Sorting Through an Economic Mess

I think the history books will remember the 2000s as the being similar to the 1970s. That era was well known in North America for its malaise with the OPEC embargo, the unpopular war in Vietnam, economic recession, Watergate, etc. Right now we're in a bit of a mess that's eerily familiar. The United States is fresh off its sub-prime lending crisis which had been threatening recession for a while. Combined with the high Canadian dollar this caused, we knew out export industries would have some problems. However, federal and provincial governments all assumed Canada could weather the storm if a recession in the US came to be. April truly is the cruelest month given that what's happened in the past 30 days has shattered this assumption. Fuel costs soared throughout April. In Toronto alone, gas prices for regular unleaded shot up 15%. Diesel has seen even greater increases. Canadians on average are paying $1.26 on average for fuel compared to $1.15 a month ago. This means shipping costs are rising dramatically. The move towards ethanol, fuelled by environmentalism and agri-politics has led to massive shortages of staple grains. This has triggered a global food crisis which is even hitting North Americans hard. Unfortunately, it seems that recession now is inevitable and Canada will not be able to weather this storm.

There's really a lot I want to talk about here. We'll start with GM's job cuts due to the ailing auto industry. 900 jobs are being axed in Oshawa, mostly due to high gas prices reducing demands for trucks. Giving the auto industry government handouts is a bad idea in my opinion since it only encourages poor business decisions. GM and the CAW should have seen this coming a mile away but did nothing to combat it. Canada is the most expensive country in the world to produce vehicles. However, if the auto industry does go under, reports from TD indicate that Ontario, once the economic engine of Canada, might become a "have not" province in two years time, comparable to the likes of Newfoundland. This would mean that Ontario would begin receiving billions of dollars in equalization payments. This has been a touchy issue in the past since the big provinces always felt they were getting the short end of the stick on equalization. The National Post also pointed out that this system was never meant to have vast sums of money going to Canada's most populous provinces. This could spell disaster when it comes time to draft federal budgets. Even if the smaller provinces loose their have-not status, it is unlikely they will be able to afford such payments to the likes of Ontario and Quebec, causing political turmoil.

Jim Flaherty was correct in lambasting Ontario recently for not cutting business taxes to encourage investment in the provice. I have long said Dalton McGuinty was an ineffective premier. When he was first elected in 2003, Ontario's economy was going strong and the future seemed bright enough. Even in 2007 when he was reelected, there didn't seem like there would be a sudden economic downturn on the horizon. With three and a half years left in his term, McGuinty is going to have to make some tough decisions. So far, all he has announced is that there will be no cuts to government services, translating to mean no budget cuts. Keynsian economics, on which modern liberalism is based, does say government spending should increase to stimulate the economy. However, there doesn't seem to be any plans to do that. Bail out packages as I have said do not work as they encourage poor decisions. McGuinty has given no clear indication of plans to help the economy other than that. The fact is that Ontario is no longer competitive and it's not the fault of NAFTA or Asian trade but rather stupid mistakes made by our own leaders. You can't simply shut your boarders anymore and hope for the best since no country is self sufficient. You also can't close your eyes and plug your ears in times of crisis and hope the problem simply goes away. Inaction usually breeds the opposite of the desired result.

That's not to say that the federal government has no responsibility in the matter. Like McGuinty, the federal Conservatives seem to have no plans to do anything to curb rampant inflation due to high fuel costs. Kim Campbell rightly noted in an interview with the National Post that Harper has become far too controlling. He's trying to do everything himself rather than relying on the tallents of his MPs. This has led to an unclear agenda as the Conservatives are begining to loose steam. As for the Liberals, Stephane Dion seems to think a carbon tax on gasoline would lower fuel prices, as he noted on an interview with CTV. That logic has holes big enough to drive the Queen Mary 2 through. I can't see how charging more for something would make it cheaper given fuel is an economically inelastic product. That means that as price goes up, demand doesn't change much. This is because fuel is an essential commodity. The NDP I have not heard much from. Jack Layton has been unusually quiet lately at a time where they should be making a fuss. I think the NDP on the federal level has become too much of a bleeding heart party and has forgotten its labour roots. The primary issue is that the Green party has been stealing votes from them, so they now focus on green issues. Unfortunately, green doesn't put food on the table or money in the bank for the average Joe. This mess must be a wet dream for these radical environmentalists though, who have long envisioned a "cooler but poorer" world as being the solution to anthropogenic global warming.
The Liberals are smart though by not pulling the plug on the Conservatives. If an election were to be called in the near future, it would truly end up as a battle royal between the three national parties. None of them have enough support for a majority and at this point, it could go either way. I'm leaning towards another Conservative victory at this point, but it would be by an even tighter margin than in 2006. The time for bickering in the House of Commons is over now. Both the Liberals and Conservatives need to start working together constructively if Canada wants to try and escape the worst of the inevitable recession on the horizon. I'm not an economist so I really can't provide specific suggestions. Right now, the best things to do would be to ban the use of ethanol for fuel as well as cut gas taxes in half at the vary least. This would help ease the pain at the pumps for consumers and businesses.

Clearly something needs to be done. If fuel goes up, that eats into profits of businesses that rely on it. That means wages go down and prices go up. I know for a fact that many people are going to be in serious trouble. Just look at all the people who live off their credit cards and only pay the minimum balance per month. Though I'm usually in favour of government staying out of business, it just can't this time around. Inaction will only breed the worst recession in decades.