...against fictions and other tall tales

Sunday, 6 November 2011

Canada needs a National Industrial Policy

The unemployment figures released by Statistics Canada this week are a huge disappointment. With employment in Canada declining by 54,000, all in full-time, and the national unemployment rate climbing by 0.2 percent to 7.3%, it is now clear that Canada was not able to avoid the current slowdown affecting the global economy.

But the most alarming part of October's Labour Force Survey are the figures relating to changes in employment in Ontario, one of Canada's most important industrial regions.

To put it bluntly, the figures are simply devastating. The loss of over 75,000 full-time jobs in Ontario, approximately half the amount of full-time jobs created during the last year in the province, represents a massive blow to Canada's economy. As a matter of comparison, even during the worst of the 2008-2009 downturn, full-time employment in Ontario did not once decline by this much within a single month. And the fact that part-time employment increased by 36,000 jobs in the province does nothing to attenuate the significance of October's decline in full-time positions.

There are two reasons why this turn of events should be of concern to Canadian policymakers. The first is that a rise in part-time jobs without at least some growth in full-time employment does little to improve the economy during a recovery. This is the case because part-time work is often temporary and usually not as high-paying as full-time work.

Another reason to be concerned about the sharp drop in full-time employment in Ontario is because of what it means for the province's manufacturing sector. Given that most of the losses in full-time work originated in the manufacturing sector, it is possible that the job losses are indicative of an acceleration in the decline of Canada's manufacturing sector. While the decline in manufacturing is nothing new (note: Canadian manufacturing has been losing jobs for six years straight, leaving its total employment for the last decade down 22 percent), there are reasons to believe that this trend has accelerated in recent years due to the strength of the Canadian dollar, which makes other nations' exports more competitive, and the drop in demand for Canadian manufactured goods such as automobiles, machinery and equipment. (Cross, 2011)

From a public policy standpoint, the decline in manufacturing has an important downside given that a nation's economy and productivity depends in large part on its manufacturing capacity. However, many policymakers erroneously believe that economies can thrive solely on their services sector. According to economist Ha-Joon Chang, this view is wrong because it disregards the link that exists between a nation's manufacturing capacity and productivity growth. Chang sums up the problem succinctly in the following excerpt of his most recent book:
...the shrinkage of the relative weight of the manufacturing sector has a negative impact on productivity growth. As the economy becomes dominated by the service sector, where productivity growth is slower, productivity growth for the whole economy will slow down. Unless we believe (as some do) that the countries experiencing de-industrialization are now rich enough not to need more productivity growth, productivity slowdown is something that countries should get worried about - or at least reconcile themselves to. (2010:97)
Given that productivity growth plays a critical part in improving our standard of living and quality of life, it would be wise for Canadian policymakers to view seriously any possible acceleration in manufacturing's decline.

One way to address this possibility and help counter any acceleration in the decline of Canada's manufacturing sector would be to put forth a national industrial policy. While some readers may recall that the federal government implemented a policy called Advantage Canada in 2007 to help promote Canadian industry, it should be mentioned that this strategy was abandoned when the federal government put forth the Canada Economic Action Plan, the stimulus package aimed at boosting the economy during the last recession.

To be sure, a national industrial policy should not aim at replacing the current Economic Action Plan. On the contrary, it would be appropriate for the policy to build on the combined success of the federal and provincial governments' stimulus measures, all of which made Canada's response to the recession one of the most effective countercyclical economic policies implemented by a major nation during the last recession. As shown in the chart below, as a result of these stimulus measures, Canada's ratio of fixed public investment as a percentage of gross domestic product now stands at the highest level in over three decades. The fact that Canadian unemployment did not rise too sharply during the last downturn is in good part a consequence of the significant increase in fixed public investment.


Therefore, instead of winding up the current Economic Action Plan, as the federal government appears to be doing as part of its strategy to reduce the deficit, the government should rather be shifting the focus from investing in public infrastructure to implementing measures that will enhance the competitiveness of Canadian industry and, more specifically, its manufacturing sector. Such a measure would be consistent with the approach taken by Canadian governments in recent years and an appropriate transitional policy at this stage in the recovery.

