“Orators are most vehement when their cause is weak.” — Marcus Tullius Cicero
Economist Jeffrey Sachs‘ book The price of civilization: Economics and ethics after the fall is a razor-sharp dissection of the implosion of American democracy and economy. As the jacket cover says, “Sachs goes deeper than an economic diagnosis. By taking a broad, holistic approach — looking at domestic politics, geopolitics, social psychology, and the natural environment as well — Sachs reveals the larger fissures underlying the current economic crisis.” All this is true, and much more as well. I won’t explore the many perceptive analyses contained within this book, but simply wish to pluck one string and examine how it reverberates in a Canadian context.
The New Globalization
In a chapter entitled The New Globalization Sachs examines three important technological changes of the past forty years (the development of computers, the Internet, and mobile telephony), how these have dramatically changed the global social, political, and economic playing fields, and how the United States has failed to adapt to this changing landscape. Sachs highlights the series of capitulations on the part of successive American administrations — commencing with Ronald Regan, followed by Bush Sr., Clinton, Bush Jr., and Barack Obama — to the national and multinational corporate kelptocracy. Where once American presidencies provided political leadership to society, industry, and the financial sector on epochal projects of national importance — the New Deal of the 1930s, the Second World War, the Cold War, Civil Rights, the War of Poverty — current American administrations are hollowed-out puppets animated by untrammeled corporate greed.
Where governments were once seen as providing the answers to problems, Ronald Reagan declared that government was the problem, and began a program of radical downsizing coupled with limited ambition. Tax revenues to government were radically eroded under the fallacious notion that greater corporate profitability would translate into greater national economic stability, and would miraculously “trickle-down” to citizens. As the political power of the government waned, corporate power waxed, driven by unheard of wealth, relentless lobbying, and the revolving door between government, Wall Street, the military-industrial complex, Big Oil, Big Pharma, and other corporate interests.
Massive government deficits became normal, the administration increasingly dependent on terms of its lenders. Economic growth and development in response to the profound technological changes of the past thirty years was replaced by “bubble” and epi-economic phenomena such as real estate booms, currency and market speculation, derivatives trading, and gargantuan non-productive investments in the military. Rather than responding to the environmental challenges of climate change in an innovative way employing the technological innovations of the past three decades, Big Oil in alliance with the Detroit automobile industry, has kept the American economy firmly clamped to the teat of fossil fuels.
One of Sachs’ points is that the political sphere has now become utterly subservient to the economic: “We can consider America’s political system today to be not so much a true democracy as a stable duopoly of two ruling parties, whose members shout at each other from time to time but which both basically stand for many of the same things when it comes to issues touching the interests of business, the rich, and the military. Both parties are instruments of powerful businesses and the rich.” The American jackass and the elephant are now one political animal, while the public has become Buirdan’s ass, caught between two identical choices and condemned to die of hunger and thirst since there is no rational basis for choosing one over the other.
These themes are dissected in considerable detail by Sachs; however, I want to focus on his final observations in the chapter wherein he writes:
“America has failed to respond effectively to the challenges of the new globalization. The manufacturing sector has shrunk as factories and employment have been shifted overseas. The working class, especially, has been squeezed. … The 2008 financial crisis was therefore a crisis of utterly mismanaged globalization. The United States had responded to the long term loss of manufacturing competitiveness by the temporary expedient of a housing boom. When the boom was followed by a collapse, U.S. unemployment soared and the emptiness of U.S. short-termism was exposed for all to see. What is remarkable is that even after the collapse of the bubble, Washington was still unable to come up with any long-term, serious responses to America’s waning competitiveness, instead turning to the very same policy mix that had failed previously: easy money, tax cuts, larger budget deficits, and starting in 2011, cuts in government outlays on education, infrastructure, science and technology (emphasis added).”
The Harper Prescription
Canadian Prime Minister Stephen Harper never tires of boasting about the economic performance of Canada. At the International Economic Forum of the Americas on June 11, 2012 Harper said, “The Canadian approach is what the world needs. A practical approach, an approach that works. Canada can demonstrate, through our actions, a model that works. This will be Canada’s message at the G-20 summit. Economic growth and fiscal discipline are not mutually exclusive. They go hand in hand. In fact, Canada’s strong record of fiscal discipline is one reason we have weathered the economic crisis so much better than many others.”
Indeed, by some measures Canada has not been subject to the degree of economic buffeting that some of the G-20 nations have since the 2008 financial crisis, although in large measure Canada’s better position derives from measures taken under previous Liberal administrations rather than as a result of anything the Harper Conservatives have done. Let’s, however, examine what Sachs specifies as the failed policy mix that has lead to the deteriorating American economy.
1. Easy Money
Money has almost never been easier in Canada. The Bank of Canada’s interest rate stands at 1 per cent where it has stood for the last 15 months. It has been at historic lows since January 2009. Bank of Canada Governor Mark Carney recently predicted higher rates by 2014, although given that the Canadian economy appears stalled at a growth rate of only 1.8 per cent, below even the modest 2.1 per cent that the Bank forecast for 2012 (“This outlook for the Canadian economy is weaker over the near term than anticipated.” – Bank of Canada monetary report), the end of easy money appears to be nowhere on the immediate horizon.
