Returning to Growth: Atlantic Canada, Government Spending, and Economic Growth

In “Disparaging Disparities in the Canadian Provinces,” I discussed some potential challenges facing the Maritime provinces–particularly dismal economic growth in recent years. More specifically, as argued by Fred McMahon in the AIMS publication Retreat from Growth, the Atlantic Provinces formerly experienced “revolutionary growth” in the 1960s and the regional economy has since declined precipitously. (Since the mid-2000s, Newfoundland and Labrador has seemingly reacquainted itself with the revolutionary growth outlined in McMahon’s book, easily becoming the “runaway leader in economic growth among all provinces.”)

Unlike other developed nations, wherein the evidence shows that poor jurisdictions seem to grow faster than their richer counterparts, Canada has witnessed an economic divergence across the provinces in these past few decades, which poses serious fiscal and economic challenges to the poorer provinces in Atlantic Canada. Despite Maritime Canada’s underwhelming economic record, however, the road to prosperity is still navigable. According to McMahon, for example, “The region was home to little more than a sixth of Canada’s population, but it boasted a quarter of the nation’s manufacturing enterprises, including both of its steel mills, six of twelve rolling mills, eight of twenty-three cotton mills, three of five sugar refineries, two of seven rope factories, and one of three glassworks.”

McMahon’s book made several pragmatic recommendations that would help provincial governments in the region boost their economies and many of those recommendations remain relevant today. One of his main recommendations was to encourage limited government intervention in the market, a recommendation that I will resurrect in this blog post.

There are several economic theories that explain what causes economic growth, but many of them do not necessarily explain the causal relationship. Daron Acemoglu, an MIT economist, along with two coauthors, has used an Instrumental Variable Method (IV) in their seminal paper, for example, “The Colonial Origins of Comparative Development,” to see whether an institution, geography, culture, or other factors–such as luck–causes economic growth. (Think of IV as the most accurate measurement of regression analysis, which eliminates omitted variables and accurately represents causal relationships.) The main finding is that “inclusive economic institutions,” i.e. those that feature secure property rights, law and order, competitive markets, and state support (public services and regulation) for markets; are open to relatively free entry of new businesses; uphold contracts; provide access to education and opportunity for the great majority of citizens; and is the primary driver of economic growth–not culture or geography, etc. These findings seemingly invalidate the antiquated belief that Atlantic Canada is an isolated region that requires additional government intervention to boost economic growth.

Correcting market failures is typically the reason for government intervention, but there is little evidence to suggest that this form of intervention is efficient or optimal. In fact, in “Economics Versus Politics: Pitfalls of Policy Advice,” Acemoglu and Robinson argue that the standard approach to economic policymaking might be incorrect because it ignores politics.

One important axiom from Milton Friedman is that “To judge policies and programs by their intentions, rather than their results,” is a “great mistake.” Perhaps politicians and policymakers have the right intentions, but the results are often less impressive, typically hindering the market, instead of promoting it. For Atlantic Canada, these policies have hindered economic growth, which affects residents of that particular region, but also the entire country.

McMahon argued in his book that a smaller and more efficient governance structure, in addition to lower levels of government consumption and competitive tax rates, is associated with economic growth. In Atlantic Canada, however, there are more public sector employees than the national average, for example, as AIMS reported in a recent study, “The Size and Cost of Atlantic Canada’s Public Sector.” Nova Scotia had 99 public sector employees per 1,000 residents in 2013–well above the national average of 84. Government consumption, therefore, is larger than in other provinces across Canada. Some folks believe that lower levels of taxation increase the wealth of private companies, but it is important to remember that these companies expend their profits, which expands the economy and creates additional employment opportunities. Moreover, McMahon argues that it is more efficient (and optimal) to use federal transfers as a means of lowering provincial tax rates, which would encourage regional economic activity while also constraining government spending.

Rinzin Ngodup is an AIMS on Campus Student Fellow who is pursuing a graduate degree in economics at Dalhousie University. The views expressed are the opinion of the author and not necessarily that of the Atlantic Institute for Market Studies

The Energy-East Pipeline: An Opportunity to Turn a Province Around

New Brunswick has been making a rare appearance in the national editorial pages and the prospect of natural resource development through the Energy East Pipeline has been the principal topic of debate. Some observers argue that this could be the province’s opportunity to turn around its fortunes, but, as always, there is opposition citing environmental problems, among others.

That opposition generally stems from the argument that Canada must end its reliance on fossil fuels and fears of possible oil spills in the future.

