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.

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 http://www.wilsoncenter.org/index.cfm?topic_id=1420&fuseaction=topics.event_summary&event_id=372221

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
HERBERT GRUBEL Financial Post
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.

"Union-made" monetary policy

Surprise, surprise: the incoming Bank of Canada Governor disses currency pegging to the U.S dollar. Of course, such a union implies redundancy for the green governor, his job likely just ceremonial in a regime managed by the Federal Reserve. But really, for whom is the Bank of Canada looking out? Claims that we need a made in Canada monetary policy should be viewed sceptically if the vision of continental integration is to be realized. What Canada needs is currency stability, not a floating rate that encourages slack productivity and inefficient allocation of capital. A brave new central bank would embrace currency union and encourage policy initiatives to facilitate the move. Pegging the loonie to the dollar would be unpopular in some corners, but would allow our economy to move one step closer to proper integration with the United States. Protecting the fiefdom of the Bank of Canada is not the visionary leadership Canadians need.

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

Speaking the truth

Indeed!


Breaking News from The Globe and Mail
Some day we'll wish for a permeable U.S. border
Neil Reynolds
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.
nreynolds@xplornet.com
© The Globe and Mail

Entrepreneurial kinship

A compelling op-ed in The Wall Street Journal on Monday puts forth a thesis that the lack of entrepreneurial culture in Europe and the Continent's relatively underperforming economy has roots in a dearth of economic dynamism. Edmund S. Phelps, 2006 Nobel Laureate in economics, argues that this dearth of dynamism - "loosely, the rate of commercially successful innovation" - is determined by the economic model that handicaps much of the Continent. Canadians should take note of the differences between the American and European models described here, and recognize that Canada shares very important aspects of the economic dynamism America possesses. Canadians would do well to celebrate this, and see the European model for what it is: deeply flawed. Too often Canadian nationalists, in a heavy-handed anti-American spirit, look to Europe as an alternative model. Indeed, Europe has its own values to right as it seeks to be competitive in the global economy.

Entrepreneurial Culture
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.
As is
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.

Many economists
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.

The other
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
workplace.

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.).

Perhaps many
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.)

The weakness
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.

Voices of realism

I was pleased to find at least one voice of realism about North American integration in some of the recent blogs I have reviewed. See http://reflight.blogspot.com/2007/02/stealth-fighters.html .

The roads that join us

Getting more attention in media and blog circles is the planned "superhighway" system that is part of the strategic integration of North America outlined by the the Strategic and Prosperity Partnership of North America (SPP) agreement entered into by the three nations almost two years ago. The initiative is designed to remove impediments to trade on the north-south axis throughout the continent. Expect the debate about the NAFTA Super Corridor plan will begin to bring special interest voices against this economic strategic plan, which is detailed at the North America’s SuperCorridor Coalition web site: http://www.nascocorridor.com/pages/about/about.htm . Policymakers in all three countries will be well served if business interests outline integrated transportation solutions that improve our competitiveness in the global economy. The NASCO 2007 Conference in Fort Worth, Texas this spring is an encouraging example of this business initiative.

The battle for a North America Union

The fear of North America Union found voice in Lou Dobbs and his fear mongering again (See link to CNN video). The negative tone of his report is indicative of what policy makers will face as the North American integration initiative develops. It will be a grand battle that will tear at the souls of a generation of Americans, Canadians, and Mexicans. And it will await the voice of a bold leadership.

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.

Fear and harmony

The cultural fears that handicap the natural forces of trade and globalization are strong. Immigration stands as one of those issues that exposes our fears, fears that come out as racism and protectionist rant. As always, politicians will be beholden to the loud voices of fear. In Utah, a state congressman has introduced a bill to restrict or retract the partnership agreement President Bush, Prime Minister Harper, and the former Mexican President Fox entered last year.

See http://www.immigrationwatchdog.com/?p=2819

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.

Dollarization - for the UK?

