Making Canada Relevant Again- The Economic Super-Thread

[Edward Campbell]

The idea of erasing the federal debt always was, and still is, a pipe-dream; as in your personal finances, while it is nice to be debt free, debt, in and of itself, is not a problem so long as the debt to GDP ratio is  acceptable.

Reproduced under the Fair Dealing provisions of the Copyright Act from the Globe and Mail:
http://www.theglobeandmail.com/news/politics/ottawas-long-term-debt-plans-shelved/article4649919/

Ottawa’s long-term debt plans shelved

BILL CURRY
OTTAWA — The Globe and Mail

Last updated Thursday, Oct. 25 2012

The Conservative government no longer has targets for erasing Canada’s federal debt, which grew by $125-billion since the recession.

Finance Minister Jim Flaherty confirmed Wednesday that the recession has derailed Ottawa’s long-term debt plans and new targets won’t be set until the government starts posting yearly surpluses again – which is not forecast to happen for three more years.

The minister said rating agencies look favourably at Ottawa’s finances but do raise concerns with him about provincial debt loads. He said it’s up to provincial governments to balance their books.

The federal debt stood at $582.2-billion for 2011-12, which is up from $457.6-billion in 2007-08.

It was just five years ago that the government was promoting an ambitious plan called Advantage Canada that promised to erase the country’s net public debt “by 2021 at the latest,” according to Mr. Flaherty’s 2007 budget.

Net debt is a measurement that includes federal and provincial government assets and liabilities, including accounts like Canada Pension Plan funds.

“Obviously that target has been stretched,” said Mr. Flaherty Wednesday, when asked for an update on Ottawa’s long-term debt targets.

Talk of the target disappeared in Ottawa after the recession hit. In recent years, Ottawa has refused requests to provide a long-term assessment of Canada’s bottom line. On Tuesday afternoon after the Auditor-General joined the calls for such information, Finance Canada complied.

The department projected federal debt as a percentage of GDP won’t be erased until about 2042. It also said Canada’s total government net debt stood at 34 per cent of GDP in 2011. When asked directly if his government’s new target for erasing the debt is 2042, Mr. Flaherty replied that any new government targets won’t be set until Ottawa’s back in surplus.

“Our priority now is on the deficit and to eliminate the deficit in the medium term,” Mr. Flaherty said. “We’re still on track to do that. Once we do that, then we can do as we did before in 2006, 2007, and that is start to use surpluses to – in part certainly – pay off public debt and then we’ll be able to plan a schedule for the elimination of federal public debt in Canada.”

Though the Auditor-General called on Ottawa to report on the long-term sustainability of provincial and federal finances, Mr. Flaherty said it’s up to the provinces to report on their own debt projections.

Opposition parties jumped on the Auditor-General’s findings Wednesday, accusing the government of creating a false crisis over public finances to justify changes to Old Age Security and provincial transfers for health and education.

Meanwhile, the fiscally conservative Canadian Taxpayers’ Federation said the government should be pressured to stick with its original debt plan, regardless of the recession.

“By abandoning it, they’re saying they’re adrift,” said Gregory Thomas, the federation’s federal director. “I think the fiscally conservative base of the government has to be profoundly concerned.”

Doug Porter, deputy chief economist with BMO Capital Markets, argues Canada’s new recession-era debt load needs to be looked at in perspective.

“It’s the reality that almost every industrialized world economy is dealing with this,” he said. Targeting the elimination of net debt was a reasonable goal before the recession, said Mr. Porter, but he questions the need for a target now.

“To have the federal government basically mandating a target that the provinces have at least as big a say in is perhaps not a useful exercise,” he said. “Canada is still definitely seen as a very favourable investment destination, and part of that is because of the more general perception that our finances are in better shape than most other countries and I think that’s still the case.”

So, what is an acceptable debt to GDP ratio? My suggestion is:

1. In "good" or "booming" times < 15:1,* when  money is pouring in the government should, simultaneously, pay down debt, restrain programme spending and cut taxes;

2. in "normal" times (moderate, steady growth) ≈ 25:1; and

3. In "had" time - a deep recession, a depression or a war >> 50:1 is wholly acceptable, not nice, cannot last, but acceptable.


__________
* Canada was in this position in the 1970s, when my political bête noire, Pierre Trudeau was in power. But we got there because of the combined effects of high growth that began in the late 1940s and fiscal policies from the 1950s. Trudeau presided over the shift from St Laurent's eminently sensible policies and moved us to a position wherein, despite having neither a serous recession nor a war, we had  debt to GDP ratio, in 1995, of nearly 70:1!

Source: http://news.nationalpost.com/2011/03/21/graphic-50-years-of-canadian-debt/

 

[Edward Campbell]

I know some members work "at the coalface" of social services so I'm posting this article, which is reproduced under the Fair Dealing provisions of the Copyright Act from the Globe and Mail, as a prelude to a question:

http://www.theglobeandmail.com/commentary/make-welfare-work-again/article4648077/

Make welfare work again

MARGARET WENTE
The Globe and Mail
Published Thursday, Oct. 25 2012

Conservatives have it half right and half wrong about welfare. They think the best cure for poverty is a job.

They think anyone who can work should work. That’s why they slashed welfare rates in Ontario and imposed workfare. Call it the “Mike Harris” approach. The trouble is, some people need a lot of support to get a job. A single mom with two kids might need child care, treatment for depression or dental work to replace missing teeth (it’s hard to get a job with missing teeth).

Progressives have it half right and half wrong, too. They think everyone, regardless of employment status, deserves a decent level of support. But sometimes, their expectations of people are way too low. And if welfare rates are too high, people won’t go to work. Call this approach “Bob Rae in his socialist phase,” when the percentage of people on Ontario’s welfare rolls was among the highest in North America.

Here in Ontario, we have it almost completely wrong. Our programs to help people find work are a miserable failure. Those on the bottom end of the welfare scale don’t get a decent level of support (unless you think a single adult in Toronto can live on $599 a month). On top of that, we’ve created a bureaucratic nightmare. Ontario has 45 different benefit programs, 240 different benefit rates and more than 800 rules and regulations governing social assistance. Case workers, who are supposed to help people find jobs, can spend more than 70 per cent of their time trying to understand and enforce the rules. The biggest product of the system is useless paperwork.

There is one general welfare program for the abled (if that’s a word) and another for people with disabilities, which is now bigger than the first program. Most people with disabilities want to work. But the system does almost nothing to help them prepare for and find employment. Essentially, it stigmatizes them and sends the message that they can’t expect much from the job market. Needless to say, there’s no accountability because the system makes no sense. This splendid monument to incompetence costs taxpayers $8.3-billion a year.

Can this mess be fixed? Frances Lankin thinks so. She’s the co-chair of a commission on social assistance in Ontario that released its findings Wednesday. Ms. Lankin knows the score because she ran Toronto’s United Way for a decade; her co-commissioner, Munir Sheikh, is the former chief statistician of Canada. They’ve produced a prescription for reform that’s both hard-headed and post-partisan.

The basics are easy enough to grasp. First, get rid of the complexity. Have one program that’s easy to understand. That way people can navigate the system and case workers can concentrate on their real jobs. Second, push the service delivery down to the municipal level. After all, that’s where the local knowledge is. Third, make it easier for employers to get involved. The good news is, many employers want to hire people with disabilities; the bad news is, we make it as hard as possible for them, because few people working on the social services end know the local labour market or understand how businesses operate.

We should also use a triage system to figure out what level of assistance someone needs. Some people – skilled new immigrants, for instance – simply need mentoring and networking opportunities to get themselves plugged into the labour market. Others, such as those who’ve been out of the work force for a long time, need more help. The truly unemployable, as well as those at the bottom rung of welfare, deserve a decent level of support. And we need to develop performance measures and audit the whole thing to make sure it’s working.

This is a depoliticized, post-partisan approach to welfare reform. It puts the dignity of work front and centre. It recognizes that work is what binds people to society and builds their skills and self-esteem. Many social-action groups have endorsed it. So have an impressive array of business leaders, who realize that the private sector has got to be a part of the solution. The real question isn’t how to reform welfare. It’s whether the government can reform itself.

