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Neoliberalism, Pipelines, and Canadian Political Economy

Photo by Luke Jones | CC BY 2.0

The national debate about how to get diluted bitumen to trans-oceanic markets by means of a twinning of the existing Kinder Morgan pipeline route between Alberta and British Columbia – known as the Trans Mountain Pipeline Expansion Project – illustrates the sad state of economic planning, diversification and vision in Canada.

The current policy of dependence on the sale of carbon-based energy resources, coupled with reliance on residential real estate construction and sale, is a short-sighted environmental and industrial strategy for a nation such as Canada. The country’s forecast continued dependence on the extraction of oil and gas, the burning of which our planet can no longer sustain, along with our primary devotion to the FIRE (Finance, Insurance and Real Estate) model of wealth creation does not serve the well-being of all Canadians nor preserve our natural environment. Instead, we should be considering alternative economic approaches that affirm Canadian economic sovereignty through the creation of jobs and socially re-invested dividends linked to a sustainable future.

It is time we organize our economy along different lines, putting people, communities and the environment ahead of pipeline revenues, quarterly profits, and energy stock prices. That this may pose challenges is not a matter of dispute. Nevertheless, our reluctance to revise or discard established ways of doing things has been an impediment to change in the past.  This was noted fifty years ago by the distinguished Canadian economic historian Harold Innis, who, in discussing our political culture, noted our “infinite capacity for self-congratulation.”  This complacency is perhaps not surprising when one considers our rich abundance of resources, land, and water; our good fortune to be situated next to the world’s economic behemoth which possessed an apparently insatiable appetite for our raw materials and commodities; and, finally, our small population occupying an immense landmass according each individual an almost blessed sense of space, ease and, for a time, opportunity. All of this good luck doubtless led some to believe, using a baseball metaphor that we had hit a triplewhen it seemed to others that we had been born on third base.

Whatever the reasons behind the prosperity that lasted well into the 1970s, it is evident that the comforting myths and assumptions of Canada’s first century are no longer operative. The branch plant economy, originally abetted by wealthy interests in Central Canada, meant Canadians had little reason to look beyond Washington, Detroit or Houston to decipher the latest demand side signals and cues.  The unstated assumption that things would continue in this benign manner into the foreseeable future led the majority to ignore the lone voices of Walter Gordon or George Grant who had decried our failure to engage in the ‘planning and control of investment (which) would have left the ordering of the economy in Canadian hands.’   The continentalist approach has a long pedigree in Canada.  As Grant himself wrote in Lament for a Nation, ’capitalism is, after all, a way of life based on the principle that the most important activity is profit-making.’

In many respects, this complacency born of affluence has continued into the first two decades of the 21stcentury.  Despite warning signs from the scientific community, recent generations of Canadian politicians have refused to recognize the incongruity of our petro-economy with the post-carbon world or to take meaningful steps in the direction of a genuinely sustainable political economy that puts citizens first. What is becoming increasingly clear to growing numbers of Canadians, and especially younger people, is that Canadian governments have failed to grapple with changing economic and environmental realities. Governments have continued to promote economic, energy and trade policies that do not advance genuine opportunity, equality and social cohesion or provide the robust protections that our natural environment so desperately needs. Instead of diversifying years ago into a sustainable, low-carbon, democratically organized and higher value-added form of industrial organization with full employment and sustainable communities as the goal, we continue with a ‘broken’ model that ignores the welfare of ordinary Canadian men and women and their families.

Over the past 34 years, successive governments in Canada, including the present one, have promoted the idea that the neoliberal economic policy playbook – in which we fixate on the financial welfare of corporations, light touch regulation, and boosting our attractiveness to global hedge funds and wealthy investors – is the only viable economic strategy open to us. A host of economic and fiscal policies have been enacted under the guise of this corporate welfare-promoting economic doctrine, one purportedly designed to free up investment capital and the “animal spirits” of the FIRE sector. Despite following these policies, Canada’s recent record is one of significant economic and industrial under-performance while, in the process, we have fostered pronounced social hardship and environmental neglect.

Three examples illustrate the point about the bankruptcy of the current model.