Such easy money has lead to what many have declared to be an asset valuation “bubble” in the Canadian real estate market. Tempted by historically low interest rates, homeowners can be enticed to leap into the real estate market before adequately looking, thus over-extending themselves financially. As Mark Carney said to the Globe and Mail last year, “The risk is that expectations become extrapolative, prompting the classic market emotions of fear and greed — greed among speculators and investors, and fear among households that getting a foot on the property ladder is a now-or-never proposition.” Such greed and fear can drive real estate values to unsustainable levels, and then bankrupt homeowners if interest rates rise — exactly the scenario that played itself out in the United States in 2008.
2. Tax Cuts
In the 1960’s the corporate tax rate in Canada was 40 per cent, by 2000 it was 29.1 per cent and in 2012 it has dropped to 15 per cent, a decline of almost two-thirds in the span of the last 50 years. Over the last six years the Harper Conservatives have decreased the Goods and Services Tax (GST) from 7 per cent to 5 per cent, a 30 per cent decline in this revenue stream to the federal government. In 1948 the top marginal tax rate in Canada was 80 per cent; by 2009 it had dropped to 42.9 per cent. Successive governments have cut rates of corporate taxation and sales tax, leaving more money in the pockets of corporations and the wealthy, and less in the public purse to invest in programs — and the Harper Conservatives have simply accelerated this trend.
3. Budget Deficits
The figure above shows the Canadian budget surplus/deficit during the tenure of the Harper Conservatives (note: the figure for the 2012 fiscal year is projected). While there has been an attempt on the part of the government to narrow this deficit since 2009, this has all been done by cuts to government services (below) and not through increasing taxation revenues, nor as a result of improved productivity of the Canadian economy. This is murdering the economy by slow starvation and reminds one of the story of the farmer who, to save money, decided to gradually wean his donkey off food. The joke goes that he had almost succeed when the donkey unfortunately died — a great shame as otherwise the experiment was a complete success. In Canada, rather than all being Keynesians as Milton Freidman would have it, we are all now Harper’s ass, gradually being starved of fodder. Cost savings are being realized, but how long before the beast expires?
Note: Canadian government debt has increased in 2010-2011 to $551,380 billion (up from $538,292 billion in 2009-2010), a clear indication of the depth of the hole that Canada has to dig itself out of as a result of cuts to tax revenues.
4. Cuts to Government Services
Where to start … ? In the United States, Sachs focused on education, infrastructure, science, and technology as critical components required to nourish a strong and sustainable economy.
In my article Escalator to the bottom: Québec students refuse the ride, I examine some of the parameters related to the funding of higher education. The Canadian Federation of Students says the average debt for university graduates is almost $27,000 and nearly two million Canadians have student loans that total over $20 billion. The weight of this debt burden has the potential to impoverish an entire generation of young people, who not only have to repay these substantial sums, but are also doing so while paying interest rates of between 5 per cent and 9 per cent. Canadian students pay on the order of $5.3 billion every year in tuition.
Moreover, undergraduate, graduate, and college tuition rates have continued to increase at a rate greater than inflation. The figure above, from a study by the Canadian Millennium Scholarship Foundation shows the average Canadian tuition fees between 1989 and 2004, and this rate of increase has continued under the Harper Conservatives.
In a special report to the Federation of Canadian Municipalities in 2009, Saeed Mirza and Cristian Sipos detail a staggering infrastructure deficit and the urgent need for new infrastructure. Canada’s water, wastewater, transportation, transit, waste management, and cultural, social, and recreational facilities are greatly inadequate and aging. Twenty eight per cent are almost archaic at between 80 and 100 years old (well past their intended life of service), and a further 31 per cent are 40-80 years old (a total of 59 per cent). Much is in need of replacement, improvement, and maintenance at a cost of $123.4 billion. Moreover, additional new infrastructure that is needed now (let alone for the future) in these areas totals $115.2 billion — a grand total of $238.6 billion in immediate needs to improve the infrastructure of the nation.
Furthermore, although a large percentage of infrastructure needs are associated with municipalities, in Canada they take in only 8 per cent of total tax revenues, the remainder going to federal (50 per cent) and provincial (42 per cent) governments. The report concludes:
“Ottawa must provide leadership in the development of appropriate national policies, regulations, innovative financing techniques (such as P3’s) and the needed support mechanisms to combat the crisis and take strong steps to restore all of Canada’s infrastructure to an acceptable level. The cost of inaction will be tremendous and it will place a burden on the future generations which will be many times the present infrastructure deficit. A consequence of this inaction and lack of appropriate maintenance, repair and rehabilitation would be the escalation of the current deficit to about two trillion dollars in 2067.”
The Canadian government has pledged $33 billion towards improving infrastructure, however Dr. Mirza, who in December 2011 calculated Canada’s infrastructure deficit now approaches $400 billion said, “That is a very small amount of money; $33 billion is totally inadequate…. Our politicians are forgetting our infrastructure deficit is really $400 billion. We need another $400 billion to upgrade on all levels and, unfortunately, our governments are not paying attention.” Mirza added that rather than focusing on legitimate needs, too much of the Building Canada fund has been spent on frivolous or trivial programs such as the construction of gazebos and lakes during the G-8 conference in Toronto in 2010. “The ministers” says Mirza “were shameless about it.”