My question is simple: Is our system as bad as Ms Wente suggests? (I suspect the answer is very complicated.)

My perception, based on almost no useful, first hand knowledge, is:

1. Ms Wente is right when she suggests that getting off welfare can be very hard for many people - not because they are lazy but because the system makes it difficult;

2. Many people receiving social assistance, of various sorts, cannot work - they are mentally ill and about 35 years ago we began to close all the warehouses we had for them and put them out on the street. We told ourselves that they would benefit from "community care," and perhaps they would - but we never provided much community care because, unlike warehousing mentally ill people, caring for them in the community is hideously expensive;

3. We have three and even four generations of welfare dependent people. The corollary is that much of our welfare problem is home grown, not caused by immigration; and

4. Welfare reform, useful welfare reform that might get people a real job, is unlikely to save any money.

 

[GAP]

find me a minimum wage job (that's where they are likely to have to start) that pays enough to provide housing, food, child care, eye & drug care, etc.....

Welfare has created it's own community and they discourage them from finding employment.... :

 

[Edward Campbell]

And here we are again with that most scintillating and stimulating of topics, Equalization!, in an exciting report which is reproduced under the Fair Dealing provisions of the Copyright Act from the Globe and Mail:

http://www.theglobeandmail.com/news/politics/can-only-one-man-see-that-canadas-equalization-program-is-broken/article4650756/

Can only one man see that Canada’s equalization program is broken?

JOHN IBBITSON
Ottawa — The Globe and Mail

Published Thursday, Oct. 25 2012

No one does a better job than David MacKinnon of revealing what he calls “the tragic consequences” of Canada’s broken equalization program.

But the real tragedy may be that no one, especially no one in Ontario, seems to be listening.

Mr. MacKinnon, now semi-retired, was a senior public servant in both the Nova Scotia and Ontario governments. He was also CEO of the Ontario Hospital Association and the Ontario Development Corporation. He knows what he’s talking about.

Using data from Statistics Canada, the Organization for Economic Cooperation and Development and think tanks in Ontario, Nova Scotia and British Columbia, Mr. MacKinnon has drawn a portrait of a country that pumps $15-billion each year into a program that fails both those who pay and those who receive.

Canada’s Constitution requires that the federal government ensure, through its equalization program, “reasonably comparable levels of public services at reasonably comparable levels of taxation” across Canada.

But equalization does no such thing, Mr. MacKinnon maintains. Instead, it ensures that Ontario taxpayers – who pay twice as much into equalization as the province receives from the program – endure lower levels of public services than those in receiving provinces.

(Though Mr. MacKinnon focuses on Ontario, much of what he says applies to Alberta and British Columbia as well.)

Consider: There are twice as many federal bureaucrats, as a share of the overall population, in Prince Edward Island as in Ontario, even though the national capital is in Ontario, according to data provided by Mr. MacKinnon.

PEI also has three times as many provincial bureaucrats, on a per-capita basis, as well as 50 per cent more nurses, 28 per cent higher university funding and twice as many long-term-care spaces.

Twenty-six per cent of the Manitoba and Nova Scotia labour force is employed in the public sector. In Ontario the figure is 18 per cent.

Both Manitoba and Quebec subsidize electricity consumption. Ontario taxpayers help pay for those subsidies.

In fact, over the past 50 years, Mr. MacKinnon calculates, Ontario has on average contributed 4 per cent of its gross domestic product to support other provinces. This is roughly the same percentage of GDP that the United States spends on defence, and the U.S. over the past 50 years has been at war more often than not.

“Viewed from this perspective, the impact of the regional subsidy effort on Ontario is like fighting a 50-year war,” Mr. MacKinnon observed in a recent address to an Ottawa-area Rotary Club.

Everyone suffers: Ontario is less able to compete with other manufacturing-based economies, who don’t see a sizable portion of their GDP drain away to other jurisdictions.

Receiving provinces pay, too, through subsidy distortions that undermine the private sector. Ganong Chocolates in New Brunswick must import Romanian workers to keep its factory going, even though unemployment in the province is 11 per cent.

In Prince Edward Island, where the unemployment rate is also 11 per cent, it’s Russians and Ukrainians who are brought in to work in the fish plants.

The distorting, debilitating effect of equalization “harms productivity everywhere,” Mr. MacKinnon maintained in an interview. But Ontario, as the largest economy, suffers most. “It could cut us off from what could otherwise be a very bright future,” he warns.

Yet though he has been sounding the alarm in speeches and articles for 15 years or more, no one in the federal governments listens, and few people in Ontario listen either.

As David Cameron, a political scientist at University of Toronto, once observed, an Ontario premier is like “a general without an army.” The same voters who put the premier in office put the prime minister in office, because, with almost 40 per cent of the population, Ontario voters largely determine the federal government.

Those voters don’t seem to much notice, or care, that the federal government, as Mr. MacKinnon puts it, “is robbing Peter to pay Paul so that Paul can live better than Peter.”

Maybe that will change. Maybe the hundreds of thousands of lost jobs, an employment rate chronically above the national average and a growth rate chronically below it, the growing provincial debt and crumbling provincial roads will finally cause Ontario to rise up.

Or not. As Mr. MacKinnon notes, in something approaching despair: “Ontario’s great sin is complacency.

“It’s a sin it needs to shed, if it wants a future.”

David MacKinnon, a native of Prince Edward Island, was awarded a Bachelor of Arts degree (honours economics) from Dalhousie University and an MBA from York University. He was awarded a Centennial Fellowship by the Canadian Imperial Bank of Commerce and York University to study at York, Harvard and Oxford Universities as well as the European Institute of Business Studies. Mr. MacKinnon served as Director, Planning and Economics and Executive Director, Development Strategy in the Nova Scotia Department of Economic Development from 1976 to 1981. He later served in several senior capacities in the Ontario Public Service, the Bank of Montreal and as CEO of the Ontario Hospital Association from 1996 to 2003. Mr. MacKinnon is a Public Member of the Council of the Ontario College of Physicians and Surgeons and is the Chair of its Finance Committee and a member of its Executive, Complaints and Outreach committees. He serves on several Boards of Directors, including the West Park Health Centre. He recently finished my five year term on the Standards Council of Canada and was subsequently elected to the board of the Canadian Standards Association. He has advised the Ontario Chamber of Commerce and other Ontario organizations on fiscal federalism issues.
Biography provided by The Frontier Centre for Public Policy (Calgary, Regina and Winnipeg)

In my opinion, Mr. MacKinnon is correct in his description of the problem and the solution to the problem is a thoroughgoing revision to what we understand equalization to be and how we calculate which provinces pay and receive and how much they pay and receive.

 

[a_majoor]

FP lays out the argument against allowig Chinese (or other nation's) SOE's to "invest" in Canada. It certainly is important to ensure that the SOE is made to comply with all Canadian rules and regulations, otherwise we wil end up in a situation similar to the ones outlined by Diane Francis in the FP, where the Chinese import their own workers, ignore or defy local laws and leave a huge and expensive mess behind. Indeed, some Chines companies in the mining industry are trying to slide something like that in here in Canada; advertising for jobs but stipulating that only speakers of Mandarin can apply. The positive side of allowing fresh investment capital into the Canadian economy should not be overlooked, no wonder the Government needs to move slowly and apply a "net benefit" test:

http://opinion.financialpost.com/2012/10/25/terence-corcoran-fascism-by-another-name/

Terence Corcoran: Fascism by another name

Terence Corcoran | Oct 25, 2012 9:10 PM ET | Last Updated: Oct 26, 2012 9:33 AM ET
More from Terence Corcoran | @terencecorcoran

State ownership makes mockery of markets

Recent media reports portray Ottawa as ready to horse-trade its way out of a looming foreign investment crisis over takeovers of Canadian companies by state-owned enterprises. In Bloomberg’s version, “Canada plans to ask China to allow several transactions in exchange for approval of state-owned CNOOC Ltd.’s $15.1-billion bid for Nexen Inc., said a person with knowledge of the matter.”

