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 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 and reverse the cartelization and regulatory capture of the economy by powerful special interests. As our drift towards crony capitalism has sapped economic vitality, so have we come to rely on increased borrowing to boost economic activity. Thus, a Conservative economic platform promoting competition will also indirectly address our looming debt crisis.
Looking first at our debts, the dot.com crash of 2000 brought central bank interest rates down to near zero, which is 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.
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 mask economic stagnation and 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’) which further encourages 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 to reduce the power of centralized cartels, improve competitiveness and promote greater efficiency.
These cartels are all around us, operating what the commentator Max Keiser calls the “rentier economy” which uses political influence and government regulation to establish monopolies which can charge customers high prices and thereby generate steady profits. However, this economic rent-seeking (or quest for unearned profits) does raise costs for other businesses, workers and consumers and therefore leads to fewer new businesses, fewer jobs, lower wages and a lower standard of living.
Maxime Bernier 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.
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, education and government services sectors while simultaneously reducing the regulatory burden borne by small businesses, tradespeople and workers. Doing so will help to level the economic playing field, encourage increased business formation and investment 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 the overall economy has become increasingly sclerotic since both major parties devoted themselves to serving corporate interests. You know a country is on the wrong path when young people would rather work in government and government-sheltered corporations than in independent small- and medium-sized enterprises. Bureaucracies are, after all, where talent and initiative go to die. However, while this tendency impoverishes the country as a whole, it nonetheless reinforces the dominant position of our government central planners and their friends in big business.
However if, as Bill Gross predicts, our current over-centralized and over-regulated economic system is certain to collapse under the weight of its spiraling debts we must, while we still can, seize every opportunity to create a resilient and competitive economy made up of nimble, innovative and efficient small businesses. If the Conservative Party of Canada can articulate a vision of how such an economy would enhance the welfare, independence and security of Canadians and dedicate itself to creating an environment in which such businesses can thrive they will have earned the right to govern at the next election.