Revising economic policy key to federal Conservatives returning to power
As the Conservative Party of Canada enters the final months of its leadership race, it is a good time to both assess the challenges facing the country and formulate some responses to these problems that reflect both Conservative and Canadian core values.
More specifically, it is a good time to think about how best to reduce our dangerously high levels of debt, which are to a large degree a consequence of the economic stagnation brought on by 30 years of cartelization and regulatory capture by powerful special interests. If the Conservatives can formulate a coherent economic platform which promotes greater decentralization and competition, both they and the country will benefit.
Looking first at our debts, the dot.com crash of 2000 brought interest rates down to near zero where they have stayed for most of the past 17 years. Predictably, these low rates have encouraged households and businesses to borrow to the point where average household and corporate debt levels in Canada are at record highs when calculated as a share of income.
Of course, this is not a problem unique to Canada. As Bill Gross, the legendary American bond fund manager, put it in a newsletter last week:
“…our highly levered financial system is like a truckload of nitro glycerin on a bumpy road. One mistake can set off a credit implosion where holders of stocks, high yield bonds and yes, subprime mortgages all rush to the bank to claim its one and only dollar in the vault.”
However, the credit bubble is especially big in Canada. In its most recent quarterly report the Bank of International Settlements, the central bank of central banks, flagged Canada as being primed for a banking crisis and subsequent recession due to our world runner-up ratio of credit to GDP of 117%. Only China’s ratio is larger, at around 127%.
The root cause of this enormous debt binge has been falling productivity and income growth. In the absence of real growth, the only way to stimulate increased spending has been to cut interest rates, which both makes borrowing for consumption cheaper and increases home and other asset prices. Higher asset prices, in turn, make people feel richer (the so-called ‘wealth effect’), further encouraging spending.
However, as it appears we will not be able to borrow our way to prosperity for very much longer, the time has come to consider necessary structural reforms intended to reduce the power of centralized cartels and thereby improve competitiveness and restore economic vitality.
These cartels are all around us, operating what the commentator Max Keiser calls the “rentier economy” which uses political influence and regulation to establish monopolies which can charge customers high prices and earn high profits that in no way reflect their contribution to society. However, their economic rent-seeking (or, in other words, quest for unearned profits) does raise costs for other businesses and workers and therefore leads to fewer new businesses, fewer jobs and lower wages.
Maxime Bernier is one candidate who appears to have a general understanding of the problem, but his promises to liberalize the markets for liquor and supply-managed agricultural products (chicken, eggs and milk) barely scratch the surface of the problem.
If the Conservative Party is serious about supply-side reform it needs to demand and enforce greater competition in the finance, insurance, real estate, energy, health care and government services industries while simultaneously reducing the regulatory burden borne by small businessmen, tradesmen and ordinary workers. Doing so will help to level the economic playing field, encourage increased business formation and engagement and drive innovation.
Fundamentally, the Conservative Party should aim to be the party of economic freedom and opportunity, which was their traditional brand when they were the party of farmers and small business. However, that tradition has been long dead, buried first by Brian Mulroney when he put the old Progressive Conservative Party squarely in the pockets of big business and multinational corporations, and more recently by Stephen Harper when he made the Conservative Party of Canada the servant of the oil and gas industry.
It should come as no surprise, though, that ever since both major parties began serving the same narrow set of corporate interests that the overall economy has become increasingly sclerotic. You know a country is on the wrong path when young people overwhelmingly prefer to work in government and government-protected big business rather than in independent small- and medium-sized enterprises. When talented individuals are discouraged by the regulatory and other requirements of operating a business, established firms benefit even as the economy as a whole suffers. However if, as Bill Gross predicts, our current centralized and regulated economic system collapses under the weight of its own spiraling debts, the stage will be set for the emergence of a decentralized economy dominated by nimble, innovative and efficient small businesses. If the Conservative Party of Canada is able to articulate a vision of how such an economy can enhance the welfare, independence and dignity of Canadians while dedicating themselves to creating an environment in which such businesses can thrive they will have earned the right to govern at the next election.