Finance Minister Jim Flaherty quickly announced that he personally had no knowledge of the matter. But speculation persists, particularly over attempts by the Bank of Nova Scotia and Manulife Financial to secure greater access to Chinese financial sectors. The Canadian mining industry is also keen on massaging its way into the Chinese market, and if that means using CNOOC’s $15-billion Nexen takeover as a reciprocity play, so much the better. Or so it is said.

As the Harper government wades deeper into the challenge posed by state-owned enterprises investing in Canada, whether from China or Malaysia or even the United States, some overarching issues need to be recognized. Foremost is this: The global rise of state-owned enterprises (SOEs) poses a threat to the market principles that have governed international and national investment for decades, and that dominate Canadian law and policy today. Investor-driven corporations, aiming to maximize profits in an open competitive market, are at the heart of market capitalism. Some find it politically advantageous to talk of state-owned enterprises as part of the rise of some benign “state capitalism” around the world. These two words are a mischievous ideological sabotage of Western values. A half century ago, state capitalism was called fascism, and it should continue to be today.

The very idea of reciprocity between Canada’s rule-of-law system based on economic and individual freedom and China’s totalitarian regime boggles the imagination.

If banks, resource companies and computer manufacturers want to do business in a country that cannot or will not open its markets and protect corporate rights, that’s a business problem. Canada as a country has nothing to trade on this front, unless it intends to undermine its own core economic and political values at home.

Canada should therefore follow the highest principles in dealing with SOEs from Malaysia, China or anywhere. Easy to say, but what might that mean in practice? Should Canada accept foreign direct investment from state-owned enterprises? If yes, under what conditions? Should the CNOOC-Nexen deal be approved? Or the Petronas takeover of Progress?

The point has often been made, including in this newspaper, that as a free-market, open-investment country, Canada could just let CNOOC pay its 60% premium to Nexen investors, who can take the money and run, leaving the Chinese to sort out the overpriced asset schmozzle they purchased.
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But buying a corporation is not like overpaying for passive investments such as bonds. Randall Morck, distinguished professor of finance at the University of Alberta and an expert in international corporate governance, sees a corporate takeover as a much more fundamental transfer. “With equity control comes control of the company, the ability to hire and fire people, the ability to made decisions about what to invest in,” said Mr. Morck in an interview. Canada got out of Air Canada because it was badly run as a state-owned enterprise, he adds, with managers often forced to answer to political rather than economic demands.

If Canadians have sound economic and political reasons for rejecting Canadian SOEs, how can we embrace foreign SOEs? The answer is that we can’t, as Mr. Morck and Vikas Mehrotra, also a professor at the University of Alberta, argue in a commentary in Friday’s Financial Post. SOEs through history are notorious value-destroyers, and Canada would be wise to adopt foreign-investment rules that recognize the inherent flaws in the SOE model.

The Morck/Mehrotra foreign investment review process calls for a two-track approach. Track one carries an always-on green-light signal to private market-based foreign investment, and a yellow-to-red signal on SOE investments, regardless of national origin.

Private firms make mistakes, but the overall outcome in a competitive market is greater economic efficiency. “Profit-maximizing firms keep the economy from wasting resources,” they write. The great historical model of SOE failure is the Soviet Union, where “central planning, by disconnecting enterprise management from profit-maximization, ultimately allowed so vast a waste of resouces that the Soviet economy simply collapsed.”

The scale of wealth destruction in China, India and elsewhere is not comparable to the Soviet experience, but foreign state-controlled firms still pose a value-destruction risk. “All this suggests,” say Mr. Morck and Mr. Mehotra, “that state-controlled foreign firms’ takeover bids be discouraged as a matter of general policy.”

The Investment Canada Act already makes this distinction. SOE and state-controlled enterprise bidders must meet Canadian corporate governance standards and demonstrate a commercial orientation. “Many state-controlled enterprises in many countries, not just China, likely fail both tests. Their governance is often overtly politicized and their objectives obviously discordant from economic efficiency,” say Mr. Morck and Mr. Mehotra.

Since most of Nexen’s assets are outside Canada, the risk to the Canadian economy of a CNOOC takeover are likely small. In that case, approval might be justified.

The principle, however, remains that SOEs are to be met with skepticism and discouraged, regardless of the country of origin, including this hypothetical: As the new president of the United States, Mitt Romney sets up a national U.S. oil company to foster his goal of North American energy independence. USOil then decides to buy Sun Oil. The Canadian answer should be no, on the principle that Canada is a free-market nation governed by private investment principles rather than state objectives.

 

[a_majoor]

And while on a different topic than investment, as a resident of Ontario I am quite sensitive to the idea that our out of control spending and debt could drag down the rest of Canada:

http://opinion.financialpost.com/2012/10/25/provincial-fiscal-follies/

Provincial fiscal follies

Philip Cross, Special to Financial Post | Oct 25, 2012 8:59 PM ET | Last Updated: Oct 25, 2012 9:18 PM ET
More from Special to Financial Post

Outlook for provincial debt is increasingly worrisome

Is there a provincial default crisis in Canada’s future? With the best fiscal record in the G7 over the last two decades and having weathered the economic storm of the late unlamented recession better than any other G7 country, Canadians have earned some bragging rights. Unknown to most Canadians, however, major problems of public debt at the provincial level are being stored up for the future, problems that could ultimately tarnish Canada’s reputation and darken our economic future if we do not change course, and soon.

The problem is not in Ottawa. By international standards, Canada’s federal government remains a beacon of fiscal probity. Despite a run-up in the federal deficit to over $50-billion during the recent recession, it has shrunk quickly to less than $20-billion and shows no signs of returning to structural deficits.

Unfortunately, this does not apply to most provinces. Their collective deficit was $42-billion (at annual rates) in the second quarter of 2012, over twice as large as the federal deficit and not far from their high of $52-billion in mid-2009.

The outlook for provincial debt is increasingly worrisome. Taking the current pattern of spending and taxation by province, and projecting what will happen to provincial finances as the population ages and as interest rates trend to more normal levels, shows that eight of the 10 provinces have a more than 50% likelihood of default 30 years from now.

Just mentioning the words “government” and “default” in the same sentence in Canada causes conniptions in some quarters. You might well ask why after recent events in Europe. Professors Carmen M. Reinhart and Kenneth S. Rogoff documented in their perfectly timed 2009 book, This Time Is Different, that government defaults over the centuries happen so often, the wonder is not that they occur but why anyone lends to some governments in the first place.

Provincial government defaults on debt have been more common than many people think. Half the provinces needed federal bailouts during the 1930s. As recently as 1993, the Saskatchewan cabinet openly debated default as an option during its fiscal crisis. A recent study by Marc Joffe for the Macdonald-Laurier Institute finds that the key determinant of default is not when debt hits a certain level of GDP, but when interest charges eat up 25% of all tax revenues.
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A major finding of the study is that provincial bond yields are remarkably close to federal yields despite differences in their default risk, as measured either in the short-term by the ratings agencies or in the long-term using a model developed by Joffe. The explanation appears to be that markets assume a repeat of the federal bailout of the provinces in the 1930s. Some commentators have suggested markets expect the provinces to react appropriately before going over their own fiscal cliff, but this should vary more from province to province than we see reflected in actual bond yields.

A default by a provincial government would affect all Canadians. Not only would federal taxpayers have to pick up the tab for a bailout but interest rates across the country could go up if our current status as a safe haven in a world of financial uncertainty is tarnished. And while every debt crisis is different, Europe shows how contagion can easily spread from one jurisdiction to another.

We know that some provinces are capable of radical change when faced with a fiscal crisis. Each province has its own preference for the mix of spending cuts and tax hikes needed to balance their books. Alberta in the mid-1990s, for example, closed three of the eight hospitals in Calgary, resulting in a memorable video of one being blown up. At the other end of the spectrum, Saskatchewan and Quebec have resorted more to tax increases than other provinces.

However, if the federal government is ever forced to bail out a province, it will be in a position to insist on changes to provincial policies that may conflict with that province’s preferences. This reflects the reality that we are seeing in Europe today, where the countries paying for the bailout of other members of the eurozone are extracting a price in terms of structural reforms to improve productivity and fiscal responsibility.

