<blockquote>"
In summary, while Canadian public policy is not universally better than in the United States, and its political orientation is at least somewhat more left of center, there is a rationality to it that has been missing from the US over the past decade or so. It is worth examining why this might be so.
Begin with monetary policy. Unlike the Federal Reserve System, which was always a political plaything, the Bank of Canada had the great good fortune to come to life during the 5-year premiership of Richard, Viscount Bennett, a blessed interlude of good policy in the otherwise bleak 27-year rule of the slippery W.L. Mackenzie King. Under the 1934 Bank of Canada Act, the Bank was to be a private corporation (which was still the status of the Bank of England at that time, before its nationalization.) Under the Act, the Bank of Canada's responsibilities “focus on the goals of low and stable inflation, a safe and secure currency, financial stability, and the efficient management of government funds and public debt.” No mention of the preservation of full employment, which was inserted into the Fed’s responsibilities by the daft Keynesian Employment Act of 1946.
The Bank of Canada was nationalized by Mackenzie King in 1938, and after World War II was mandated to encourage economic growth in Canada, a similar mistake to that made by the Employment Act in the United States. This led to crisis in 1961, when the populist prime minister John Diefenbaker objected to Bank of Canada governor William Coyne’s restriction of the money supply to fight inflation. Diefenbaker won that round; Coyne was forced to resign, but since the 1980’s the Bank has reverted to its original statutory mandate of managing the money supply to fight inflation. The current Governor, Mark Carney, is a former Goldman Sachs executive who played a major role in the Canadian government’s economically sensible but unpopular decision to tax income trusts."</blockquote>
Learning from the grown-upsBy Martin Hutchinson
October 20, 2008
SourceCanada’s election result, in which the moderate conservative government of Stephen Harper gained substantially in strength, garnered surprisingly little comment south of the border. That’s a pity, because when you look at Canada’s economy it becomes clear that under Harper the place has been run by grown-ups. Inevitably in this political season the sad thought of a US voter turns to the inevitable question: where are the US grown-ups?
US free-marketers have grown used to thinking of Canada as a dozy rather inefficient socialist paradise, where any attempt at progress is thwarted by bilingualism and the iron grip of the Liberal party on political power. All those assumptions must now be called into question. The Conservatives under Harper have extended their lead over the Liberals to only 12 short of an absolute majority, while the Liberals are marooned far from power. Admittedly the presence of the New Democrats and the Quebec Liberation Front complicate matters; the New Democrats at least are pretty reliable supporters of the Liberals’ leftist instincts, and combined bring the parties near to parity to the Conservatives, even now.
Nevertheless, when you look at the practical policies Canada is carrying out, rather than the theoretical balance of parties, it is clear that some grown-up thought has been going on with respect to economic matters. The Canadian budget is in slight surplus, unlike that of its southern neighbor. Canada’s balance of payments is also in surplus; the economy is well balanced between its natural resources and manufacturing sectors.
Canada’s government spending, at 39.9% of GDP, is higher than that in the United States, but you have to factor in the difference between the two countries’ bank bailout programs – Canada’s was 1.5% of GDP, compared with the US 5% of GDP. Furthermore, lavish spending plans by both US Presidential candidates and the Democrats who control Congress suggest the US may have the higher government fiscal burden by 2010 or 2011. Canadian interest rates are a little higher, with the Bank of Canada’s discount rate at 2.5%, while its inflation is lower at 2.8% on the consumer price index. Canada’s savings rate is thus also higher, at 2.8% of GDP compared with a rate close to zero or negative in the US.
In second tier policy matters, Canada is also more economically reasonable than the United States. Home mortgage interest is not tax deductible, so there is no vast subsidy towards the construction of McMansions. There is a subsidized housing agency, the Canada Mortgage and Housing Corporation, but it is properly located as part of government, unlike the egregious Fannie Mae and Freddie Mac, with their former worst-of-both-worlds quasi-private status.
In summary, while Canadian public policy is not universally better than in the United States, and its political orientation is at least somewhat more left of center, there is a rationality to it that has been missing from the US over the past decade or so. It is worth examining why this might be so.
Begin with monetary policy. Unlike the Federal Reserve System, which was always a political plaything, the Bank of Canada had the great good fortune to come to life during the 5-year premiership of Richard, Viscount Bennett, a blessed interlude of good policy in the otherwise bleak 27-year rule of the slippery W.L. Mackenzie King. Under the 1934 Bank of Canada Act, the Bank was to be a private corporation (which was still the status of the Bank of England at that time, before its nationalization.) Under the Act, the Bank of Canada's responsibilities “focus on the goals of low and stable inflation, a safe and secure currency, financial stability, and the efficient management of government funds and public debt.” No mention of the preservation of full employment, which was inserted into the Fed’s responsibilities by the daft Keynesian Employment Act of 1946.
