Friday, August 14, 2015

Some difficult questions for Canada's next PM

This is an investment blog and I have tended to be agnostic about politics ts in different regions of the world, preferring to analyze the market implications of different political developments. That has been the main guiding principle of this blog.

However, this is also a personal blog and I am a citizen of Canada, which is undergoing a federal election, and I am going to share my thoughts as part of my readers' weekend reading.

I emigrated to Canada as a boy in 1967, left in 1994 to work in the US and returned in 2007. Canada is my country. Much of my career has been in finance, both on Bay Street and Wall Street. With that preface in mind, I have a number of key (hopefully) thought provoking questions for the potential prime minister of my country on October 20.

I am just a humble investment analyst and therefore the framework for these question are related to either the economy or the economics of different policies. The issue in many of these questions is not to try and assign blame for what might have happened in the past, but to seek an understanding for what course of action the leader of each party is likely to undertake in the future. As Prime Minister Stephen Harper is the incumbent, most of the questions are directed to him.

Prime Minister Stephen Harper, Conservatives
On the economy
I understand the macro-economic philosophy of the Conservatives of lowering taxes to "starve the beast" and smaller government. At what point do you stop and say, "Government is small enough"?

When I left Canada for the US in 1994, the economy was well diversified. Rising commodity prices would benefit the West and hurt the manufacturing heart of Ontario and Quebec. When commodity prices fell, which usually dragged down the CADUSD exchange rate, Ontario and Quebec became more competitive and exports to the US grew. Fast forward to today, a BCG study showed that Canadian manufacturing has fallen dramatically behind its NAFTA partners and the CFO of Ford laughed out loud when asked if the low loonie could entice Ford to locate its manufacturing plant in Canada instead of Mexico.

The macro-economic solution of lower taxes and smaller government appears to have its limits in the problem of deteriorating Canadian manufacturing competitiveness. What plans do you have to re-vitalize manufacturing in Ontario and Quebec? (Please don't say "subsidy", as that is anathema to the Conservative philosophy of getting government out of the way of business).

On fighting terrorism
There appears to be an inconsistency in your position on fighting Middle East based terrorism. You have made it clear many times that you are a strong supporter of Israel. A look at the map shows that Israel borders Syria, which is where many elements of ISIS are located. However, recent reports indicate that Israel isn't assigning a high priority to fighting ISIS and al Qaeda. The Wall Street Journal reported that Israel has lent passive support to the Nusra Front, the Syrian branch of al Qaeda, by treating casualties from Syria on a "don't ask, don't tell" basis:
Only about one-third of the Syrians treated in Israel, however, were women and children. An Israeli military official acknowledged that most of the rebels on the other side of the fence belong to Nusra but said that Israel offered medical help to anyone in need, without checking their identity.

“We don’t ask who they are, we don’t do any screening…Once the treatment is done, we take them back to the border and they go on their way,” he said.
The WSJ further reported that Israel is far more concerned about Iran and its proxies in the region than either ISIS or Al Qaeda:
“There is no doubt that Hezbollah and Iran are the major threat to Israel, much more than the radical Sunni Islamists, who are also an enemy,” said Amos Yadlin, the former head of Israel’s military intelligence who is slated to become minister of defense should the center-left Zionist Union, led by Isaac Herzog, unseat Mr. Netanyahu in Tuesday’s elections.

“Those Sunni elements who control some two-thirds to 90% of the border on the Golan aren't attacking Israel. This gives you some basis to think that they understand who is their real enemy—maybe it isn’t Israel,” Mr. Yadlin added during an interview.
If Israel, your closest ally in the region, doesn't give a high priority to opposing ISIS or Al Qaeda, which is camped on their border, how much priority should Canada give to fighting ISIS and Middle East based terrorists when they are half a world away?

Follow-up question: Canada has wide ranging security concerns and limited resources. Please describe the return on investment, or cost benefit analysis, of devoting such resources to opposing ISIS and terrorism, when reports indicate that the Canadian Forces have suffered more losses from suicides than from terrorism, or combat deaths in Afghanistan?

While we're on the topic of cost benefit analysis, please describe the reasons why Canada is so committed to buying the F-35 fighter when it can't even beat an F-16 in a dogfight?

Justin Trudeau, Liberals
The Liberal support for the Bill C-51 has been high controversial. Please see above question on Israel, Nusra Front and Middle East based terrorism. How would you answer that question. How would you formulate a policy for the Canada's security?

On the economy, please see the above question on the revitalization on Canadian manufacturing in Ontario and Quebec.

Thomas Mulcair, NDP
Just as there appears to be an inconsistency in Mr. Harper's position on Middle East based terrorism, there seems to be one in your energy and environmental policy.

I fully understand the environmental concerns of the NDP to control resource development and, by extension, pipelines like Northern Gateway and Keystone XL. However, the capacity of the current North American pipeline system means that Canadian oil has really nowhere to go except for the United States. Consequently, Americans pay a discount for Canadian oil because they are the only customer that Canada can sell to. In some cases, Canadians pay a higher price for oil than Americans pay. In effect, what we have is a form of reverse NEP in place today. Then, Alberta was selling oil at the world market price abroad and Ottawa wanted a made-in-Canada price that was below the world market price. Today, Alberta is forced to sell both its light and heavy oil at a discount to the world market price because it has only one customer, the United States, while Atlantic Canada imports oil at the higher global market price.

Is selling oil to the United States at a price lower that what some Canadians pay the intent of NDP energy and environmental policy? If not, how would you correct for such a side-effect?

(As the NDP hasn't really articulated a growth plan, I am not going to ask about the revitalization of Canadian manufacturing.)

That's all I have for now. These questions also demonstrate why I will never be running for political office.


RAS said...

Cam- I believe NAFTA would have been a good agreement had it included only the US and Canada because wages in the two countries are roughly comparable. However, when Mexico, a very low wage nation, is thrown into the mix, it encourages both US and Canadian manufacturers to move to Mexico to take advantage of the low wage environment, all to the profound detriment of US and Canadian workers. It's no wonder the Ford executive was amused at the idea of locating a new plant in Canada (and though it wasn't stated he probably feels the same way about the US). Why would anyone pay US or Canadian wages, when they can go to Mexico and pay a small fraction of the US/Canadian wage? I agree with many aspects of the Austrian school of economics, but I depart from them on the issue of free trade. I'm not willing to sacrifice my country's living standard on the altar of free trade.

Rick T. said...

Cam - excellent questions. As an American, I wish journalists and the other candidates were asking as incisive questions of the clowns in both parties running for president.

RAS - Are you sure that the laugh from the Ford exec related to high wages, and not the inefficiencies from the government entrenched unions that exist in Canada, and also Detroit, another place that earns a laugh from any big employer? Also, the paychecks that the Mexican workers and execs earn from working for American or Canadian employers, do they place them in a big bonfire and burn them, or do they spend them on computers, movies, cars and other goods and services sourced from their northern neighbors? I think the latter. So what is the problem?