The only sure way to avoid a loss of any province’s sovereignty over its areas of jurisdiction, like spending on health care and education or the taxation of natural resources, is to adopt policies that begin to address its fiscal follies. Past fiscal crises show that the longer action is delayed, the more severe and less politically appealing it will be. Otherwise, some provinces risk becoming an ignominious entry in a future edition of Rogoff and Reinhart.

Financial Post

Philip Cross is research co-ordinator at the Macdonald-Laurier Institute.

 

[Edward Campbell]

I know this is dull as dishwater, but trust me, this is an important cog in the productivity wheel:

Reproduced under the Fair Dealing provisions of the Copyright Act from the Globe and Mail
http://www.theglobeandmail.com/news/politics/canada-us-struggling-to-reach-agreement-to-agree-on-product-rules/article4715685/

Canada, U.S. struggling to reach agreement to agree on product rules

JOHN IBBITSON
The Globe and Mail

Published Sunday, Oct. 28 2012

An ambitious plan to harmonize product regulations between Canada and the United States has become all process, few results. But there is hope.

The Regulatory Cooperation Council – announced with much fanfare last December by Prime Minister Stephen Harper and President Barack Obama as part of the Beyond the Border initiative – has little to show for its efforts, thanks in part to the distraction of the American election and in part to entrenched interests.

Government officials, who are not authorized to speak publicly, point to work plans and consultations, but not to “deliverables,” as the wonks like to say.

Yet there is one possible deliverable that could have a major impact.

While harmonizing existing regulations may be an ambition too far, a framework agreement is in the works that would commit both sides to working together on future regulations.

While we may never see a continental standard for toothpaste, we could see one for hydrogen-powered vehicles, if such a machine ever reaches the market.

It’s a glass-half-full, glass-half-empty sort of thing. But even half a glass is better than none.

The RCC is mostly confined to three sectors: automobiles, foodstuffs and health and personal-care products.

But although 29 work plans have been drawn up and some minor agreements implemented, when one official was asked what had concretely been achieved, the glum answer was “not much.”

Both governments have large bureaucracies and many agencies with turf to protect. States and provinces jealously guard their own powers. And private industry can be as obstructive in practice as it is supportive in principle.

U.S. Ambassador David Jacobson has repeatedly asked why the Cheerios he eats in Ottawa are fortified with vitamins and minerals in a different way from the Cheerios he ate in Chicago. “I feel neither healthier or cheerier in one country or the other,” he declared.

Sorry, ambassador, but your Cheerios aren’t going to change.

So is the whole RCC process a waste of time? Perhaps not. For one thing, there have been recent agreements on fuel emissions and pesticides. For another, businesses on both sides of the border – the cosmetics industry is one example – are teaming up to demand action and propose their own common sets of regulations.

Most important, there is goodwill for working together more closely going forward, even if little can be done about what’s already on the books. Think, for example, about those rear-view cameras that are becoming increasingly common on cars.

Under the proposed framework – which would be less than a treaty, but more than a memorandum of understanding – if either country began work on regulating the cameras, it would be required to inform the other, and propose joint co-operation in setting standards, which would then be separately implemented by each country through regulations or legislation.

Colin Robertson, the former Canadian diplomat who is probably better informed on cross-border issues than anyone not actually on the negotiating teams, is a glass-half-full kind of guy.

“In terms of immediate progress, they don’t have much to show” for their efforts, he acknowledged in an interview. But if the two sides can entrench a culture of future co-operation, “it promises to be revolutionary,” he believes. After all, he observed, “if the regulators on both sides had been talking to each other,” when drawing up rules already on the books, “we wouldn’t be where we are today.”

If the RCC truly does its job, its greatest achievement will be to encourage a culture of trust, so that if one side does decide one day to change the rules on fortifying cereals, both sides will work together to achieve common standards.

Mr. Jacobson may yet get to eat the same bowl of Cheerios, no matter where he lives. It just won’t be any time soon.

Glass half full; glass half empty. Take your pick.

The costs of these incompatible regulations to the whole continental economy are real, measurable, fairly large in many cases, and entirely avoidable but, as Ibbitson says,, "Both governments have large bureaucracies and many agencies with turf to protect. States and provinces jealously guard their own powers. And private industry can be as obstructive in practice as it is supportive in principle." The costs, which come directly out of your wallet and mine, are the price we pay for pig headed protectionism on both sides of the border.

 

[a_majoor]

Perhaps closer to most of our experiences is air travel, and the incredible price we have to pay in Canada for the privilege of flying. For me, I have flown from Detroit Metro to US destinations for about 1/3 of the cost of a similar flight from Toronto. Since Toronto and Detroit are about the same distance from us by road, there is no real "downside" to using Detroit Metro for our flying needs:

http://business.financialpost.com/2012/10/27/why-canadian-airports-are-so-expensive-and-inefficient/?__lsa=877f46af

Why Canadian airports are so expensive and inefficient

Scott Deveau | Oct 27, 2012 7:00 AM ET | Last Updated: Oct 29, 2012 3:23 PM ET
More from Scott Deveau | @scottdeveau

A Conference Board of Canada report earlier this month concluded that if the federal government were to change its policies, including reducing or eliminating many of the fees and taxes it levies on the industry, it could potentially bring two million passengers back to Canadian airports a year.

Government taxes and fees have long carried the blame for the noncompetitive nature of Canadian airports and for the bleed of nearly 5 million passengers a year in search of cheaper flights south of the border.

But not everyone agrees taxes and fees are the primary source of what ails the air travel industry in Canada. Howard Eng, chief executive of the Greater Toronto Airport Authority, which oversees the country’s busiest airport, Pearson International, is one of them.

Mr. Eng argues that while reducing various government fees — such as airport rents, security charges, and fuel excise taxes, will certainly help — the federal government would be better served focusing on a national strategy to increase the number of passengers flying to the country. This would include the elimination of red tape for passengers transferring onto other destinations, streamlining the customs process, and making the country a focal point for travel in emerging markets like India and China.

“They’re looking at the cost disadvantage between Canadian airports and U.S airports,” Mr. Eng said in an interview at Pearson earlier this week. “But it’s more than that. What I would like to see is [a focus] on the opportunities around the world. This is a global business.”

A Conference Board of Canada report earlier this month garnered a lot of attention by concluding if the federal government were to change its policies, including reducing or eliminating many of the fees and taxes it levies on the industry, it could potentially bring two million passengers back to Canadian airports a year.

But the board’s report didn’t rest the entire blame on federal fees and taxes. It also noted that Canadian carriers are less competitive than their U.S. counterparts. This is due to their higher labour, fuel and aircraft ownership costs as well as lower aircraft utilization contributing roughly 50% of the cost differential with their U.S. counterparts. Airport fees amounted to 25% of the difference, the board said. Combined this left Canadian carriers at a 30% cost disadvantage to their U.S. counterparts, leading to higher fares.

SUBSIDIZED U.S AIRPORTS

Yet there are also a lot of questions about whether the highly subsidized U.S. airport system is sustainable given the current economic situation there, said Vijay Gill, who authored the report.

“We have a viable system, and they don’t,” he said in an interview. “The U.S. does not have a fully-funded infrastructure. They’re subsidizing it … there’s also a huge gap that they’re going to have to make up somehow.” Mr. Gill said the U.S. will be likely be left with a choice between increasing its airport subsidies, or increasing their own airport fees.

It wasn’t too long ago Canadian airports were also government run and relied heavily on subsidies for their operations. But in the early 1990s, the operations of country’s largest airports were handed over to various airport authorities so that they could be run in a more business-like manner.

The federal government, however, retained ownership of the land the airports sat on, and has been charging them rent, which is passed onto flyers as a user fee. An estimated $2.5-billion has been collected from the country’s various airport authorities since, which has become a bone of contention for Canadian carriers as well.

In June, a federal Senate Committee tasked with reviewing the competitiveness of air travel released several recommendations. Much of the attention the report garnered was focused on the recommendation that Ottawa stop charging rent and transfer ownership of the land to the various authorities who operate the airports.