The Wall Street Journal published an op-ed this week that raises the stakes for Canada's monetary regime. It asks: why should the U.K. limit itself to the Euro as a currency option? Why not consider dollarization? Indeed, the U.K. is at an important monetary watershed. It must decide between ceding its monetary independence to the continent - and suffer the consequences of a divisive and oft misguided EU - or continue to be weighed down by the cost of its "sub-scale and relatively illiquid" currency.

Competing monetary regimes are facing the same pressures global industries must. The cost of supporting a monetary regime weighs against competitive efficiency in capital and goods markets. Indeed, the dominant position of the U.S. dollar is enough to have tradition bound exchequer look across the Atlantic as a viable alternative to a marriage with the rest of the EU. Ted Hall of Mayacamas Associates makes some compelling arguments in his WSJ piece (April 11, 2006) for the dollarization of sterling, but his points remind us that Canada is even more positioned to adapt to dollarization. He states his case:

There is much at stake in the U.K.'s choice. Adoption of the dollar would eliminate exchange rate risk, improving risk-adjusted returns for all asset classes. More venture capital would stay in the U.K. (and flow to it from the U.S.), stemming brain drain and fostering a more innovation friendly environment in the U.K. The cost disadvantage and illiquidity premium associated with participating in a $40-trillion pool (euro zone plus the U.K.) will be significant compared to participating in a 40% larger $56 trillion pool (U.S. plus the U.K)

Canada would benefit in the same way should it negotiate a currency union - likely dollarization. The impact on our economy would be significant, in all the ways described above. Perhaps the arousal of a dollarization debate in the U.K. will bring our monetary regime some policy focus for Canadian politicians, business leaders, and, most importantly, ordinary Canadians. Certainly, U.K. dollarization would make the issue fait accompli in the Great White North. The loonie is dead with sterling dollarization.

Just as the U.K. must face this challenge to its monetary traditions, our current Canadian monetary regime demands a debate about its future. The sooner the better.

An end to marketing boards...please

There is a chicken glut that has sent prices down 50% over the past year. But that news seems foreign to my Canadian ears. And it is. The prices the USDA publishes for poultry prices are a quite a bit different from the prices posted north of the border. Indeed, the wholesale price of skinless/boneless chicken in Canada is about CDN $14/kg (CDN $6.37/lb) - nothing close to the CDN $2.58/kg (CDN $1.17/lb) posted in the United States. If this is just one example of the consumer cost of agricultural marketing boards, then it is time Canadians wake up and push for policy change.

Too often the interests of consumers are ceremoniously tossed to the wayside, all in the ill-advised defence of producers. The livelihoods of certain sectors of our population depend on the protectionism that brings forth all manner of consumer taxes. This is indisputable. But it is imperative that policy makers understand the crippling effect of protectionism. Far better to deal with global trade head-on by dismantling protectionist institutions like marketing boards and help redirect producing assets toward industries with some level of comparative advantage. The economic rewards for the nation would be substantial. My family's annual chicken savings alone could be over $1,000 at the current prices. That is the kind of tax cut Canadians could use.

Time for Canada to be proactive on regulatory co-operation

The CD Howe Institute published an important article on the need for regulatory convergence in Canadian - American trade relations. Michael Hart's article "Steer or Drift: Taking Charge of Canada - U.S. Regulatory Convergence" (see http://www.cdhowe.org/pdf/commentary_229.pdf ) correctly puts the weight on Canadians shoulders to effectively face up to its fears regarding North American integration and tackle the regulatory framework head-on. Our economy would benefit greatly with regulatory convergence - or reducing the "tyranny of small differences". The more Canadians wrestle with the inevitable integration that must take place, the more we penalize our nation. As Mr. Hart concludes, Prime Minister Harper would do well to turn the focus of the upcoming meetings in Mexico with President Bush toward positive efforts that promote regulatory convergence.

