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How Harper and the Conservatives Broke the Canadian Economy

2015 October 2
by Ian Welsh

The Canadian economy, since about 1890 or so, ran as follows.

  • When commodity prices were low, we sold manufactured goods to the rest of the world and subsidized commodity producers so they weren’t wiped out.
  • When commodity prices were high, we relied on selling them, and we subsidized manufacturers so they wouldn’t go out of business.

A manufacturer who responds to a lower Canadian dollar by increasing production increases their costs. That means that when the dollar rises, their cost structure is too high for them to survive if they are not subsidized.

There are lots of ways to subsidize manufacturers, including directly, through tariffs, currency manipulation, and so on.

Commodity production doesn’t require as much subsidy, with some exceptions. There are projects which cannot easily restart, and primary processing (canning, pulp and paper mills, lumber mills, refineries, etc.) can have significant start time requirements. This means you don’t want them to go out of business. Fewer employees, with the government supporting the out-of-work employees is fine. Actual loss of capacity is not.

Meanwhile, unemployment insurance (now called EI) is generous to whichever part of the country is in recession due to the commodity price cycle, so people don’t leave and go to the high cost area unless there are actually jobs, while the areas with lots of jobs are less generous so that people who aren’t employable there even in good times are encouraged to go to places with lower costs of living.

This is a fairly simple balancing act, though it can be complicated in detail. It has been made more complicated by restrictive “trade” deals which outlaw many types of subsidies, but it is essential to ANY country with a large resource sector which also wants to have a significant manufacturing sector.

Harper ended this. He did not properly subsidize manufacturing. Those manufacturers who, during the last period of a low Canadian dollar, expanded production, were wiped out. This is bad not just because they were wiped out, but because it means current manufacturers know they shouldn’t expand if it increases structural costs during this drop in the Canadian dollar, because if they do, when the dollar rises again (and it will), they too will be wiped out.

Harper has managed, thus, to eliminate much of the stimulative affect of a low Canadian dollar on manufacturing.  Genius.

Also, being, in ideological terms, an American-style “conservative,” he used their methods for artificially inflating an economy: He encouraged a housing and stock market boom. Canada’s housing bubble did not burst in 2007/8, due to concerted government action. (We basically guarantee almost all mortgages.)

Such financial games create fake growth–they are based on increasing asset prices un-anchored to actual productive increases or income increases, and transfer money from the young to the old and the poor to the rich.

They work for a time, much as stimulants work on the human body, then the user crashes. The longer one stays stimulated, the worse the damage, and long-term abuse can destroy a person or country.

I should point out (as MFI noted to me privately) that the Canadian Conservative party is actually a radical party of the right. Conservatives preserve the old; the mixed economy strategy was over one hundred years old, and had worked during that time to make and keep Canada one of the most prosperous countries in the world.

Only a moron, and a radical, ends a successful strategy that has not yet failed nor showed signs of failing.

This is the self-inflicted tragedy afflicting Canada today. Let us hope that the Conservatives are not re-elected (due to our first-past-the-post system).

We accept Democracy because it creates legitimacy. It is a way of saying, “That was fair, even if I don’t agree.” This does not meant that democratic methods always produce optimal or even good results. Canada, Britain, and Australia are all discovering this, as are many other countries.

There are many reasons for this, but in the next post, I will discuss is how constituencies for policies and parties really work.


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14 Responses
  1. Virginia Simson permalink
    October 2, 2015

    You are one my all-time favorite writers. I share all your posts on FB and twitter but could you please get a share button?

    Harper has GOT to go. Full stop.

  2. Lisa permalink
    October 2, 2015

    Neo-liberals have always been anti-manufacturing. Every country that has signed up to that ideology have destroyed their fdemoestic manufacturing industries.

    They did for both political and ideological reasons and (I suspect) an unconscious dislike of science and technology (both also destroyed).

  3. The Tragically Flip permalink
    October 2, 2015

    I wonder to what extent the decision to not support manufacturing was to smite the Ontario Liberal party in hopes of their defeat due to a weak provincial economy.

    One thing Harper has shown is a Bushie level disregard for ever putting governing over partisan interests.

  4. Lisa permalink
    October 3, 2015

    Oh no it is universal, with a few hold outs lke Germany. Naturally the Anglo Saxon countries, where neo-liberalism came from, have done it to a far greater degree.

    Science, technology and manufacturing are hated by them, asset appreaciation and financialisation are the only parts of the economy favoured by them.

  5. October 3, 2015

    The Harper phenomenon cannot really be understood without understanding the history of the Reform Party and the variety of identity politics that they leveraged in which the central Canadian manufacturing economy was demonized as a political force that prevented Westerners, particularly Albertans, from exploiting their resources to the point where they would become rich and influential inside the federation. This made it politically impossible to follow the type of sensible policy suggested by Ian.

