for 18 hours before landing to refuel. With its cameras and sensors, it can detect a moving person from 11 kilometres away.
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Thursday, November 20, 2008

A less contrived North America

We live in a global economy that facilitates economic growth through trade and capital investment. Without either trade or capital there is no growth. There is no wealth creation. Whether we acknowledge this fact or not, our welfare is linked to the successful working of the global economy, and more importantly, the elimination of trade and capital barriers between our greatest and closest trading partners. The benefits extend well beyond large corporate interests. Workers, consumers and entrepreneurs all would benefit from lower costs and greater opportunities.

I was born and raised on the Canadian prairies. From there I saw the way Ontario and eastern Canada exercised great control over the regions. I saw how we paid more for goods manufactured in eastern Canada, when I wondered why we could not instead buy from American plants that were closer to Western Canada than Toronto or Montreal. I wondered why we had to watch the CBC and its central Canadian bias, and were either denied access or forced to pay more for media more reflective of the environment I lived. I learned early that Canada is what you make of it, but it is a contrived nation. My vote is for a less contrived political and economic framework - one that opens up potential for people to be their best. A North America Union offers that opportunity.

Wednesday, October 22, 2008

The "third option" refrain...again

In the news recently is a renewed call for a trade pact between Canada and Europe. See Canada and Europe ponder trade pact. When will Canadians dispense with nationalistic pretenses and whole-heartedly embrace the good fortune of being America's primary trading partner? Fears about having all your eggs in one basket are misplaced. While the glorious effects of globalization have lifted the economic clout of Europe and the Far East, America remains a powerful and dynamic market. Canadians would be better served to work toward an improved North American trade framework, freeing up labour mobility and capital constraints. Yes, there are expanding markets abroad, but unfettered trade will gravitate Canada toward trade among partners in this hemisphere. Better that Canada work with the U.S. to improve the economic vitality of Latin America than to play politics with Europe and China. There is tremendous potential that can be unleashed here in the Americas.

Wednesday, October 08, 2008

Free market solutions to the credit crisis

The credit crisis has threatened severe economic hardship on the global economy. Many politicans have turned toward stepped up regulation and socialization of the credit markets in searching for a solution to this very serious problem. The failure of the financial system has been equated by both liberal and some conservative voices as an indictment against the free market. This is a dangerous consequence of policy failure and threatens the economy with a new round of growth-killing liberal economic policies. Indeed, the U.S. election campaign is replete with a range of vilifying statements about both financial institutions and borrowers. But these market participants are not the root cause of this crisis. Instead, it is the institutionalized failures of The Federal Reserve Board and its dual mandate and the failed immigration policies of the United States.

The Federal Reserve's hand prints are all over the mortgage crisis that has crippled the financial system. Clarifying voices that direct blame toward this institution are starting to be heard, although the tremendous regulatory roar for banker's blood is still far too defeaning. The(WSJ opinion piece - Judy Shelton: Loose money and the roots of the crisis) , is a recent example that clearly states the source of the credit crisis. Instead of vilifying market participants and regulators, Ms. Shelton directs blame on the compromising dual mandate of the Federal Reserve - its monetary fine-tuning of economic output at the expense of its core responsibility of protecting the value of the currency. Such an incompatible mandate is untenable over the long-term. Cheap money is the fertile soil of credit abuse. We should not be surprised that both financial institutions and borrowers abused a fiat money system that makes it so easy to lose sight of fiduciary responsibility and financial discipline.

In addition, the demand failure of the mortgage markets to continue to fuel ballooning asset prices can be linked to an immigration shortage. Demographics are the foundation of the housing market - policies that inhibit the natural labour flows of the economy handicap its proper functioning. Restrictive immigration policies are the prime culprit. Here the U.S. has failed itself immeasurably by institutionalizing the boom and bust cycle of this critical asset class. They have brought collapsing house prices upon themselves.

Today's WJJ opinion piece by Lee Ohanian - Good policies can save the economy reveals how pivotal immigration is to achieving a solution to the housing crisis. Instead of taxpayer bailouts - as both Republican and Democratic Presidential candidates have espoused - this housing crisis has a free market solution: immigration.

In this respect it is important that Americans understand the importance of the integration of North American labour markets. Without a new vision toward the North American economy the failures of the institutions that create crisis will lead to continued breakdowns of the market economy. It is time for North Americans to rethink the national boundaries of its member states and work toward a partnership that ensures prosperity and energy security in the face of a complex and challenging global economy.

Tuesday, February 12, 2008

The economic cost of the Canada-U.S border

Most Canadians do not realize the impact of the current leadership void in tackling cross border security issues with the United States. Without an integrated security perimeter commercial relations between the two countries will become increasingly strained. It is imperative that border issues be resolved and that Canadians recognize the importance of a joint security plan. In a recently published study by the Woodrow Wilson International Center Michael Hart details the trade costs of this failure. See Free Trade in Free Fall? Assessing the Impact of Nontariff Barriers on Canada-U.S. Trade accessible at

Friday, January 18, 2008

Dropping Canada's floating exchange rate

Whether Canadians want to admit it or not, the floating exchange regime of the loonie is fracturing mechanism that exposes the tenuous geographical and economic links of the Dominion. Exchange rate uncertainty will pit one region against another. A strong loonie reflects the comparative advantage of one region (oil producers) versus another (non-oil producers). The policy strains caused by this imbalance are becoming increasingly evident both in monetary and fiscal arenas. Exchange rate uncertainty is extremely detrimental to commerce, and has a crippling effect on productivity. For that reason there should be an increasing debate about changing the current currency regime with an alternate vision that more aptly reflects our U.S. centric trading relationship. Currency Union and dollarization, although highly desirable options, are political swamps for those brave enough to espouse these objectives. Another alternative is set forth by Professor Herbert Grubel of Simon Frazer University, whose commentary below was found in today's National Post. Although currency controls are highly debated, the special circumstances of the Canadian economy vis a vis its U.S. partner - and the political intractability of the population on both sides of the border - makes Grubel's position worth entertaining.