References

Chang, H-J., "23 things you didn't know about capitalism", (Bloomsbury Press, London), 2010

Cross, P.,  "2010 in review", Statistics Canada, Section 3, Canadian Economic Observer, April 2011

15 comments:

  1. CIRCUIT!!! i concur entirely with your first reader's comment and reverence a NOD for the best concise non-partisan rendition of the state of Canadian Manufacturing and Industrial policy in decades. the focus on unemployment and manufacturing sector is praiseworthy of the best in critical thought. not only do you give credit where credit is due but you highlight the fragility of the economy, the shortcomings of political complacency and the dangers of shorting fiscal stimuli. to those parliamentarians who lack insight, resources or courage, you have offered a balm.

    would that there be more of your types in the GoC.

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  2. Great write-up circuit. Someone should highlight the regional disparities and the provincial shortfalls. I'm with you on GoC missing the important indices.

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  3. Grizzly posting....NOD!!! I have two reservations: is there really a need to drop investment in public infrastructure, in order to accommodate manufacturing. As jh nuanced, shorting fiscal stimuli may be dangerous. Moreover, can't the BoC be more flexible in order to enhance sectorial competitiveness. There's enough data from to warrant target management. Stay the course, circuit... regardless
    helluva great column!!! from the Many

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  4. P. Grondin Montreal7 November 2011 at 14:01

    Je suis d'accord avec swells. Est-il vraiment necessaire d'abandonner un programme d'infrastructures publiques qui effectivement a un rayonnement sectoriel beaucoup plus vaste que le seule manufacturing...

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  5. Thanks to all for your comments. And Tim, welcome. BTW, Nfld did well in October. JH, I thought you might like this week's column. Had to postpone the next entry to my deficit series, but I figured no one would mind. That said, I thought it was important to discuss the jobs report. My opinion is that the decline of Canadian manufacturing is one of the biggest economic challenges facing the country in the coming years. There needs to be more focus on that at levels of govt.

    As for the question relating public infrastructure, I should clarify that I'm not advocating a complete abandonment of public investment in this area. However, I would strongly encourage decision-makers to prioritize those infrastructure projects that are known or that are intended to contribute directly to enhancing the competitiveness of Canadian industry (and especially manufacturing). As you may know, the recent economic action plan funded all sorts of projects, from hockey arenas and parks to highways and public transit initiatives. My preference would be to really focus on assisting industry at this point. Also, a new way of thinking is needed. In Germany, for instance, every policy proposal considered by the government must include a section on how the proposal would impact industry (similar to a cost-benefit analysis, but with a greater focus on issues such as jobs, productivity, etc). Decision-makers in Canada *need* to be disciplined to think like that. I sense a growing attitude of laissez-faire that is unhealthy among our policymakers.

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  6. I think the less visible but as painful impact of the manufacturing downturn is found in the second round effects mostly incurred by the service industries and the public sector. I've been following your Canadian columns more closely than the US and UK, and quite honestly I find it refreshing that someone in this country is signalling the real threats to the economy. I'll join some of your readers' chorus: Stay the course!

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  7. Anton Uhlmann, Palo Alto, CA9 November 2011 at 14:20

    It's very difficult to understand why manufacturing is not the buzz word anymore while investment banking is so glamorous when you consider that the latter generates the biggest crisis in the world and the former was the solution to the previous biggest depression in the world and underscores China's rise to economic hegemony. Good post circuit.

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  8. N. Morianis, Kingston9 November 2011 at 17:03

    You should be in government rather than policing the policy.

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  9. In contemporary economic scenarios, as JH and swells are better informed, highlighting an increase in fixed investment is sometimes ominously correlated to significant drops in non-replaced manpower. The caveat is that some good may be found in the increase in temps or part-timers, but, over time, a significant decrease in national disposable income is inevitable. Favorable GDP is usually relatively short-lived in such times of dropping manpower. Plant and Equipment cannot expend, and as far as I know, Canadian technology exports are not competitive with the best out there unless the currency plummets significantly and commodity prices stay the range(nod to JUO back in time). So both effective and aggregate demand emerge as problematic over the longer-run.

    I like your caution, circuit, but I caution the complacency of the Government of Canada in putting emphasis on the Capital Goods Component as a reflection of good economic policy.

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  10. Nod to Goffredo. I agree entirely with your assessment on the ambivalent impact of fixed investment to the economy, and that of Circuit (nod)in his column and his 'reader comments' where he cautions that increases in productive capacity are only significant if long term employment is a result (the case of job losses highlighted by Circuit is discouraging). I presume from your respective discourses that manufacturing without employed people is ultimately, non-productive to economic growth. It's a terrible dilemma for a policy-maker to envisage, because hope lies in the fact that if capital investment increases, then people are usually hired. As both of you suggest, that condition is no longer prevalent in global practices.