    The ressentiment over multiculturalism in Québec, this time via the niqab issue, seems currently likely to preserve Harper in power, but there are still a couple of weeks left.

  6. JustPlainDave permalink
    October 3, 2015

    Took a bit of a quick look at the NAICS series and what really leapt out at me was how the largest part of the stagnation in manufacturing (that’s really what it is, accompanied by a significant commodities expansion) is due to decline in transportation equipment, almost all due to motor vehicle and motor vehicle parts manufacture. Given the centralization in that industry and the decreasing ROI in terms of subsidy value to lasting, high quality employment, I have pretty mixed feelings about that being the best place to put subsidy dollars.

  7. JustPlainDave permalink
    October 3, 2015

    I was there for the formation of the Reform Party (as an observer, not an adherent) – from what I saw there was no sense that the manufacturing sector prevented westerners from accessing resources. What there was a sense of was a notion that easterners (to include “central Canadians”) wanted a double standard – anything that we produced was to be at “global prices” but politically important activities (i.e., automobile manufacturing, anything made by Bombardier, the fisheries, dairying, etc.) centred in the East were to be subsidized at all costs.

    Not a big surprise that this – combined with the central Canadian electorate’s general cluelessness about anything west of London (or east of Ottawa, or North of the 407 on some days it seems) – caused and continues to cause resentment.

  8. Ian Welsh permalink
    October 3, 2015

    I LIVED out west right thru 1986. I remember the LPC hatred, and partook in it as a teenager. My father was one of the first members of the original Reform party and supported it all the way to Harper before he died in 2010.

    It was not politically impossible. This fucking weird idea that politicians don’t do what the polls of even their supporters are against needs to die, because it’s not how the real world works in so, so many cases. (If you can’t come up with a dozen examples without me spoon feeding you, you are being deliberately obtuse).

    In any case, these things can always be done back-door, in ways that are not obvious.

    Harper, personally, did not want to.

    What some folks don’t get is how thin the air is at the top. I am only two steps away from a lot of people who were senior in American administrations (and at least a couple in Canada.) Choices matter, and they can be made, and polls don’t matter very much during the day to day operation of the government.

    Harper did what he did because he believed it was the right thing to do. Harper, of all people, is an ideologue, a true believer. He could easily have supported manufacturing and thrown them other meat (as you should see today with the Niqab.)

    We do not live in the best of all possible worlds. That sort of bullshit is beneath anyone with half a brain, and was not even believed by Pangloss himself who created that philosophy for public consumption, but had his own, private philosophy.

  9. Ivory Bill Woodpecker permalink
    October 3, 2015

    Since the Industrial Revolution began in the UK, one would think English-speaking elites would have the most respect for science and technology and manufacturing, instead of the least.

    Anyone know why the opposite is the truth?

  10. October 3, 2015

    What there was a sense of was a notion that easterners (to include “central Canadians”) wanted a double standard – anything that we produced was to be at “global prices” but politically important activities (i.e., automobile manufacturing, anything made by Bombardier, the fisheries, dairying, etc.) centred in the East were to be subsidized at all costs.

    Yes, but that sentiment eventually produced the election of an ideologue and a political constellation for whom any manufacturing subsidy contingent on resource extraction-favourable conditions were anathema.

  11. October 3, 2015

    I LIVED out west right thru 1986. I remember the LPC hatred, and partook in it as a teenager. My father was one of the first members of the original Reform party and supported it all the way to Harper before he died in 2010.

    You’re, uh, hardly the only person with a connection to Western Canada here. Reform also made some sense to me back then — for a time I briefly took part in the resentment of the constant Québec-obsessiveness, Meech Lake: the Meecherating (I was a little bit underwhelmed when I saw the actual lake), etc. Like you I got over it.

    It was not politically impossible. This fucking weird idea that politicians don’t do what the polls of even their supporters are against needs to die, because it’s not how the real world works in so, so many cases. (If you can’t come up with a dozen examples without me spoon feeding you, you are being deliberately obtuse).

    In any case, these things can always be done back-door, in ways that are not obvious.

    Harper, personally, did not want to.

    What some folks don’t get is how thin the air is at the top. I am only two steps away from a lot of people who were senior in American administrations (and at least a couple in Canada.) Choices matter, and they can be made, and polls don’t matter very much during the day to day operation of the government.

    Harper did what he did because he believed it was the right thing to do. Harper, of all people, is an ideologue, a true believer. He could easily have supported manufacturing and thrown them other meat (as you should see today with the Niqab.)

