Politics and the Oil Sands
Last week a firestorm of political jousting occurred after NDP leader Thomas Mulcair suggested that Alberta oil exports raise the value of the Canadian dollar, thereby negatively hurting export industries in other parts of the nation, particularly Ontario and Quebec. The Conservatives were quick to slam the NDP and Mulcair with Tony Clement, President of the Treasury Board, stating oil sands development intervention would “jeopardize thousands of jobs across the province of Alberta and across the country, and thousands of new ones as investment dries up.” A few months prior Alberta Premier Alison Redford and Ontario Premier Dalton McGuinty got into a similar clash over McGuinty suggesting a very similar idea, that an inflated Loonie was killing manufacturing in his province. The issue of a high dollar is often dubbed the “Dutch Disease” or the “Resource Curse”, whereby natural resource exports/exploitation inflates the domestic currency resulting in the decline/death of manufacturing, the most notable example occurring in theNetherlandsin 1970.
It’s clear that a very divisive issue exists; however the oil sands industry generates spinoff development and jobs, not to mention the royalty revenues which fund transfer payments to provinces such as Ontario and Quebec. With the Canadian dollar trading above or close to parity with the USD for a prolonged period now its certain that manufacturing has been affected, to what extent is more difficult to measure. With that said one positive impact is that exporting industries will have had to undoubtedly find productivity or cost improvements in order to stay competitive in the current environment. Canadian manufacturing may be leaner, but certainly stronger with respect to our global peers.
With the regards to the development of the oil sands it will undoubtedly continue but Canada should aim to export the most value added resources it can. This means refining more product ourselves and finding alternative markets in which to sell it; outside of the already saturated markets of the U.S. Midwest where Canadian oil and NGL’s are being steeply discounted due to their oversupply. The pipeline debate is directly linked to this and will need to be balanced with environmental concerns. If there is one drum Mulcair should be banging on it is not the question of oil sands development but rather the manner of oil sands development, as most polls suggest all Canadians’ are concerned with its impact. The environmental impact of the oil sands is impossible to deny and with recent modifications to the Fisheries Act by Stephen Harper and the Conservatives to expedite pipeline approvals and project development timelines Mulcair would have gained more brownie points by centering on the ethics of this amendment. Rather than appearing uninformed in the energy debate, Mulcair would have presented a more balanced approach to development, something which may just have resonated with Canadians.
Want to know more? Check these stories out: http://www.theglobeandmail.com/news/politics/john-ibbitson/no-room-for-centrist-compromise-in-a-left-right-split-canada/article2445923/
http://business.financialpost.com/2012/05/28/the-re-education-of-thomas-mulcair/
Behind the Jets: A Winnipeg Reborn
By Michael Sipidias, CCUF Columnist at Wilfrid Laurier University
As a hockey loving, Midwest Canadian city, the loss of Winnipeg’s major league team in 1996 felt like the city had lost an integral part of itself. Like Montreal’s loss of their Expos, Winnipeg’s NHL team moving south of the border seemed to be more of a symbolic reference to its loss of economic status than anything else.
Once a booming city at the epicentre of Canada’s breadbasket, Winnipeg had, like much of Canada, slipped economically as market forces were put aside in pursuit of other, more politically driven efforts. The creation of the Canadian Wheat Board, which essentially controls the wheat market in Canada, is a prime example of the policies that hindered innovation in Winnipeg’s markets in lieu of more stable prices.
But as the Wheat Board’s continued operation is met with evermore scrutiny, so too is the city’s economic sluggishness looking to be left in the past. And with the rebirth of the Winnipeg Jets this summer, it is only apt for us to take a look at how far Winnipeg has come since its symbolic low when the Jets left back in 1996.
Formerly the Atlanta Thrashers, the approval of the Jets move from Atlanta has been a long and rigorous process for the city and was not thought of as the ideal location within North America to move the team. However, the growth of Winnipeg and its dedicated local fan base, albeit small as it is, are seen as the key reasons the Jets new Canadian owners sought to bring the city its team back. But although the team may be the same, the city it’s returning to certainly is not.
Since 1996, Winnipeg has been developing its manufacturing sector drastically with a 5.7 percent increase in job growth in 2007 alone, which has been a vital part of their growth. Another very strong indicator of their economy resurgence is the increase in major construction projects in and around the city. Several very large projects such as the Manitoba Hydro building, the Red River Floodway expansion and repairs to the Disraeli Freeway are contributing to not only job growth in Winnipeg, but the city’s increasing economic infrastructure.