The Bank of Canada was nationalized by Mackenzie King in 1938, and after World War II was mandated to encourage economic growth in Canada, a similar mistake to that made by the Employment Act in the United States. This led to crisis in 1961, when the populist prime minister John Diefenbaker objected to Bank of Canada governor William Coyne’s restriction of the money supply to fight inflation. Diefenbaker won that round; Coyne was forced to resign, but since the 1980’s the Bank has reverted to its original statutory mandate of managing the money supply to fight inflation. The current Governor, Mark Carney, is a former Goldman Sachs executive who played a major role in the Canadian government’s economically sensible but unpopular decision to tax income trusts.
On fiscal policy, Canada has an advantage of running a parliamentary system. Hence the Budget when presented to the House of Commons by the Minister of Finance is a government document, not simply a suggestion to the barons of Congress, which is frequently controlled by the opposing party. While pork-barrel spending is excessive in both systems, the Canadian (and British) approach mean that the government is firmly in control of the country’s fiscal stance, and is not simply reduced to wringing its hands feebly about overspending, or pretending as has the George W. Bush administration that the abominable fiscal laxity is not at least partly its fault.
Canada’s rationality about housing, restricting public provision to lower-income families and providing no subsidy to mortgage borrowing is a little more difficult to pin down. However it seems likely that the lack of tension between the legislative and the executive branch reduces the temptation for the legislature to pursue a social policy different from that of the executive, by creating entities with their own lobbying capability that are independent of Treasury control and the executive branch generally. It should be remembered that both full tax deductibility of home mortgage interest and the Fannie Mae/Freddie Mac structure are not seen in other developed countries. Full mortgage interest tax deductibility is only allowed in countries (Sweden, Netherlands, Switzerland) where rental income is imputed to homeowners, while Fannie and Freddie are a uniquely American disaster.
To repeat: this is not to suggest that the political and social outlook in Canada makes it superior to the United States, merely that some of the peculiarities in the US political structure have produced perverse results. The next question is what to do about them.
The Fed can be reformed by rewriting its charter. In an ideal world, it would be formed as a central bank, with very limited political control and the objective solely of managing the money supply to control inflation. Controlling the banking system and providing bailout funding when it goes wrong should be hived off into a separate agency, which would remain under full political control. The objective should be as far as possible to “Volckerize” the Fed, ensuring that the tight monetarist policies of Fed Chairman Paul Volcker would remain in place, even when as is normally inevitable the Fed Chairman was a lesser mortal.
The ideal structure for the Fed and wording for the Fed’s monetary objective might be the West German Bundesbank Law of 1958, which envisaged control being exercised through the central banks of the individual lander (states.) This cumbersome structure prevented the Federal German government from exercising effective control, of the Bundesbank, which was the objective desired by the admirably grown-up Chancellor Konrad Adenauer. Germany in 1958 was serious about inflation because it remembered the hyperinflation of 1923; the US similarly needs to get serious as it digs itself out of the rubble left by the moderate but pernicious monetary inflation of 1995-2007.
US fiscal policy needs urgent reform of the budget process, by bringing the executive and legislative arms into alignment so that the legislature merely amends the executive’s budget rather than writing its own. A presidential line-item veto, declared unconstitutional on highly specious grounds by the Supreme Court in 1996, needs to be put in place, if necessary by constitutional amendment. The political resistance to such an amendment will be high; it will require an intelligent Democrat President with high political popularity to achieve this necessary reform (because a Republican is unlikely to have a filibuster-proof Senate majority.) Barack Obama if elected is unlikely to pursue this immediately, but by the time he sees the shambles that recession and uncontrolled spending have made of the federal budget, he may come to agree that it is essential.
The reforms needed in the housing area -- abolition of Fannie Mae and Freddie Mac, restriction of subsidies to an agency that is directly under government control, and abolition of the mortgage interest tax deduction – do not require a constitutional amendment. They do however probably require a President Ronald Reagan, a Republican of firm convictions and high political prestige. Since another Reagan is unlikely in the near future, this is perhaps the least likely of the three necessary reforms to see the light of day soon, even though it is also the least politically disruptive.
Canada is not simply a Canuck joke; it is a country from which we can learn.
--
(The Bear's Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that, in the long '90s boom, the proportion of "sell" recommendations put out by Wall Street houses declined from 9 percent of all research reports to 1 percent and has only modestly rebounded since. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)