The committee report said ground rents average about $3 a passenger nationally, ranging from 77¢ a person in Edmonton to $4.63 a person at Pearson.

RED TAPE FOR INTERNATIONAL TRAVELLERS

But Mr. Eng said airport rents are merely a cost of doing business. He said the committee’s other recommendations were more important for improving the competitiveness of the industry, including developing a national air travel strategy and eliminating the red tape for international travellers coming into Canada and transferring onto other destinations.

For example, Indian nationals transferring onto U.S. destinations through Canada are required to get a separate Canadian visa even though they may only be in the country for a matter of hours and never leave the airport. That sort of red tape acts as a deterrent for using Canadian airports as hubs, and drags on the competitiveness of carriers here, he said.

At the same time, the requirement that connecting passengers recheck their bags and re-clear security before catching their connecting flight has a dramatic impact on the productivity of Canadian airports, and their ability to improve turnaround times.

The Vancouver International Airport, for example, says it takes their international travellers 90 minutes on average to catch a connecting flight. The Senate committee urged the government to work with immigration officials to bring that number closer to the industry standard of 60 minutes by streamlining the processes for international travellers.

Eliminating that sort of nuisance would have a dramatic impact on the industry, and help fill planes to Canada and increase frequency of flights at airports, Mr. Eng argues.

Reducing costs does remain an important issue for Canadian airports, Mr. Eng said, and Pearson is still considered one of the most expensive airports in the world to land at. But Mr. Eng said part of that is because Pearson’s landing fees have been bundled into one charge, a legacy of their government ownership, while other airports break out their fees.

Pearson is in the process of unbundling its fees to reduce costs to its customers. It recently broke out its counter fees so carriers pay for the hours they use them.

The International Air Transport Association, which represents 240 of the world’s largest airlines, lauded these efforts. IATA is also in favour of Pearson’s efforts to grow its non-aeronautical revenues through the addition of restaurants and shops, said Martine Ohayon, spokeswoman for the association.

CO-OPERATION WITH U.S. COMPETITORS

While many have pointed to the bleed of passengers to the U.S. as a problem, Mr. Eng surprisingly doesn’t see it that way.

In fact, he says he has even reached out to his counterparts at Buffalo Niagara International Airport to see if there is a way they can cooperate, which may include shuttle buses or flights to tap into Buffalo’s larger domestic network and Pearson’s greater international presence.

“We live in a society [where] competition is good, and that the consumer has choices,” he said. “Sometimes the more choices for consumers the better because it generates more activity. So, what I’m saying is I’m going to meet with not just Buffalo — all the airports in the surrounding area — and say how can we cooperate.”

A regional and national strategy, along with the introduction of things like a rapid rail line to downtown Toronto, will be key to winning additional passengers in the future. He noted there are about 500 million air trips today in China but that will rise to about 1.3 billion in the coming years as the middle class there grows, he said.

“How can we make it so that they want to come to Canada?” he said, adding that gaining approved destination status was an important step in that direction. “What I’m looking at is how we make the pie bigger. If the pie gets bigger, everyone’s slice of the pie gets bigger. Pearson will grow along with it.”

But not all Canadian airports see the issues the same way.

The Canadian Airports Council has been lobbying for years to have the federal government reduce the tax and fee burdens it places on the industry. Those efforts appear to have been finally gaining some traction in recent months after a Senate Committee urged Ottawa in June to stop treating the country’s airports as “toll booths, and start treating them as economic spark plugs.” The federal government has until Nov. 8 to respond to the Senate committee’s recommendations.

Fees and taxes have been a bigger issue for airports like Montreal’s Trudeau International Airport, which competes against both Burlington, VT, and Plattsburgh, NY, for passengers.

James Cherry, Aéroports de Montréal chief executive, said he doesn’t have much of an issue with the airport in Burlington, which he said is “a legitimate airport” in a busy community. But he does have an issue with Plattsburgh, which he says was built on an old military base with public funds and markets itself as “Montreal’s U.S. Airport.”
   
He has no intention of cooperating with Plattsburgh.

There’s more than enough capacity at Montreal’s various airports to accommodate any new growth, he said, calling Plattsburgh’s airport “entirely parasitic.”

“Plattsburgh is there because the federal government closed a military base, for whatever reason, and said what are we going to do with it? They’ve created this highly subsidized, artificial airport that has no pretense other than to steal market from Burlington and Montreal,” he said.

Mr. Cherry said he believed Ottawa has been hesitant to eliminate airport rents and other fees because it believes the U.S. system is not sustainable, and will have to eventually move to a model similar to Canada’s. Plattsburgh, to him, is the best example of the need for change, which he estimates drains 60,000 to 100,000 passengers a year from Montreal.

Mr. Cherry said eliminating airport rents and reducing other fees won’t be a cure-all, but will certainly help Trudeau be more competitive with its U.S. counterparts.

“My view is that it is an issue we need to deal with it. But there’s not a silver bullet.”

 

[dapaterson]

Competing on subsidy is a race to the bottom.  And with the US soon being forced to dismantle its subsidy regime to cut their deficit, that problem will begin to fade.

Speeding transit through customs, whether for international connections or Canadian travellers, on the other hand, would be very welcome.

 

[Edward Campbell]

Competing on subsidy is a race to the bottom.  And with the US soon being forced to dismantle its subsidy regime to cut their deficit, that problem will begin to fade.

Speeding transit through customs, whether for international connections or Canadian travellers, on the other hand, would be very welcome.

I agree with both points. Airports ought to be treated as a self sustaining public utility rather than, as now, a 'cash cow' for Ottawa - that's basically the rents and fess argument. But it is good, speedy access to and services at airports (like quick customs and security screening and good baggage handing, not just shops and restaurants) that makes them attractive.

 

[Edward Campbell]

In this column, which is reproduced under the Fair Dealing provisions of the Copyright Act from the National Post, Andrew Coyne provides a warning for Canada:

http://fullcomment.nationalpost.com/2012/10/29/andrew-coyne/

Like Europe, Canada is attempting to run a monetary union without a proper fiscal union

Andrew Coyne

Last Updated: Oct 30, 2012

By now the problems of the euro are well understood, at least on this side of the Atlantic. As hundreds of Canadian commentators have patiently lectured Europe, the basic — elementary, really — mistake was to attempt to form a monetary union without also forming a fiscal union. Members of the euro faced no real constraint on their appetite for debt, but rather could borrow as much as they liked, without regard for the consequences for the others.

The effect, as we tried to explain to the Europeans, was to allow the weakest states to borrow on the good credit rating of the strongest. The consequences of any member defaulting on its debts would be so horrible for the rest, markets reasoned, that they were bound to be bailed out. The potential for moral hazard was childishly obvious: with other states implicitly guaranteeing their debt, yet without corresponding formal limits on their borrowing capacity, member states had every incentive to … to …

Er, hang on. Isn’t that more or less how the system works in Canada?

Like Europe we have a single currency. And like Europe, we maintain within that common currency a number of sovereign fiscal authorities, each seeking funds from credit markets in splendid isolation from the others, and each entitled to borrow without restriction of any kind. We, too, are attempting to run a monetary union without a proper fiscal union.

Indeed, it has long been a subject of debate among economists whether Canada is an “optimal currency area.” The various regions have such disparate economic bases, it is sometimes argued, that it makes little sense for them to share the same currency: When one is expanding, the other may be contracting. Moreover, the former’s good fortune may in part be the cause of the latter’s woes, so far as it contributes to a higher exchange rate. See: “Dutch disease.”

That certainly has been part of the trouble in Europe. At a given level of the euro, German firms may be able to compete, while Greece’s cannot. When the drachma was its currency, Greece could address this problem by devaluation; as a member of the euro that option is not available to it. Ontario faces a similar dilemma.

Of course, there are differences between the two situations. In addition to the provinces, Canada also has a federal government, with full taxing and borrowing powers of its own. As regional economies wax and wane, it can redistribute funds between them, not only via explicit inter-governmental transfers like equalization, but also through its own operations, collecting more in taxes from one region, less from another, and varying spending inversely.