Economists have speculated that the recent growth trend of Winnipeg’s economy can be attributed to a bubble effect, which eventually will pop. However, with strong population growth, a growing manufacturing base, and increasing construction within the city, this can only allow for more job growth and consequently a larger growth in GDP. The city of Winnipeg is one of the leading economic growth prospects within Canada and trails only behind oil production powerhouses like Edmonton and Calgary. With the coming of the new Winnipeg Jets, this should allow for even more positive economic growth and push Winnipeg closer to being a major player within Canada’s competitive economic market and the world’s.
Are First-Time Home Buyer Incentives Justified?
By Mustafa Bukhari, CCUF Columnist at Queen’s University
Many pundits say that property values in Canada are overvalued. The fundamental factor which should determine housing prices is income. So any growth in GDP per capital should be matched by housing prices, and if property values rise faster for a sustained period of time then a bubble will essentially be created. Canadian house prices have risen by 23% in real prices where as income has risen by 16.4% over the same period. Over a substantial 10 year time period this is quite an over valuation so why is it that prices have risen faster than incomes and are we in a bubble?
Inflation can affect housing in a number of ways. The nominal prices will of course rise to match inflation. This is good for a home buyer as the price will be higher than when he purchased it and especially if you have a mortgage the payments will be easier to cover as their worth is less. As well as a nominal increase a real price rise is also likely as the demand for housing will go up but sellers will hold so as to benefit from further rises (remember most people don’t take inflation into account). Untamed inflation may cause a rise in interest rates but this has not happened and is unlikely to happen in Canada for the foreseeable future. In this case, the rise in house prices have risen higher than incomes in real terms so inflation was certainly not a major reason.
Canada’s price to rent ratio is almost one and a half times higher than its long run average and has been like that for over a decade. The price to rent ratio takes into account micro factors such as overcrowding, quality, and others where the quality of houses is reflected in the rent charged. This means that as an investment a house will not generate enough income to give you a good return on your investment (think of it as a bond with rents coupon payments). Income inequality may explain this as if a part of the population can afford to pay higher prices for housing it may skew the market and push prices on average higher. But income inequality hasn’t risen by much over the last 10 years and even rich people count buying a home as an investment so they would watch this metric carefully.
The real reason is that the percentage of people owning homes is rising and this is making people take less notice of rents as they are not renting out. This is putting upward pressure on prices without the same pressure on rent.
There are a number of reasons why this is so. One is the freely available credit. With developing nations such as China having huge savings which they invest mainly in US money markets but Canada’s as well, pushing down interest rates. This may seem all well and good but the cheap credit is allowing otherwise untenable projects (especially real estate) to go ahead. When interest rates will rise these mostly long-term projects will be very much ‘out of the money’ and will represent noting more than wasted resources.
Evidence of this was seen when during the recovery housing prices in Canada rose very quickly due to ultra low-interest rates forced on by the financial crises. There is no easy fix for this fundamental problem as it really concerns a global effort to realign the world’s economy into a more sustainable model, balancing investment and savings.
Control on capital, widely regarded as an anathema among economists before are widely been seen as an effective if not perfect way of controlling exchange rates and other fundamental factors at their ‘true’ values. Canada should definitely look into these measures for example a tax on foreign bond ownership which brings the effective interest rate being received by the holder in line with true market determined levels across the term structure. What these levels are is hard to say but a tax would be better than no tax.
Exacerbating this problem is the fact that the Canadian government gives subsidies to encourage first-time home buyers to get their own home. The goal of having every Canadian owning their own home is certainly a noble one. But the way to do this is by having market oriented policies which encourage growth. These will not only be cheaper but will be safer for the housing market as it will not distort its fundamentals thereby creating a bubble. I think especially with the subprime mortgage crises in the US this would have become abundantly clear.
While I don’t think that real estate is a bad investment right now, and I’ll lay out the reasons in a forthcoming psot, I do think that if left unchecked a housing bubble cold hurt us in the future.