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  11. @Swells earlier: I hope the BoC does something. Based on my take of the news and various statements by the BoC during the last few years, the Bank was the first to point to some of these challenges.
    @GC and KP: Agreed, jobs must remain a priority. One of the problems is that every time government steps in to save or create jobs here, there is some reporter who'll quantify the cost expended to save or create these jobs (and usually, without considering the beneficial second round effects that Fred discussed earlier). I was trying to frame the idea without focusing on that aspect, but I admit that it cannot be set aside. One of the key lessons I learned by reading Kalecki is that the benefits of increases in productivity do not automatically get transmitted to workers. This is why I support the idea of government as a source of employment. The demand that follows from full employment would be a benefit to all. Also, government is well positioned to create incentives for businesses to invest into job-enhancing initiatives.

    KP, you raise a good issue. The government has to find the right balance between helping industry and workers. One way to achieve this is for government to provide grants and subsidies to firms only under the strict condition that jobs be created as a result. Not an easy task but an essential one.

    @N.Morianis: Wouldn't it be great if parliamentarians pointed to this stuff during the public accounts committee or on air? I'm hoping some of the more enlightened new 'recruits' will step up and talk about it. But, I'm afraid we probably won't see that until the idea of balancing the budget still rules supreme. It's clear that all parties still hold on to this view. However, I'm sensing the liberals under the interim leadership of Rae are edging toward a more relaxed view.

    @Anton: Your comment reminds me of a speech by Paul Volcker where he admitted being somewhat disappointed by his grandson's decision to go into finance rather than engineering or mathematics. Now, I have no problem with finance (some of the brightest individuals I know work/worked in that field), but I can see the problem when *all or most* talent ends up being diverted to that field. BTW, the BoC is always looking for good people with a finance background. Perhaps that could be a good compromise choice.

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  12. Manfredo Incantalupo10 November 2011 at 10:01

    Good column, circuit and great comments to your readers. I'm pleased that you emphasized the job content of Industrial Policy. Not only does it underscore GC's economic principles, it is critical to keynesian tradeoff matrices. I think GC is closer to the spirit of Obama's American Jobs Act than the White House itself. It seems from your comments that so are you. Industrial Policy cannot succeed without long term job creation, and not long term job prospects, which is 'rubbish' as a friend would say. I would surmise that manufacturing is the essence of job creation, and manufacturing entrepreneurship the mark of the true 'animal spirit'. Many may indulge in a polemic, but when it came to policy, animal spirit was not the disposition of bubble makers, but of reasonably intended creators. One should contextualize the notion within the complete works of JMK. I surmise even Schumpeter would not disagree. What the world needs is that type of spirit in our policymakers.

    I also commend you on your reference to regional and industry job losses. Too often, columnists forget the importance of highlighting the sector and geographic depletion of employment resources. You would be interested in the following link which focuses on public (state and munis) sector job losses and the spinoffs of the phenomenon:

    http://www.washingtonpost.com/business/economy/economy-adds-80k-jobs-in-oct-unemployment-dips-to-9percent/2011/11/04/gIQAt2ynlM_story.html?wpisrc=nl_headlines&sub=AR

    Although, I sympathize with many of the comments, I do not endorse across-the-board job creation financed by public-X. This type of automata has proven deficient when economic conditions are complex and bleak as they are now. Construction, or public infrastructure rehauls etc are adequate targets but they should always be complemented by state (in Canada, provincial and territorial) initiatives. Stay the course.

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  13. Excellent point on the importance of manufacturing. I cannot agree with you more on the importance of creation and animal spirits. Schumpeter, a master, is indeed relevant. The role of the entrepreneur is central. Access to credit is also key. Banks play a role in providing advances to firms. When these two parties aren't playing ball, government should step in, as it did. It's the only way to keep the system going. BTW, most of the public investment was by all provinces combined. Seems there still some Keynesian reflexes in provincial capitals. Appreciate the link.

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  14. There's a rule of thumb that designates supposedly keynesians as promoting first price stability. It's a rule of thumb paneled in the Keynes-for-the-birds pulps, where the birds are usually the authors. JMK was and is foremost about full employment. Nod to the lot above that remind the birds that their eyes-view is nought (allow the archaic)

    I trust that Draghi will not mime Lagarde's rhyme on deficits, and that along with Draghi, Papademos and Monti remember their alma maters. What Europe needs is jobs, not razes on expenditures, otherwise, we'll end up with a Wasteland on all sides of the oceans, the likes of which has n'er been seen.

    I trust that Mr. Harper resist the UK experiment.

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