Canada, what is more, arguably enjoys a higher degree of labour mobility: Workers from depressed regions can more easily move to booming areas. It’s probable, too, that prices and wages are more flexible here, allowing some degree of “internal devaluation” in response to economic shocks, in place of a falling currency.

When it comes to member states’ borrowing, we’re exactly like the Europeans. Or rather, we’re worse

Still, when it comes to member states’ borrowing, we’re exactly like the Europeans. Or rather, we’re worse: There were, after all, supposed to be conditions attached to euro membership, as in the Maastricht treaty — a debt-to-GDP ratio of less than 60%, deficits no greater than 3% of GDP — even if these were widely ignored. In Canada, uniquely, there are no such rules. The system depends entirely on the provinces behaving responsibly on their own.

As, for the most part, they have. No province has had to be bailed out since the 1930s. Neither is any province likely to face that ignominy in the near future: there are no Greeces here. There are, however, troubling signs for the longer term.

The problem, as ever, is the aging population. Other things being equal, it portends relatively fewer workers, slower growth, lower revenues and escalating costs, especially for health care. As such, its impact is almost entirely confined to the provinces. The federal government, having restrained the growth in transfers to the provinces and reformed its own pension programs, is in relatively good shape, as the parliamentary budget officer has recently reaffirmed. But past a certain point, a problem for the provinces becomes a problem for the feds.

A new study for the Macdonald-Laurier Institute, Provincial Solvency and Federal Obligations, calculates most provinces face a better than 50% probability of default over the next 30 years, based on current trends; for some it’s a near certainty. Perhaps surprisingly, it predicts Alberta is the most likely to default in the long term, while Quebec, though it has the highest current debt load, is the least likely. The reason: Alberta’s population is projected to age the most, while Quebec is least exposed to a collapse in commodity prices.

Yet this variance in risk is not reflected in the interest rates charged on provincial bonds. That may, as the study allows, reflect investors’ confidence that the provinces will take action in time to avert a default: Again, these numbers are based on current trends, i.e. if nothing were done. Or, possibly, it may reflect a more disturbing conjecture: That the federal government would step in to bail out a failing province, if it came to that.

Would it? Should it? Can we afford to allow such expectations to take hold? Or, given the magnitude of the fiscal challenge facing the provinces in the longer term, should we not begin to think about laying down some ground rules for provincial borrowing — to complete the fiscal union our monetary union implies?

Postmedia News

Can you imagine the Constitutional firestorm that any attempt by Ottawa to control the fiscal union would ignite? On the other hand, how soon until some provinces come to Ottawa, cap-in-hand, demanding a bailout?

 

[Edward Campbell]

More on heavy oil development and pipelines, this time to Edmonton, in this article which is reproduced under the fair Dealing provisions of the Copyright Act from the Toronto Sun:

http://www.torontosun.com/2012/10/29/transcanada-partnering-with-chinese-firm-for-oilsands-pipeline

TransCanada partnering with Chinese firm for oilsands pipeline

BY BILL KAUFMANN,
CALGARY SUN

FIRST POSTED: MONDAY, OCTOBER 29, 2012

CALGARY -- TransCanada Pipelines is partnering with a Chinese state energy firm to construct a $3 billion pipeline from Alberta's oilsands.

The Calgary-based firm announced Monday it would split ownership of the proposed Grand Rapids Pipeline with Phoenix Energy Holdings Ltd. that would transport crude from the oilsands 500 km to terminals in the Edmonton region.

If approved, it would provide a much-needed link to servicing the western oilsands region, TransCanada spokesman Grady Semmens said.

It would also presumably enable development of Chinese holdings in the oilsands, partly explaining why Phoenix, a subsidiary of PetroChina, is a pipeline partner, Semmens said.

"They have new projects in the MacKay River area and Dover long-term agreements," Semmens said.

Increased Chinese involvement in Canada's oilpatch and an impending trade agreement with Beijing have raised fears over threats to Canada's sovereignty.

TransCanada would be 100% operators of the new dual line, designed to pipe natural gas-based diluent north to be blended with oilsands bitumen so it moves more efficiently.

Grand Rapids would have a daily capacity of 900,000 barrels out of an area that's currently less-than-passable, Phoenix president Zhiming Li said.

"Given that transportation in the Athabasca region has become a bottleneck, working with TransCanada to build a pipeline system in a timely fashion is crucial to implementing our development strategy," he said in a statement.

Another 330,000 barrels of diluent will transported daily as well.

The pipeline would also be key to doubling of the current oilsands production foreseen over the next two decades, Semmens said.

"There's lot of potential new opportunity in the next 20 years," he said.

It's hoped regulatory approval will be granted next year with completion of the pipeline in 2017.

For TransCanada, Grand Rapids is almost a new frontier, Semmens added.

"It's only the second pipeline we've announced in the oilsands region," he said.

TransCanada is still awaiting Washington's go-ahead for the northern U.S. leg of its Keystone XL pipeline which has met stiff resistance on environmental and economic grounds.

This would not be much of a story were it not for the furor that the proposed CNOOC/Nexen deal has created. The issue is Chinese not foreign investment. Thanks to the "odd couple" joint efforts of e.g. right winger Diane Francis and loony leftie Maude Barlow, the Chinese have joined the Americans in Canada's little pantheon of bogeymen.

 

[a_majoor]

Privatizing CMHC should reduce the possibility of taxpayers getting dragged down by the housing market (even if you don't believe the market is overvalued now, sheer demographics means that more and more seniors will be leaving the market and selling their houses to fund their retirements, while fewer and fewer young people will be there to buy these houses. Supply>Demand=lower prices for houses).

The second point about CMHC being on the hook if interest rates rise is a dire prediction based on the irresponsible actions of the Ontario and Quebec governments over the years, loading up on debt and excessive spending. Ontario is already under a credit watch, and the Provincial debt is almost half the size of the Federal debt, so there is real danger here.

http://fullcomment.nationalpost.com/2012/10/30/jesse-kline-good-reasons-to-start-now-with-cmhc-privatization/

Jesse Kline: Good reasons to start now with CMHC privatization

Jesse Kline | Oct 30, 2012 9:40 AM ET | Last Updated: Oct 30, 2012 9:41 AM ET
More from Jesse Kline | @accessd

“The history of [Canadian Mortgage and Housing Corp.] has to do with providing adequate housing for veterans after the Second World War,” said Finance Minister Jim Flaherty last week. “It’s become something rather grander.” It has indeed — it’s become a significant risk to Canadian taxpayers.

One need only look to our neighbours to the south to see the disastrous effect government meddling in the mortgage market can have. The United States government has, for decades, favoured a policy of incentivizing home ownership. By 2002, nearly 68% of Americans owned their own home. Yet the housing market was built on flimsy fundamentals, and the house of cards came crashing down in 2008.

Two government-sponsored enterprises, Fannie Mae and Freddie Mac, added fuel to the fire by purchasing and insuring risky mortgages, backed by an implicit guarantee from the federal government. This drove mortgage investment into unsafe markets and inflated housing prices by distorting the allocation of capital, which helped create the housing bubble.

Flaherty should not only take the American experience into account when considering whether to follow through on his recent musings about privatizing CMHC within the next five to 10 years, he should also look at Australia — a country that experienced a similar housing bubble in the early 1990s and eventually privatized its government-owned mortgage insurer.

In the mid-1980s, the Australian state of New South Wales set up a mortgage securitization company known as the First Australian National Mortgage Acceptance Corporation (FANMAC) — a hybrid entity that was jointly owned by the state government and a number of financial institutions.

The government used FANMAC as a means of increasing the availability of mortgages to low-income borrowers through the HomeFund program, which was started in 1986. Under this program, FANMAC provided mortgages to borrowers who did not qualify for private-sector loans. It funded its business by selling mortgage-backed securities (MBS) to investors. In order to make the MBS an attractive investment, the underlying loans were guaranteed by the government.

Partially as a result of political pressure and as a means of growing its business, FANMAC continually decreased its lending requirements and relaxed its credit controls. When the economy went into recession in the early ’90s, however, many borrowers found themselves unable to keep up with their payments. As house prices and interest rates began to fall, many people were locked into high-interest-rate mortgages that were worth more than the value of their properties.