Locked Up Efficiency? Finances at Prison
By Mustafa Bukhari, CCUF Columnist at Queen’s University
I recently volunteered to teach a finance class at a prison in Kingston, Ontario Along the way I saw unnecessary bureaucracy, overstaffing and heavy-handed regulation on taxis of all things.
The prison administration organises classes for inmates who are nearly done with their prison sentences to help them back on to their feet. This helps them from falling into the vicious cycle of relative and sometimes absolute poverty which is often followed by crime, leading them back to jail. A truly commendable effort, especially because besides the social benefits, it’s virtually cost-free. Smart government. But viewing how the prison system is run generally is a little troubling.
To check in at the reception there were around three people at the desk. As one of them checked our IDs, the other two sat and looked on. You may think that you need many guards at a prison but this was a minimum security facility where inmates could walk around the compound freely as long as they checked in and out. Why do they need three people? Who knows, but were paying for it.
Now it’s tempting to say that it’s providing employment so let it go. After all it’s not much in the bigger scheme of things. But this is really a chronic problem across government agencies. Friends of mine who have worked for the government complain of little work not only for them but for everyone else at their respective offices. If we could have government more efficient than we wouldn’t need to be taxed as much. More consumption and investment by consumers and businesses will result. The people who are laid off would then be put to better use elsewhere
How do we solve this?
There are of course significant challenges to getting departments to be more efficient. One is that it is just naturally hard to fire people.
But the even higher hurdle is of motivation. Why should a department head let go of people? Why should the supervisor have his/her budget cut and have lesser influence because of it?
Basically there is a shortage of incentive. No high-ranking official with such an agenda will be able to impose a sum of how much departments should cut from their budgets as he won’t know where the inefficiencies are. Only department leaders on the ground will be knowledgeable enough to make the call.
So how do we keep departments from running up costs without any profit and loss reports for them to be worried about?
The Cost-Bonus Ratio
Cost of running department after operation streamlining
Original costs
To create the necessary incentives we could use the above ratio. The fewer dollars you’re able to run a department on, the lower the ratio will be. And we could assign large bonuses for each percentage point cut to be shared among the units who achieve those cuts.
The ratio is simple and I think very effective as managers know exactly what activities they need and the ones they don’t. The bonus should be given only if services maintain equal quality and scope. Of course, tying incentives with cutting costs can create a negative, counterproductive outcome. It is therefore essential to push the idea of efficiency over the more understood “cost cutting”.
The extra prison guards might be a small problem, but it represents a huge expense for our nation. It might seem commonplace to accept any government as being inefficient, but let’s prove that we can be the exception to the rule.
Come Together
By Mustafa Bukhari, CCUF Columnist at Queen’s University
I don’t have any statistics about the issue, but I’d venture to say that most peoples’ foremost thoughts are about their financial well-being. Let’s define this as the amount of resources they have at their command.
What determines this? It is the value of what a person can produce and how valuable it is to the society that person lives in. The more the society can produce, the higher that person’s affluence. For example, consider a bartender in Canada and consider a similar bartender in, say, Namibia. Both provide pretty much the same service, but the Canadian bartender probably has a decent home, access to better healthcare, a nice flat screen TV, and so on.
On the other hand, the Namibian bartender most likely lives in a small shack and listens to a radio. Why is this? Because the Canadian economy can produce much more on a per-person basis, and thus the Canadian bartender’s service can be rewarded with greater resources.
So obviously it really matters how productive our economy is. In fact, the only way of sustainably enabling all of us to become richer is to be more productive.
Therefore it’s quite a scary thought that Canada is one of the least productive of all OECD countries. What’s even scarier is that productivity is not static, and in fact is always changing. So if we don’t address the serious issues relating to the morbid Canadian productivity deficit, then we could easily become a poorer society. Although that doesn’t seem possible, remember that poverty is relative to our neighbours, and as the world becomes more globalized, everyone is looking to one at each to see who has the “greener pasture”.
This is the reason for CCUF: For Canadians to come together and share their own insights on what’s wrong and how to fix it. The solutions are relatively simple to come up with; harder is agreeing upon a method and even harder is to implement them without causing some serious short-term pain. The issues are many and varied. And they’re all around us. From “big brother” trade unions to highs taxes to failed attempts to “go global”.
So post your thoughts, comment on others, and let’s make a vibrant platform of debate and hopefully create an intellectual database, which will launch Canada into the 21st century much richer!