Fix the loonie
Cure Canada’s Dutch disease by setting the dollar at par
David Laidler’s recent defence of Canada’s flexible exchange rate system misses completely the point made by Nobel Prize winning economist Robert Mundell in his famous article on optimum currency areas. Mundell’s article has been widely credited with providing the intellectual base for the European Monetary Union and merits attention.
Mundell’s point is simple and straightforward. If flexible exchange rates are best for Canada on the grounds presented by Laidler, why would flexible rates not be best also for Alberta, Ontario or New Brunswick? Like Canada, these jurisdictions encounter economic shocks the impact of which would be minimized by the exchange rate buffer.
Milton Friedman’s response to Mundell was that he would not advocate flexible rates for every possible region. He told me once that he did not think that Panama would benefit from flexible rates and that its hard currency fix, the use of U.S. dollars, served the country best.
Clearly, the standard FriedmanLaidler analysis misses essential ingredients needed to decide the case for Panama and, I would insist, Canada. The following analysis considers the costly burden suffered by Canadian manufacturing through the strong appreciation of the dollar during the recent boom in commodity exports, the short-comings of all suggested remedies, and the permanent cure to the problem by the adoption of a hard currency fix.
As Laidler notes, Canada has a bad case of the dreaded Dutch disease, which is named after the problems that developed in the 1960s when the Netherlands sold natural gas that had been discovered on its coast. The increases in Dutch exports of resources, like those of Canada in recent years, resulted in a strong appreciation of exchange rates, which was reinforced by interest rate policies of central banks and currency speculators.
The disease manifests itself through the loss of domestic manufacturers’ ability to compete abroad and with imports. In both countries many workers in these manufacturing firms lost their jobs. Some became unemployed but many undertook the desirable move into the booming export and steadily growing service sectors.
Less desirable was the move of some of the unemployed into public-sector employment, which was facilitated by fiscal surpluses due to the economic boom. During the year ending October 2007, Canadian public sector employment rose by 4.9% while private sector employment rose only .9%
This increase in public-sector employment reduces the growth in productivity because of the perverse incentives facing civil servants: punishment if innovations fail, no rewards if they succeed. Moreover, productivity growth in the private sector is slowed by the proclivity of civil servants to design and administer onerous private-sector regulations.
There are no simple remedies for Canada’s Dutch disease. Subsidies for manufacturers are complex to administer, inefficient and likely to become permanent.
The government can use fiscal surpluses to retire public debt, a large part of which is held by foreigners. While such foreign-debt retirement lowers the exchange rate and thus helps manufacturers, it comes at the expense of tax reductions.
The Bank of Canada can keep interest rates low to discourage capital inflows and thus exchange rate increases, but at the cost of fuelling inflationary pressures.
The most promising remedy for the Dutch disease is the increased importation of labour-saving capital by the private sector, taking advantage of the favourable exchange rate. The problem is that the resultant higher productivity and international competitiveness would grow only slowly.
While all of the opportunities for dealing with Canada’s Dutch disease have some merit as quasi palliatives, there is only one permanent cure: inoculation of the system by fixing the exchange rate at a level that allows manufacturers to be competitive, perhaps at the rate the Bank of Canada research identifies as the longrun equilibrium, around US90¢.
The Netherlands and Austria in the years before the introduction of the euro successfully operated such a system and enjoyed near perfectly stable exchange rates against the German currency. The essential ingredient in this success was the official commitment of the central banks of these two countries to maintain the same interest rate as that of the German central bank.
An analogous commitment by the Bank of Canada with respect to U.S. interest rates may not be credible, tested by speculators and therefore ultimately doomed to failure.
However, there is a solution to this lack of credibility. In Europe, it came through the creation of the euro and formal end of the ability of national central banks to set interest rates. The analogous creation of the amero is not possible without the unlikely co-operation of the United States.
This leaves the credibility issue to be solved by the unilateral adoption of a currency board, which would ensure that international payments imbalances automatically lead to changes in Canada’s money supply and interest rates until the imbalances are ended, all without any actions by the Bank of Canada or influence by politicians.
It would be desirable to create simultaneously the currency board and a New Canadian Dollar valued at par with the U.S. dollar. With longer-run competitiveness assured at US90¢ to the U.S. dollar, the creation of the new currency would reduce present incomes, prices, assets and liabilities from their current Canadian dollar value by the same 10%, leaving real incomes and wealth unchanged.
The public would readily use the new Canadian and the U.S. dollars interchangeably and enjoy savings in the conversion of one currency into the other. The present exchange risk premium on Canadian interest rates would be eliminated completely.
The creation of the New Canadian dollar and its credible fix against the U.S. dollar is not a panacea.
Fluctuations in global demand for natural resources will always result in competition for labour and capital among Canadian manufacturers and producers of resources. But, at least, the firms in these sectors would no longer have to concern themselves with exchange-rate fluctuations and policies of the Bank of Canada.
There will also always be changes in the U.S. (and Canadian) dollar exchange rate against the euro and other major currencies. But these changes would have minor effects on the Canadian economy because 80% of the country’s trade is with the United States.
Herbert Grubel is Professor of Economics Emeritus, Simon Fraser University.