By 1992, the HomeFund program was incurring heavy loses. Borrowers were falling into arrears and the rates of defaults and foreclosures were rising steadily. In 1993, FANMAC was shut down and the New South Wales government was forced to pay out hundreds of millions of dollars to borrowers and investors. The disaster caused by FANMAC is eerily similar to the sub-prime crisis in the United States, although on a much smaller scale.

Australia now has very low levels of government intervention in its housing finance sector, largely due to the lessons it learned about the risks involved in creating government-sponsored mortgage companies with public guarantees. In the late ’90s, a government inquiry recommended privatizing the federal government’s mortgage insurer, the Housing Loan Insurance Company (HLIC), which was similar to the CMHC in that it had private competitors, but the advantages afforded to it by being a government agency allowed it to dominate the market.

The inquiry found that the government guarantees provided to the HLIC were giving it a competitive advantage, distorting the market and that there was little or no public benefit in maintaining a state-run mortgage-insurance company. It was sold to Genworth Financial — a company that also operates in Canada — in 1997.

Withdrawing public-sector involvement had little or no effect on the rates of home ownership, and all the private mortgage insurers continued to remain profitable throughout the financial crisis. This is not to say that privatization is the magic solution to all housing market’s woes. The Economist magazine estimates that Australian house prices are overvalued by 30%.

But the fact that the government was not backstopping the amount of loans that the Canadian or U.S. governments were put it in the enviable position of being able to craft a policy response to the economic downturn, without having any pre-existing exposure to the mortgage market.

Like Australia, Canada also managed to avoid a housing market meltdown, but whether this country can avoid a crash remains to be seen. Part of the reason Canada did not experience a sub-prime crisis similar to the United States is because the government has maintained strict standards on the types of mortgages the CMHC will insure.

In recent years, Ottawa has moved to tighten lending standards and increase the CMHC’s accountability. But there is only so much the feds can do while the CMHC remains a Crown corporation. Even Flaherty admits he doesn’t “think there’s a lot more to do with CMHC or mortgage insurance,” at least “not in the foreseeable future.”

While it’s hard to tell whether government guarantees are helping to fuel a made-in-Canada housing bubble, the risk the CMHC poses to taxpayers is abundantly clear. The Crown corporation is fast approaching its cap on mortgage-insurance underwriting of $600-billion. According to Chris Horlacher of the Mises Institute of Canada, that is only one of a host of problems facing the mortgage behemoth.

“Total insurance-in-force is up 10.3% from last year, while total assets only grew 1.4%. This is simply unsustainable, particularly when 88 cents of every dollar of assets added is exposed to the same risks that the CMHC is insuring against,” wrote Horlacher. “Further compounding this problem is the razor-thin capital cushion that the firm is carrying. Assets to equity stand at an anemic 24:1, meaning a 4.1% loss on their assets will completely wipe out the firm’s capital.”

The CMHC is also taking on large amounts of debt, to the point where, according to Horlacher, a “0.6% rise in the cost of servicing this debt would completely wipe out net income.” If we do start experiencing a bear market in real estate, or if interest rates rise — both of which are very real possibilities — it is Canadian taxpayers who will pay the price, as the CMHC’s liabilities are fully guaranteed by the government of Canada.

By privatizing the CMHC, the government could reduce the amount of exposure taxpayers have to the mortgage market and prevent any future distortions of the marketplace. But this will not be an easy task. The government will likely have to break up the mortgage giant, to ensure that one player does not inherit a monopoly position in the market. There are also questions about how attractive the CMHC would be to private investors, especially if the government lifts its guarantees.

Considering the massive restructuring that will need to take place — including splitting off  CMHC’s affordable housing initiatives and creating a way for financial companies to privately securitize mortgages — Flaherty’s timeline of five to 10 years is probably not too far off the mark. This is why it is so important that the government start acting now, so Canadians can enjoy a stable housing market in the future.

National Post

 

[Edward Campbell]

The Globe and Mail is reporting that the Eastern oil pipeline feasible, TransCanada says. The article says that TransCanada chief executive officer Russ Girling said that a $5-billion project to carry Alberta oil to eastern Canada is both technically and economically feasible. The article reports that the preliminary $5-billion estimate would involve building some 375 kilometres of new pipe, and connecting it with 3,000 kilometres of existing gas pipe, to carry oil from the oil hub at Hardisty, Alta., to Montreal. A further 220 kilometres of new pipe, at a cost of several hundred million dollars, would be required to bring oil to Quebec City.

 

[foresterab]

The hub at Hardisty though is a mix of light and  heavy oil....only one of which can currrently be used in Eastern Canada and both of which are in demand in the US via the existing infrastructure.  This also follows on the 3 billion dollar announcement of TransCanada to built a new line to Fort McMurray in partnership with a Chinese firm to increase flow of heavy oil.

Given that heavy oil still trades at a significant discount the issue might be more complex if upgrader facilities are needed to produce a crude oil usable in Eastern Canada....

And all this assumes that all provinces in between are in agreement of the change and no impact will occur.

 

[Edward Campbell]

And the Globe and Mail reports, with a headline suggesting that the CPC broke an election promise, that "New year-end numbers reveal the federal government quietly cut spending by $8-billion after Canadians handed the Conservatives a majority mandate ... [and] ... the government’s critics say the latest figures are another example of Parliament being kept in the dark when it comes to Conservative spending cuts."

Good on the government; the Good Grey Globe's reportorial biases are showing again.

 

[Edward Campbell]

Remember when the government did not allow a takeover of Potash Corp by Anglo-Australian mining giant BHP Billiton? Now, according to Reuters Canada, Potash Corp is in merger talks with its smaller rival Israel Chemicals (ICL). It looks like the Israeli Government will now have to decide if that deal passes its 'net benefits' test.

 

[Edward Campbell]

Conservative MP Chris Alexander posted a self serving paean to Tory fiscal management which I will not repeat, but this excerpt from it is both true and a useful reminder that Canada (despite its governments?) is doing some things right:

+ Canada, since July 2009, has seen over 820,000 net new jobs created – the best job growth record in the entire G-7.
+ The World Economic Forum says our banks are the soundest in the world.
+ Forbes magazine ranked Canada as the best country in the world to do business.
+ The OECD and the IMF predict our economic growth will be among the strongest in the industrialized world over the next two years.
+ Our net debt-to-GDP ratio remains the lowest in the G-7, by far.
+ All three of the major credit rating agencies – Moody’s, Fitch and Standard and Poor’s – have reaffirmed Canada’s top credit rating.
  Little wonder more and more international leaders are pointing to Canada and our economic leadership as a model to follow:
+ IMF Managing Director Christine Lagarde: “Canada, a country with one of the strongest financial sectors in the world … Canada can teach the rest of the world about how to build a stronger, safer financial system …
  If I look at Canada and the anomaly that it constitutes compared to other countries – because it’s growing pretty well, because its banking system is solid and growing, because its inflation is under control,
  because its fiscal deficit is also pretty much under control and its level of indebtedness is reasonable – you know, it’s not bad as a scorecard.”
+ OECD Secretary General Angel Gurria: “(Canada is) well prepared. You have been better prepared and therefore you’ve weathered the storm a lot better. You are well prepared now. Your fiscal policy,
  your monetary policy, your financial system (is) in better shape. And therefore, you are doing better in … the world economy.”

 

[Edward Campbell]

But, on the downside, this just came in from the Dow Jones Newswires via J.P. Morgan/ADR:

Reproduced under the fair Dealing provisions of the Copyright Act from adr.com
https://www.adr.com/Markets/GlobalNewsStory?docID=1-DN20121031011798-7UJ95AHTQGMONK4TU88RFO2US1

UPDATE: Canada GDP Declines Unexpectedly in August

10:27 AM ET on Wednesday, October 31, 2012

--"More trick than treat," analyst says
--Third-quarter GDP likely closer to central bank's 1% forecast
--Finance Minister says growth on track for the year

(Updates throughout with more detail, background, comments from Finance Minister Jim Flaherty and analysts, and reaction in currency and bond markets.)

