With the growing turmoil in world currency markets, our dollar is plummeting like a rock. Last week the Loonie sank to its lowest rate since 1858, below 64 cents, despite a one percent interest rate hike by the Bank of Canada.
The experts say Russia’s currency collapse and the Asian mess, primarily Japan’s failure to reform its financial system, have sideswiped Canada. In today’s globalized economy, our commodity-based industries, from grains to oil to gold, are suffering as Asian demand collapses.
Through it all, Prime Minister Chrétien remains unfazed, arguing that Canada’s economic fundamentals are sound. In more conventional times he would be right. Our economy is stronger than it was a few years ago and his government is actually running a small budget surplus.
But these are not conventional times. If we ignore the temporary panic in currency markets (which have oversold the Loonie) we must still ponder the long-term trend of diverging currency values between the U.S. and Canada. Why is it that 25 years ago both dollars were at par? Since then, a consistent slide has brought us to the point where it takes $1.58 to buy a U.S. buck. Looking at it in dollar terms, our American neighbours enjoy about a 60% higher living standard than we do. More than a mere embarrassment to Canuck pride, it presents severe risks to the country as we know it.
Essentially, Canada has become a cheap buy. The dollar’s slow-motion plunge is a product, to put it delicately, of the less than optimal public policies practiced by governments from sea to sea. The hangover is a half-price country for American investors, who laugh at the cheap deals they enjoy. They can buy up land, real estate and companies with their spare change.
Ironically, the main goal of these policies was to differentiate us from our American neighbours. Rather proudly, our governments built a sprawling welfare state in the European mode. We welcomed one of the most generous unemployment insurance programs in the world, lavish welfare rates, regional development subsidies, hospitals in every small town, widespread bureaucracy and heavy labour market regulation. Collectively this public policy hodgepodge became a recipe for high costs and declining productivity.
Once the party started to roll, it was hard to close down. Entire sections of society found it in their interest to badger politicians to spend more or, at a minimum, maintain their entitlement programs. Deficits flew out of control, debts ballooned and taxes exploded. We may have a government sector with mainly balanced budgets today, but we also have one of the largest public debts per capita in the developed world. Interest payments, a useless expenditure, munch about 35% of federal revenues every year. Our public sector, which accounts for close to half our economy, is, in comparative terms, about 40% larger than that of our main competitor, the U.S.
To support it, we impose much higher tax burdens, so Canada and the Loonie became much less attractive investments. To make matters worse, those burdens are skewed the wrong way. Canada taxes labour, especially the most valuable and most mobile labour at almost punitive rates compared to the U.S., resulting in an increasing brain drain south. In a world where commodities are constantly declining in value, this tax regime further undermines the country’s long-term position. Brains and technological know-how are what counts now.
To reverse the damage we need smarter, smaller, more effective government and lower tax burdens — especially on high income earners who can easily double their standard of living by "voting with their feet". Otherwise, we’ll continue the relative drift downwards — becoming a low-income resource- and brain-supply colony for wiser jurisdictions.