    I don’t understand what you’re referring to here. I wasn’t talking about the political impossibility of what Harper can and can’t do — I know that Harper is an ideologue. He was quite appropriately wielded by the likes of Chrétien as a boogeyman back in the day, specifically because he chose to represent the instrumentalization of Western resentment. That he wields this power against Ontario manufacturing should surprise no one who remembers any of that.

    The point is: taking into account the reality of how we got to Harper. But you seem think that I would claim that Harper had no choices — why would you assume that? It would be absurd on its face.

    The “political impossibility” to which I alluded was the social trajectory of the federation as a whole that progressive forces were unable to hinder. It is that inability to hinder these kinds of political shifts that interests me, not the decision-making process that Harper or whoever went through. We know those, he’s never hidden them, not really.

    By the way, pulling rank by virtue of “rarified air” doesn’t impress me. Some people had a connection or three and other people had balcony seat tickets and …, …

    We do not live in the best of all possible worlds. That sort of bullshit is beneath anyone with half a brain, and was not even believed by Pangloss himself who created that philosophy for public consumption, but had his own, private philosophy.

    Who said we live in the best of all possible worlds? Who?

    What I know is that we live in a world where (some) progressives believe strange and abstract things about political influence that keep being proven wrong (in the sense of remaining “unoperationalized”), despite their apparent high connections. But apparently, disagreement with their theories in this matter means that one believes that we live in the best of all possible worlds. An instance of the fallacy of the excluded middle?

    In Canada’s case, more so than in the USA I think, progressives have never been able to untie the Gordion knot of identity politics — at least in some cases, on account of not genuinely believing that these are real things. As you probably remember, I was banging this or a similar drum way back to Tilting at Windmills if not before. Canadian identity politics include the regional and language politics, of course. That is one of the things likely necessary to get to the “better possible world”.

  12. October 3, 2015

    I mean, you seem to think that the niqab thing is just “meat”, meaning presumably, “distraction.” It isn’t. It touches on a profound and significant conflict. Not one about women’s rights, though that’s there too. It’s about Québec’s relationship to official multiculturalism, for starters.

  13. Jessica permalink
    October 3, 2015

    @Ivory Bill Woodpecker
    “Since the Industrial Revolution began in the UK, one would think English-speaking elites would have the most respect for science and technology and manufacturing, instead of the least.
    Anyone know why the opposite is the truth?”

    Surface answer: Our oligarchs and other elites care about what makes big money, even better easy big money. Little of the big money is made from manufacturing and it requires real skill and effort. Even “manufacturing” companies at least in the US have long made their money more on branding/marketing and through finance. The real easy pickings is in legal gambling and fraud, a.k.a. finance.
    Deeper answer: Industrial capitalism completed its job: it built up the infrastructure and the highly-educated work force for a super-productive abundant economy. But for various reasons, not all of them from the top, society (mostly unconsciously) chose the path of trying to ram the potential abundant economy within the very narrow confines of now obsolete capitalism. One of the results of this is the pattern of emphasizing financial games (including criminal fraud) over anything requiring real skill and effort. Since the capacities we had developed (by say 1960 or so) were not used constructively, they flowed into destructive activities, once again finance, financialization of medicine, etc.

  14. JustPlainDave permalink
    October 4, 2015

    I think anathema might be overly strong. Near as I can tell, there has been somewhere between $1.4 and $1.8 billion in project-based subsidy for the auto industry since 2004, with around 45% funded by the Feds (tough to get a great handle given the current mania for announcing and re-announcing previously allocated funds). Beyond that there was the bailout, to the tune of $14 billion.

    I personally think the central question those dyed in the wool Reformers would have (once one got past the crotchety “let the Easterners freeze in the dark” rhetoric) is whether that money was well spent. I think the answer in terms of the bailout is pretty much incontestable – we actually got our money back and sold the stake in the company we acquired along the way. I think we the people might have actually made money on the deal – and that’s before factoring in the benefits of avoiding cratering a chunk of the economy. So yeah, win.

    The other subsidies seem to me to be less clear cut. I’m actually quite shocked by how small the number of new jobs these projects entail. Subsidy is accounting for about 16% of investment and the cost per new job runs about $125,000 (and that’s not accounting for situations where projections didn’t play out). Even factoring in retained jobs, that strikes me as pretty high compared to what I know about job creation costs in other sub-sectors.

    I’m not averse to subsidies if it gets us something, but I’m not sure this is a such a great deal. The manufacturing sector as whole has been trending down as far as the series goes back (1961) and these particular subsidies centre in two companies that have been accounting for an ever declining percentage of vehicles sold in North America. It’s not striking me as a home run.

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