By Nirmala Menon

OTTAWA--Canadian gross domestic product shrank unexpectedly in August, the first decline since February, as output in mining, crude petroleum, manufacturing, utilities and retail trade declined, underscoring the challenges facing the domestic economy amid global headwinds.

The soft result likely means growth in the third quarter was nearer the Bank of Canada's new downgraded forecast of 1%, and reinforces Governor Mark Carney's comments last week that interest-rate hikes are "less imminent."

GDP dropped 0.1% following an unrevised 0.2% gain in July, Statistics Canada said Wednesday. The consensus call was for another 0.2% increase in August, according to a report from Royal Bank of Canada.
Compared with a year ago, GDP decelerated to 1.2%--the slowest annual expansion since January 2010--from 1.9% in July.

The Canadian dollar weakened to trade just below par with the U.S. unit on the weak data. Bond prices rose across the board, driving yields lower.

Finance Minister Jim Flaherty said growth is "on track" for the year despite the soft August figures.

"There is some weakness in Europe certainly, and the American economy is slow," Mr. Flaherty told reporters Wednesday. "We are going to see variations month to month, but overall for the year we are on track with GDP growth." The government Monday kept its 2012 growth forecast at 2.1% but cut the projection for 2013 to 2% from 2.4%.

Coming on Halloween, the data are "more trick than treat," David Tulk, chief Canada macro strategist at TD Securities, said in an interview, adding there is "some broad-based weakness starting to creep in to the economy."

The central bank last week slashed its forecast for third-quarter growth from the previously predicted 2%, and Mr. Tulk and other economists said the August figure likely validates the new projection, and Mr. Carney's comments of rate hikes being "less imminent."

But they believe the central bank's forecasts of a sharp rebound to 2.5% or more in the fourth quarter and through 2013 might be too optimistic given global headwinds, including the looming fiscal cliff in the U.S. and the euro-zone crisis.

"There isn't really that underlying momentum that's pushing economic growth forward, CIBC World Markets economist Emanuella Enenajor said in an interview.

Metal ore mining output declined 4.7% in August from scheduled maintenance shutdowns. Production of copper, nickel, lead, zinc, gold and silver all decreased.

Non-metallic mineral mining dropped 2.6% as a result of lower output at potash mines. Mining output excluding oil and gas extraction fell 2.8%.

Output in oil and gas extraction shrank 0.4% as a decline in crude petroleum production outweighed increased natural gas extraction. Crude petroleum production was hit by maintenance activities at some oil fields.

Meanwhile, the previously reported strong gain in the volume of factory sales failed to translate into manufacturing output, which fell 0.6%, dragged by lower production of durable goods.

Output of utilities and construction also declined, by 0.8% and 0.1%, respectively. Retail trade output fell 0.5%.

Output of real estate agents and brokers fell 6.6%, the fourth consecutive drop, as activity in the home resale market declined.

Industries that posted gains included wholesale trade, agriculture and forestry, and the public sector.

Overall, output in the goods-producing sector fell 0.5%, the most since February, while services sector output was flat.

-- Paul Vieira contributed to this article.

Write to Nirmala Menon at nirmala.menon@dowjones.com

(END) Dow Jones Newswires

October 31, 2012 10:27 ET (14:27 GMT)
Copyright (c) 2012 Dow Jones & Company, Inc.

 

[a_majoor]

An interesting idea to mobilize social capital (rather than bureaucrats) in dealing with social problems:

http://fullcomment.nationalpost.com/2012/11/13/john-ivison-conservatives-look-to-tackle-social-services-with-free-market-ingenuity/

John Ivison: Conservatives look to tackle social services with free market ingenuity
John Ivison | Nov 13, 2012 11:26 PM ET
More from John Ivison

The government is always making “important announcements.” Every press release is labelled as such, even if it’s (as on Tuesday) merely funding for snow-grooming equipment for a quad riding club in Quebec. To be fair, that was probably judged “important” in Victoriaville, Que., if nowhere else.

Yet last Thursday, there was a genuinely important announcement made by Diane Finley, the Human Resources Minister, where she called for ideas to cure such stubborn social problems as recidivism, low literacy rates and homelessness through the use of a relatively new marriage of the public and private sectors known as social financing.

The idea is to leverage taxpayers’ money to incentivize the private sector to deliver better results.

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Kelly McParland: Ottawa explores ‘social impact bonds’ to finance services at a profit

Its advocates suggest success could spark a revolution in the way we pay for social services in this country.

Its detractors say it is another way this government plans to privatize public services.

What everyone can agree on is that the status quo is not working.

The cost of lodging an inmate in a federal prison is $114,000 a year. The re-conviction rate for all released prisoners in the first year is nearly 50%.

Ms. Finley said that when she was first appointed Human Resources Minister in 2006, she was told there were 150,000 homeless people in Canada. When she returned to the department three years later, after a stint at Immigration, she was told that the number was still 150,000.

The Conservatives acknowledge they don’t have all the answers, nor, in times of fiscal restraint, the resources to tackle the problems on their own.

The intransigence of Canada’s social ills has produced some unlikely allies.


Stuart Gradon/Postmedia NewsPaul Martin has long been an advocate for mobilizing private capital for public good..Paul Martin, the former prime minister, and Ms. Finley probably don’t agree on much. Yet they are both excited by the potential of social financing.

Mr. Martin has long been an advocate for mobilizing private capital for public good and sat on the task force that made suggestions to the government.

He believes that no bureaucracy can match the obsession of someone with an original idea who is driven to make it happen.

“What government should do is facilitate the rise of the social entrepreneur,” he said in an interview.

Untapping that spirit of social entrepreneurship is becoming possible for the first time because the financial sector is waking up to the prospect of making money from its community social responsibility activities.

To this point, the biggest obstacle to someone with a good idea taking it to the next level was lack of capital.

Access to new sources of finance like social impact bonds, where the yield is funded by governments through the savings it anticipates it is going to make, mean those social entrepreneurs may now be able to grow their businesses.

The catalyst appears to have been a pilot project in Peterborough, England. The four-year project, launched last year, is working with 3,000 short-sentence prisoners and aims to reduce reconvictions by 7.5%.

Investors, mainly charities and foundations, will receive a payout if the number falls by 7.5%, capped at a maximum return of 13% over eight years. If the 7.5% goal is not reached, investors get nothing back.

One of the investors is St. Giles Trust, a charity that specializes in rehabilitating offenders through use of mentors and assistance in finding jobs and housing.

Though the results will not be available for another two years, local police are already reporting a lower incidence of re-offending.

This is hardly the privatization of social services that the NDP is already warning is the end game of the Conservative government.

The Conservatives acknowledge they don’t have all the answers, nor the resources to tackle the problems on their own

The concern in Britain is that the budding sector will be dominated by charitable institutions who would look on projects as donations, if they don’t meet their target.

But at a two-day social finance forum at the MaRS Discovery District in Toronto last week, RBC president Gord Nixon said there is a high level of interest on Bay Street. “We may end up having more capital available than we actually do opportunities,” he told the Financial Post. RBC has set up a $20-million fund looking for social financing ventures.

But social impact bonds should not be the only way the government leverages its funding, according to Mr. Martin, who said tax and other incentives are needed to bridge the risk/reward gap.

He said when he was in government, he enhanced tax support for conventional charitable activities, but he didn’t go far enough.

He now believes that social funds should be allowed to give tax deductions similar to charities, which would allow them to compete with the higher returns that venture capital earns in the markets.

“I think impact bonds are a tremendous idea, but they cannot simply be a way of taking government off the hook. They have to be a way of expanding the pie, not simply replacing government,” he said.

These are early days and Ms. Finley said the focus at the moment is to receive enough quality ideas by the end of the year to incorporate any new initiatives in the spring budget. She said changes to the tax code and social impact bonds are all options. “There may be several different ways to structure projects,” she said in an interview.

It will be some years before the results are in, but anyone who believes in the ingenuity that free markets can unleash should welcome social financing as a positive development.

Critics may harp that it’s “the commercialization of social values” but positive results on recidivism and homelessness would ease strains on the correctional and health-care systems.

Where’s the downside in that?

National Post

• Email: jivison@nationalpost.com