 

I would add that it is critical to move on the security front as well. The commercial regulatory environment is highly dependent upon the shared security goals of the member nations. On this matter, too, it is imperative that Canadians maturely address the nations dependence on America and its shared economic interests. It is time to put aside nationalistic pride and work toward an integrated security perimeter, with shared or co-operating institutions that ensure that the security of North Americans are effectively and efficiently administered. Only then will the commercial interests of the two nations flourish.

 

The Canada - U.S. border should allow for free movement of goods and people. This implies much: shared immigration and refugee policies, regulatory and legal convergence or co-operation. All this may seem like a brave leap for Canadians, but it is far better to embrace the common values and interests we share as North Americans than to foolishly hang on to institutions that prevent the regional flowering that is so evidently nascent.

 

Yes, small steps are the political prescription, but what we need now is a voice - a strong voice - that bravely confronts the people of Canada with a plan for integration. There is no need for barriers to be drawn. No need for costly bottlenecks at the border. This may be far too much to ask of a minority government. For now, chipping away at "small differences" is the expedient option. But really...its time for the Canadian people to address the future maturely - and bravely. 

North American security

The Canadian tourism industry is starting to let its concerns be known about the effects of the proposed U.S. identity documentation required of travelers from America. It worries that Americans will forgo travel to Canada for business and pleasure because of these restrictions. Indeed, we can expect that this obstacle will result in reduced flows of money into this important part of our economy. This will affect many businesses and employees in the Canadian travel and tourism industry.

Understandably, the United States must take responsibility for the security of its citizens. They have every reason to make their border with Canada as secure as feasible. Unfortunately, until Canada embarks upon a harmonization of security and moves toward the ideal of a North American security perimeter, it will be forced to deal with unfortunate consequences for trade. It is important that the Canadian government tackle this vulnerability head on. That means clearly establishing a shared commitment to security and integrating North American security measures and forces. There is too much at stake to leave the U.S. government forced to invoke the documentation requirements. Better that Canada help offer alternative solutions. We are, irrevocably, partners in our own security. Canadians should take this relationship seriously.

Labour mobility

Recent newspaper articles about the surge in Maritime labour movements to Alberta and its high paying jobs reminds us of the importance of free movement of labour. Of course, Canadians are entitled and privileged to travel interprovincially to secure employment and to maximize their well being. We would not think of our Dominion in any other way. Certainly, the opportunities for labour to maximize earnings is an important cornerstone of open markets. Economic development is adversely affected by labour shortages. But more importantly, human resources are squandered when they cannot be put to their best use. While some people find it near impossible to pick up roots and look for a better life if their home region denies them that opportunity, we know that the New World was built on the very spirit of self preservation that guided our ancestors to this distant continent. Indeed, immigration is still a driving force of our economy. Inter-provincial labour mobility is an important conduit to economic growth.

This should remind us that such efficiencies are prevented from blossoming completely in North America. The border that separates Canada from the United States (and indeed the U.S. Mexican border that creates such fear in America) prevents individuals from maximizing their capacity to earn income and contribute to a more dynamic North American economy. One of the failings of the market system is that while capital moves relatively freely across borders, people do not. This puts individuals without capital at a disadvantage. Surely labour should be free to move to its best advantage. The U.S. - Canada border forces most human capital to take up opportunities that may be secondary in advantage - taking people even farther from their native regions than would be the case in a borderless North America. Would not an unemployed/underemployed native of Halifax prefer to relocate in Boston than in Toronto? The political boundaries give individuals poor choices sometimes. The result is often continued unemployment/underemployment. For others, it is a life far from where they were raised.

On a personal level, I know this well. I am celebrating my 20th anniversary of arriving in Toronto this month. When I first made the long trip from the prairies to begin a career in Canada's financial heartland I knew that Toronto was the place for a Canadian to find work in the financial services industry. And yet, my western roots were pure. I had never been east of Winnipeg previously. Indeed, my urban experiences were largely American as a young person. Cities like San Francisco and Los Angeles seemed to have more of a geographic affinity to my prairie homeland than Ontario's capital. I might well have made my way west to other financial centers, if only to be closer to my family. Instead I am in Ontario. It is a wonderful place, this place I call home now. But sometimes I wonder...