While environmental concerns are particularly important in all natural resource development cases, it would be irresponsible for any government (of any political stripe) to ignore the possibility for serious economic gains. This fact becomes very clear from an examination of the state of the New Brunswick’s economy and the stimulus the project could provide.

It is no secret that New Brunswick has faced serious economic problems since the 2008 global economic meltdown. In September 2013, Statistics Canada reported that the province faced a 10.7% unemployment rate, which is one of the highest rates in the country. In conjunction with this report, CBC reported in the same month that the province lost approximately a net 2,944 individuals to other provinces in 2012.

Although these are only two indicators of economic performance, they tell a story that New Brunswick is facing a major economic problem.

This brings forward the next level of discussion: How can the Energy East Pipeline help build the New Brunswick economy?

TransCanada, the company who wishes to build the pipeline, employed Deloitte to explore the economic benefits of the pipeline for Canada. Deloitte found that the pipeline would add the following figures to New Brunswick’s economy:

  • $2,799 million to GDP
  • S266 million in tax revenues during construction (6 years)
  • $428 million in tax revenues during the operation phase (40 years)
  • 868 jobs in development (3 years)
  • 2866 jobs in construction (3 years)
  • 385 jobs per year in the operations phase (40 years)

These large amounts of tax revenues could mean balanced budgets for New Brunswick and extra money to spend in other areas of government, such as education and healthcare. Balanced budgets will also restore investor faith in New Brunswick.

The pipeline would create jobs that would not only reduce unemployment, but also increase consumption. That will lead to more economic spin-off, meaning that individuals will be able to afford more and, therefore, will buy more goods and services creating even more jobs in turn.

In conclusion, considering the state of the New Brunswick economy, it would be reckless for the government not to consider the opportunities that could be afforded to the province through natural resource development: the numbers show clearly that there is an extreme potential for growth and the Energy East Pipeline could have serious economic benefits for the province.

Randy Kaye is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute

The Debt Party is About to be Crashed

Personal debt among Canadians has reached a 20 year high and now exceeds 160% of income, almost precisely the same amount which was present in the United States before the bursting of the government generated real estate bubble. Canadians have been enjoying an unprecedented period of economic stability, low interest rates, low unemployment and a dollar at parity with the U.S. greenback. Naturally these factors have encouraged Canadians to purchase real estate and increase personal consumption.

debt

While debt accumulation was natural and expected, the beginning of 2013 should usher in a new era in the personal finances of Canadians. Here are five reasons why we should do everything in our power to eliminate credit card debt, reduce mortgage debt as much as possible, and start rebuilding our savings.

1. U.S. and European economies will remain vulnerable

Don’t expect the kind of strong American economic upsurge upon which our economy is reliant for deeper growth, the U.S. is too politically mired to structurally reform itself. America will still be vulnerable to economic shocks and political indecision, an employment slump or return to recession is possible as government debt continues to rise and economic fundamentals remain very weak. Across the pond many European countries will continue to slide towards bankruptcy as government raise taxes instead of cutting spending to deal with unsustainable borrowing. Weakness in these regions will dampen our economic strength and will keep the world economy exceptionally fragile. Greece, Spain, Portugal, and Croatia are among the few which will see their economies shrink in 2013.

2. Interest rates will have to go up soon

The Federal Reserve would be foolish to keep interest rates artificially low past 2014, inflation and prices are rising and criticism of the U.S. economy’s reliance on low interest rates is mounting. The Bank of Canada will have to escalate rates in response to a Fed increase and might have to raise rates earlier if inflation exceeds 2% before 2014.

3. The housing boom is finally cooling down

While a massive housing bust is only going to occur if a huge employment shock transpires, it is clear that housing prices and demand are beginning to plateau in many parts of the country. This means regions and economies dependent on residential construction and real estate, such as the Greater Toronto Area and Vancouver will have to prepare for slower growth and a less dynamic market.

4. Take advantage of strong banks, governments are doing more than ever to encourage savings

Canadians are serviced by some of the strongest banks in the world; high interest credit card debt should be weaned off through lower interest personal and student loans, 7% interest is better than 19% interest. Tax free savings accounts and generally declining tax rates should be taken advantage of; Canadians should reduce retail consumption and save more of their disposable income.

5: Listen to the experts

Former Bank of Canada Governor Mark Carney, along with countless academics, politicians, and public figures have been warning Canadians of high debt loads for many years now. While the temptation to take advantage of low interest rates is enormous, it is important to keep in mind that leaders of government and public policy are genuinely worried of the risks of skyrocketing debt. Nobody wants a repeat of the 2007-2009 financial crisis here at home.

-Dino Alec