The Bear’s Lair: Oh Canada – for crying out loud!

Justin Trudeau’s election victory in Canada on October 19, after a campaign in which all three major Canadian parties had led briefly in the polls, was not unexpected. However it leads to a future very much resembling the past, in which government and debt grow inexorably, while the economy, ties with Britain and Canadian relative living standards all gently decay. Predictable, even inevitable as was the election result, it was also deeply exasperating.

The nine-year government of Steven Harper in many respects represents a missed opportunity. The right in Canada has always been fatally diffident – a Canadian failing – with the long-time naming of the right-wing party “Progressive Conservatives” being a typical feeble wimp-out. In the 1930s Richard Bennett was in his early years an admirable free-market prime minister who with Neville Chamberlain signed the historically beneficial 1932 Ottawa agreement establishing Imperial Preference. However facing re-election in 1935 he caved to the left and introduced a third-rate imitation of FDR’s New Deal (it was useless; he lost the 1935 election and the “PCs” didn’t get back until 1957 with John Diefenbaker.)

Bennett suffered from the same problem as his distant successor Harper; his period in office coincided with spectacularly bad policy from the Colossus south of the border which proved a huge drag on Canadian prosperity. For Bennett, Hoover’s Smoot-Hawley tariff was followed by the 1932 income tax increase which was followed by the New Deal. Just looking at that list increases one’s sympathy for the poor man; he did his best.

Harper was almost as unlucky; he came to power just as George W. Bush (no great economic manager anyway) lost effective power with the 2006 midterm elections, then had to suffer the 2008-15 Fed foolishness of zero interest rates and the Obama morass of regulation which doomed the U.S. to sluggish growth that inevitably affected its northern neighbor.

Technically, Obama’s recent veto of the Keystone pipeline, which would have helped diminish the discount from world prices applied to Alberta oil, occurred under Trudeau. However in reality the administration which that much-delayed pipeline could have helped was Harper’s. The $27 billion annual cost of that pipeline (at the peak 2011-13 differential between Alberta and world oil prices) was almost entirely borne by Canada, and affected Harper’s administration, not Trudeau’s. (In late 2015, the Western Canada Select oil price was discounted $19 per barrel from West Texas intermediate, so the 2015 gross cost to Canada of not having Keystone is about $15 billion.)

However, even given the difficulties facing him, Harper could have done better. He did nothing to reverse Canada’s over-liberal immigration policies, which have for decades produced one of the highest immigration rates in the world. In 1970, men who immigrated to Canada earned 85% of the wages of Canadian-born workers, rising to 92% after a decade in the country, according to Macleans magazine in 2013. By the 1990s, in spite of an improvement in the average education of immigrants to Canada, new immigrants earned only 60% of the wages of Canadian workers, rising to 78% after 15 years. Unemployment among foreign-born university graduates who had lived less than 5 years in Canada was 14% in 2010.

Needless to say, that did not reflect a society that has become more hostile to immigrants, it reflected one that has let in too many, exceeding the capacity of the Canadian economy to absorb them easily, and depressing the earnings of both the immigrants themselves and Canadian-born citizens forced to compete with them in an ever more competitive job market.

About the only advantage that Canada has gained from the flood of immigrants is that Quebec independence has become very unlikely; the huge influx of non-francophone aliens has eliminated the possibility of an independence referendum succeeding. A pity; an independent Quebec, with fabulous food and massive hydro-electric schemes propping up the economy, together with a proudly distinctive national culture, is a dream with which I had a great deal of sympathy. Globally homogenized societies are much less attractive than strongly idiosyncratic nationalist ones.

Canadians worry that their housing market may be in a bubble; high immigration and consequent relatively rapid population growth has contributed to this, but so have the monetary policies pursued since 2008. Canada had a good financial crisis since it had not endured a housing bubble beforehand and its banks had been more sensible than those to the south. For the first few years after the crisis, it appeared that Canada was being notably more sensible monetarily than the United States, since the country never took interest rates down to zero. At the time Mark Carney, Bank of Canada Governor until early in 2013, got the credit for this. However from his track record of sloppy money and politically meddling political correctness as Governor of the Bank of England we can see that this was very likely wrong, and that much more of the credit should go to the persuasive skills of Harper and his excellent finance minister Jim Flaherty.

Flaherty, who died in April 2014, deserves much of the credit for Harper’s success in another respect; he never allowed Canada’s budget deficit to balloon in the way British and U.S. deficits did; instead it peaked at 3.6% of GDP in 2010 and was eliminated entirely in Flaherty’s last year, 2014-15, being replaced by a surplus.

Harper’s government, so brave and capable on fiscal policy and (to the extent it was responsible) monetary policy, was feeble on regulation. Ask the shareholders of Taseko Mines (NYSE:TGB), for example, whose immensely valuable Prosperity copper and gold mine in British Columbia, twenty years in the development, was unexpectedly rejected by Harper’s Environmental Assessment Agency, in late 2010, at the absolute peak of its potential value, after British Columbia had approved it. After a redesign to meet minor environmental objections the project was rejected again in 2014, and is now going through a lengthy and probably pointless (given the advent of Trudeau) appeal process. The principal objection to it was a political one: its site was close to the “sacred ground” of a First Nations tribe. I’m sure Taseko wishes its project had been located in Peru; there the allegedly leftist government of Ollanta Humala has sent in troops to back mining companies against far less frivolous objections by indigenous peoples.

Needless to say this kind of state obstructionism is immensely damaging to the nation’s wealth and the incomes of its people. To that extent therefore Harper got what he deserved when he was forced to endure an election in a year when oil prices had dropped, with an economic track record that was only moderately impressive, hampered as it was by both U.S. and Canadian regulatory obstructionism, the latter of which he could have done something about. As always, a Canadian conservative government had come to power amid great hopes, and for once had survived for almost ten years, a decent run by any standards, but had failed to achieve the society-changing successes of a Reagan or a Thatcher, instead perishing in a miasma of feebleness and compromise.

That’s not to say the Canadian electorate was blameless. Justin Trudeau’s father Pierre had in his two terms of office (1968-79, 1980-84), apart from driving an unnecessary wedge between Canada and its mother country, increased public spending almost to the point of bankruptcy. He was succeeded by a feeble PC government under Brian Mulroney followed by a really rather brave and capable Liberal government under Jean Chretien which had balanced the budget and brought the debt down. A rational electorate would have seen Justin Trudeau’s promises of reinvigorating the economy by modest additional public spending for what they were: a direct path down the road of profligacy to the near-bankrupt destination Canada had reached in 1992.

In reality, turning on the taps of public spending to deliver just an additional 0.5% of GDP is impossible; a government like Trudeau’s with a propensity to waste money will always find infinite ways to waste more of it. Fiscal discipline is very hard, and an administration without a commitment to it will quickly find its deficit soaring to 5% of GDP or more and its public debt zooming down the unhappy road travelled by the United States. It’s not as if the Canadian people will get much for the money either; in Canada as in the United States large infrastructure projects have become impossible to keep under control, with idiot legal and environmental blockages causing their cost to soar to a huge multiple of their real costs in a 1950s political economy.

The Canadian electorate has spoken – fools! One can only hope that the Conservative party uses its period in opposition to rediscover its fundamental principles, and realize that fiscal and monetary prudence without deregulation or immigration restrictions will not bring the prosperity the Canadian people want. Moderation and compromise are Canadian weaknesses, and incompatible with good government.

(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 the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. 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.)