Energy exports to U.S. will shift balance of power in Canadian politics

The ascendancy of the west in the Canadian political economy is heavily weighted toward the development of oil & gas reserves. Energy exports to the United States will dictate a common interest between oil producing provinces and the American market. The value of energy exports is rapidly increasing, and the relative importance of energy in our balance of trade is growing. In 2001, energy products accounted for 13% of Canadian exports. Last year energy accounted for over 19% of exports. Indeed, the 16% gain in total exports to the United States recorded in December 2005 (vs December 2004) has much to do with the improved picture for the Canadian petro-economy.

This growing U.S. energy dependence on Canadian resources will eventually bring the interests of the oil-producing provinces into conflict with the political powers in the east. Federalist voices will be called upon to compromise the competing claims. This is a recurring battle in Canadian history, but the shear economic clout of the petro-economy of the west will force the federal government to accommodate the economic interests of the west. And those interests are tied to the United States.

Strong Canadian dollar - time to negotiate currency union

The irony of the moment for Canadians is likely lost on all but the most ardent advocates for currency union. But for those that see the ultimate forces toward union inevitably at work, the current commodity cycle is both beauty and bane. Yes, the heightened demand for commodities has elevated the loonie back toward respectability as the balance of trade clearly indicates the ascendancy of our resources. And the prospect for continuation of this bullish trend in energy and mineral markets is notably positive. But as the loonie now approaches 90 U.S. cents Canadian nationalist sentiment swaggers. Thoughts of weakness are long lost. No fear of depreciation here, not like a short few years ago when a 50 cent dollar seemed imminent.

 

Unfortunately, it is lost upon policy makers now that the time to negotiate is in times of strength. When businesses seek merger opportunities they do so when their stocks are strong. It makes for a much better deal for the shareholders. So too for the Canadian shareholders. Far better that Canada parlay the current business cycle into a favourable currency union agreement now. The terms of the merger, likely dollarization, are favourable enough now to enable a smoother transition for the regional economies of Canada. Ontario, specifically, would benefit from the timing of a currency agreement now. Unfortunately, the political vision, the political will, is no where to be found. Too bad.

Economic impact of currency union

The political impetus for Canada's adoption of a currency union with the United States rests on the cost/benefit analysis of economists who must provide the necessary backbone for political voices. They must produce convincing arguments about the effects of currency union on the Canadian economy. In the end, the question will come to Canadians: is it acceptable to give up monetary autonomy? An affirmative answer will depend on the economic return, the degree to which Canadian industry thrives and adapts to the move away from a flexible exchange rate - the currency regime in place now. Indeed, there would be winners and losers across the diverse Canadian economic sphere, but the heightened level of economic integration between the two countries has now put the balance toward currency union.

 

One study that looks at this matter concludes that we are much nearer to meeting the conditions necessary for optimal currency union, although it does not expressly prescribe union. Have a look at this case study: http://aix1.uottawa.ca/~scoulomb/pages/Beine-Coulombe-WE2005.pdf

 

This kind of academic study is an important starting point, and I would expect to find more analysis in the coming years.

Consumers of the World, unite!

The global economy showed its face in Giant Tiger today. For those of you not from rural or suburban Eastern Canada, Giant Tiger is a chain of discount stores. It's the sort of place you can pick up household items and clothing at dollar store prices. It's the kind of store that many Canadians pick up their weekly wares, their back-to-school clothes - even their groceries. I was tempted by the 99 cent flax bread, since I know the same loaf goes for $2.30 at my grocery. But if you are shopping for clothes, take a look at the racks in Giant Tiger. You will find a world in the labels of these wildly inexpensive clothes.