The Harper Government has presided over what is certainly the most systematic, concerted, and extensive attack on science ever seen in Canada, indeed probably in the developed world. On July 10 some 2,900 scientists gathered on Parliament Hill to protest the actions of the Harper Government in what was called the Death of Evidence rally. The hallmark of the protest was the slogan “No Science, No Evidence, No Truth, No Democracy.” An editorial by Nature, one of the two most prestigious scientific publications in the world, detailed some of the most draconian recent cuts to science funding by the Harper Conservatives:
“The government plans to cut the Research Tools and Instruments Grants Program (RTI), the main equipment-funding scheme for basic researchers, and to jettison the 24-year-old National Round Table on the Environment and the Economy (NRTEE), an independent source of expert advice to the government on sustainable economic growth. The government is closing the Polar Environment Atmospheric Research Lab (PEARL) … one of only three stations that keep a close watch on the polar atmosphere. The move comes just as data from the fast-changing Arctic climate are most needed.
“Equally disturbing is the proposed elimination next year of the internationally renowned Experimental Lakes Area (ELA). Work at the ELA has produced important evidence on the effects of acid rain and led to the discovery that phosphates from household detergents cause algal blooms. It has elucidated the impacts on fish of mercury and shown how wetland flooding for hydroelectricity leads to increased production of greenhouse gases.
“It is hard to believe that finance is the true reason for these closures. Critics say that the government is targeting research into the natural environment because it does not like the results being produced. If the Harper government has valid strategic reasons to undermine vital sectors of Canadian science, then it should say so. If not, it should realize, and fast, that there is a difference between environmentalism and environmental science — and that the latter is an essential component of a national science programme, regardless of politics.”
Beyond the cutbacks are other egregious policies of the Harper Conservatives such as the systematic muzzling of Canadian scientists and the assignment of Stasi-like political “minders” to keep tabs on Canadian scientists at an international polar year conference in Montreal in 2012.
In the case of technology, the situation is complicated. The tech sector in Canada has been in steep decline. Currently high tech companies comprise a mere 1.6 per cent of the TSX composite, a dramatic decline from the 41 per cent share in July 2000. Not only have former technology giants such as Nortel and RIM (Research In Motion) disappeared or declined, a striking number of Canada’s high-tech firms have been bought out by foreign buyers, 45 in 2011 alone. Moreover, although Research and Development (R&D) undertaken by Canadian universities is ranked very high — second only to Sweden — the transfer of this R&D into business is very low. Canada has a very well educated workforce, scores well in science competitions, and citation indices indicate that Canadian scientific research is of high quality. Nevertheless, State of the Nation 2010: Canada’s Science, Technology and Innovation System noted, “Research and development performed by business in Canada is low by international standards. In addition, from 2007 to 2009 Canadian industry R&D declined further in both current and real dollar terms.”
Although the report praises the innovative work done by the Canadian Institutes of Health Research (CIHR), Natural Sciences and Engineering Research Council of Canada (NSERC), and Social Sciences and Humanities Research Council of Canada (SSHRC), the Harper Conservative’s 2012 budget slashed funding for all three of these key Canadian research funding institutions, a total of $60.3 million over three years, thereby pushing federal commitment to science, technology, and innovation in precisely the wrong direction. These funding cuts are in addition to funding cuts to Environment Canada, Fisheries and Oceans Canada, Library and Archives Canada, the National Research Council Canada, and Statistics Canada — all organizations that could reasonably be supposed to support innovation in Canada.
The Conference Board of Canada rated the country as poor in innovation and in an article entitled Canada’s Innovation Deficit Heather Munroe-Blum and Peter MacKinnon say, “there is a growing consensus among informed observers that Canada is deficient in the culture of competitiveness that stimulates innovation and in turn inspires productivity.”
“Anyone can make a mistake,” wrote Marcus Tullius Cicero in the first century BC, “but only an idiot persists in his.” Cicero was a statesmen, philosopher, orator, and political theorist and he seems to have understood what contemporary politicians — from Barak Obama in the United States to Stephen Harper in Canada — have failed to. In both countries these leaders seem intent on duplicating fundamental economic mistakes.
As Jeffrey Sachs has pointed out, the same failed policy mix that lead to the 2008 financial crisis in the United States, is being repeated. In Canada, it is being replicated with minor variations by the Harper Conservatives. Where better Canadian real estate regulation, banking regulation, budget surpluses, higher taxation revenues, and investments in infrastructure previously shielded Canada from some of the worst effects of the financial crisis and “mismanaged globalization”, the Harper Government appears to be determined to learn these mistakes — and duplicate them in a Canadian setting.
To a crowd of the party faithful at the Calgary Stampede this July, Prime Minister Stephen Harper said “To succeed, what the world must become in the future is what Canada is today.” Cicero, however, observed “There is nothing so unbelievable that oratory cannot make it acceptable.”
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