Gwyn Morgan, Director, Manning Centre for Building Democracy
Barack Obama's inauguration provided a much-needed emotional lift for Americans and for millions of other people around the world. The charismatic young President's "yes we can" message has also inspired Obamania in Canada, a phenomenon not seen here since the emergence of Trudeaumania in the late 1960s.
But Canadians would do well to remember the Trudeau government's profligate deficit spending led to runaway inflation and interest rates over 20 per cent and transformed our country from one with virtually no national debt into the league of perennially teetering economies such as Italy. It has taken two decades, but economic growth, balanced budgets and utilizing surplus cash to pay down debt has put Canada in the best financial shape of any G8 country. So as much as we admire Mr. Obama and wish him great success, Canadians should be happy to trade off political charisma for our much better economic outlook. Let's contrast the financial challenges facing these two countries.
The Banks
The U.S. banking sector has had a complete meltdown. Independent Wall Street brokers have either been obliterated by bankruptcy or absorbed by banks, most of which soon discovered they had bought Trojan horses. After $300-billion (U.S.) in taxpayer-funded bailouts, including of former global icons Citigroup and Bank of America, the U.S. banking sector remains paralyzed, profoundly impacting the vital operating credit lines of businesses. Just as alarming is the debilitating drive to end renewal and stop new loans to customers with reliable track records in the real estate and other sectors.
In Canada, our banking sector remains solid. Ironically, the partial or complete nationalization of failing American and European banks actually puts Canada's banks at a competitive disadvantage in terms of cost of capital. This perverse effect occurs because government bailouts allow failing banks to borrow at sovereign credit rates. Ottawa has helped offset this by offering wholesale loan insurance to financial institutions. It has also acted to move government-insured mortgages off bank balance sheets, a measure which was expanded in last week's budget as part of a $200-billion "Extraordinary Financing Framework." Together, these measures increase confidence and expand badly needed loan availability to creditworthy businesses, as well as individuals. In contrast to the huge public costs of U.S. bank bailouts, none of these Canadian measures add anything to the deficit.
Debt and deficits
We keep hearing that the economic crisis has "made everyone a Keynesian," as panicking politicians unveil skyrocketing deficits, citing as justification Keynes' theory of increasing government spending in an economic downturn. But after emergence from this downturn, I wonder how many of these enthusiastic Keynesians will remember his counterbalancing belief that governments should build the financial strength needed to respond to the bad times by running fiscal surpluses and shedding debt during the good times.
Canada has come closer than any other industrialized country to this "saving for a rainy day" part of Keynes' teachings, achieving continuous budget surpluses and paying down debt over the past decade. Meanwhile, U.S. national debt doubled to over $10-trillion, requiring a new digit in the Times Square debt clock. In 2009, the debt clock will increase by another $2-trillion when Mr. Obama's $800-billion stimulus program is added to a previously estimated $1.2-trillion deficit.
And that gigantic debt hole is poised to get even deeper with rumours out of the White House of an additional $2-trillion for purchase of "bad bank assets."
I admit to being in economist Milton Friedman's "small government, pay as you go" camp rather than that of Keynes. Not because of their respective theories, but because it's highly improbable politicians will actually show the discipline needed to replenish public coffers when the economy recovers. The other reality which makes me a Friedman disciple is the perennial mismanagement and waste that occurs when money goes to government from the hands of the people who earned it and then, theoretically, back to the people.
All of this is good reason for Canadian taxpayers to worry that the "temporary" spending programs in last week's stimulus budget will lead to years of deficit spending, erasing Canada's hard-earned financial strength. But while we are right to worry about that, we can at least take heart that we have demonstrated that balanced budgets and debt reduction are politically possible in Canada, while our southern neighbours just kept digging their hole deeper right though a prosperous decade.
International trade, current account deficits
Canada's resource exports have underpinned trade and current account surpluses over many years. This is a strength that will continue to serve our country well as the economic crisis passes. By contrast, a combination of energy dependency and debt-fuelled imports of consumer goods has driven big trade deficits in the U.S. Adding the trade deficit to the hundreds of billions of dollars flowing to the war in Iraq created an enormous current account deficit which, until recently, exerted downward pressure on the greenback.
The global financial meltdown has reversed this temporarily as China and wealthy Middle East states park huge cash reserves in the only currency with enough liquidity. Ironically, America's need to fund its burgeoning deficit through the issuance of Treasury bills has provided that parking place. But as economic conditions improve, that money will flow back into global stock, private equity and real estate markets. When this happens, the continuing need for the U.S. Treasury to print money, without any realistic chance of paying it back, will surely result in a downward revaluation of the greenback.
Despite real challenges, Canada is in a vastly better position than the United States. We have managed our banking and fiscal affairs more prudently. We have energy and other natural resources the world needs. If we can hold on to that advantage by rebalancing the books over the next two years, we can quickly regain our economic strength as the storms subside. In fact, the biggest worry isn't the situation within our borders, but the deteriorating short- and long-term outlook of the economic partner that's so important to our prosperity.