Jeans for $19, made in Bangladesh. Long-sleeved shirts, khaki pants, and jackets for $13. All made in China. And a well-made bunny hug jacket made in Jordan, of all places. That will set you back $6. The garment makers of the world in Port Elgin, Ontario. That my visit to my wife's parents home town would result in another visit to Giant Tiger is little surprise - there are not many places to shop there. But what are we to make of this consumer mecca. For Canadians who survive on limited or even lower-middle class incomes, the growing global trade has unleashed a wonderful anti-inflationary world.

Silly that economists laud Alan Greenspan and the Fed for controlling inflation. Silly that they would even think that the out-going Fed Chairman had a lot to do with the relative containment of the price level over the past decade. No, the truth about Greenspan is more that he fueled the economy with more paper than we really needed. What consumers really have to be thankful about is not the bankers who control our money supply, rather they should celebrate trade liberalization and the growing global economy. They need to thank the workings of the market economy that brings products from places we would never have imagined before. They need to thank WalMart! (And in Port Elgin they will soon finally get their own WalMart, too.)

Clothes from Turkey and Central America. Juice from Montenegro, boots from Latvia, and scarves from Pakistan. And then, there is China and India. The North American consumer now basks in the affordable choices in front of him. For a family of four, the benefit is very real. Were it not for the competitive price pressure afforded by the global economy and liberalized international trade, the prospect of meeting the non-discretionary expenses in the modern world would be daunting. Inflation would certainly be the primary economic concern.

So what of this consumer world? For the most part, consumers have not had to speak out to protect this burgeoning domain. The loud voices of self-interest, narrow-minded self-interest of the protectionist union forces that seek to dismantle global trade - these are the voices that have garnered the political wings. Their fear-based convictions worry about uncompetitive domestic industries and lost jobs. The media gives full attention to labour unrest whenever the producers feel threatened. But what of the consumer? The silent majority lacks a political champion in the global trade arena. We need a broad consensus that explicitly champions the benefits of unimpeded international trade. We need the customers of Giant Tiger to speak out so they can protect their wallets from the self-interests of the powerful minority.

North America must embrace international trade, and the best way for it to prepare for its impending reality is to formulate even stronger trading relationships on the continent. An economic union of North America would provide a strong base for embracing trade relations with other regions of the world. The competitive advantage of North America, disperse as it is, would deliver new found wealth and protect the North American economy from the ravages of inflation and the unintended deflationary times that so often impede economies when they choose more insular, anti-trade domestic policies.

Canada - U.S. trade first

The "multi-" in trade is as complex as it is in culture. There is no telling where the complex world of multi-lateral trade agreements can co, but the WTO's relative stalemate at the Hong Kong table instructs us: agreement by committee is no way to pursue aggressive trade liberalization. It is in individual countries best interest to seek bi-lateral agreements - and for Canada, the U.S. and Mexico the trade framework should be a heightened agenda to improve cross-border trade, to build upon NAFTA.

Michael Hart and Bill Dymond are senior trade policy experts, and their recent article found in the February 2006 issue of Policy Options (see http://www.irpp.org/) spells out Canada's need to step back from the multi-lateral framework and focus on trade issues with the United States:

"The simple fact is that Canada's most basic economic interests are now inextricably bound up with those of the United States and can no longer be addressed multilaterally in the WTO."

Their conclusion:


"Today, however, further multilateral negotiations can make at best a marginal contribution to the most pressing Canadian trade and economic interests. Instead, the opportunities lie in elaborating the bilateral Canada-US agenda and crafting an accommodation with the United States that is commensurate with the reality of deep and irreversible cross-border integration. That agenda involves creating a less intrusive border, pursuing a more deliberative strategy of regulatory convergence, and establishing institutional capacity to manage deepening and accelerating integration. None of these issues can be addressed multilaterally, but they will be at the heart of Canadian tradecraft for the next generation."

North American integration is our best hope for continued economic growth. Better we work on bringing down trade barriers that affect our most important trading relationship than wait for the utopian outcome that is so distant at the WTO table.