Debt

Let’s look at indebtedness first: Canada’s ratio of Private Debt to Gross Domestic Product (GDP) now stands at 267%. This is currently the highest level among the G-20 and is the sixth-highest in the developed world. Relatedly, the Bank for International Settlements publishes data on the Debt Service Ratios (DSRs) of the private non-financial sector. This includes households and non-financial corporations. The DSR indicator captures the share of income used to service debt in light of interest rates, principal repayments and loan maturities. Of the 32 OECD countries for which data is available, Canada had the third-highest DSR (24.0) after only Norway (26.4) and the Netherlands (25.2) in 2016. Alarmingly, the DSR for Canadian non-financial corporations was 58.1, the highest of all 17 major OECD countries reporting in this category. A third telling indicator of the financial burden confronting ordinary Canadians is revealed in filings obtained from the Office of the Superintendent of Financial Institutions for February of this year, in relation to loans that Canadians secured against their homes – (Home Equity Line of Credit or HELOC).  The latest balance shows that Canadians have racked up a total of $251 billion in personal loans secured with residential real estate – a 6.83% climb compared to the same month last year and bringing the total to an all-time high. In technical terms, a HELOC secured for personal reasons is considered non-productive by the banks, and it points to the fact that the borrower may have maxed out their credit vehicles and have high levels of unsecured debt. The vulnerability to Canadians from this development is further intensified by the fact that banks can change the terms, including the interest rate, of a HELOC at any time.

The picture painted above is the culmination of a range of policy choices and decisions made by Canadian governments over the last three decades. At the highest level, it is consistent with what critics of neoliberalism have described as a deliberate policy of wealth and income transfer brokered through “rent” payments. Canadians, with the tacit support of successive governments, have become indentured to financial institutions, credit card companies, and insurance firms as they devote growing portions of their income to service mortgages and rent payments, debt interest and principal repayments on loans, and installment and standing order payments. The constant effort to normalize this situation can be seen in the great number of television and web-based advertisements that tout the benefits of banking services, fee-for-service investment advice schemes, private health insurance policies, reverse mortgages, or credit check tools. Ordinary Canadians have seen their modest monthly incomes converted into lucrative revenue streams for banks and other wealthy creditors. Many of the loans Canadians have increasingly resorted to taking have a variable rate, which makes the debtor highly susceptible to arrears, default, and ultimately bankruptcy as a result of interest rate hikes. Banks and other financial intermediaries prosper at the expense of average Canadians in a rising rate environment, as the spread between what they charge for mortgage, credit card and home equity loans significantly exceeds what they pay in interest for deposits on accounts. We are creating, in effect, a Canada based on debt peonage.

High levels of aggregate private debt and debt service carrying charges for individuals are a significant drag on personal consumption. But, as a growing body of analysis suggests, private debt has a significant impact on the business cycle and patterns of commercial investment as well. The heterodox economist Steve Keen has devoted considerable effort into shedding light on this phenomenon, something neoclassical economists and proponents of our newly “financialized” economy have tended to downplay or ignore. In effect, during “normal” economic times, businesses and investors succumb to unduly optimistic assumptions about future growth in asset prices and over-lever themselves. The natural aversion to risk diminishes, and credit is increasingly relied upon to make financial asset purchases. As the noted American economist Hyman Minsky points out, however, the economy is unerringly cyclical, and euphoric expectations are seldom if ever realized, largely because the demand for finance in an expansion cycle eventually drives up debt-to-equity ratios. Firms quickly over-extend themselves and have trouble meeting loan repayment schedules. In a financialized economy, in which a shadow banking system has provided a great deal of the loan finance and credit, and which itself is highly motivated by yield/profits and bonuses, the natural response  to perceived payment difficulties, increased defaults, and heightened risk, is to increase the cost of money (i.e. interest rates). This, in turn, wipes out original profitability assumptions and a scramble for liquidity through early redemptions ensues. As debt-fueled bubbles subside, corporations and households are forced to deleverage radically. Given the levels of private indebtedness described above and the degree to which overall Canadian GDP depends on credit – Keen estimates it to be 12% of Canadian final demand – the prospects for a dramatic drop in demand and economic product are very real. The average Canadian family is thus highly exposed in the medium and longer terms to systemic risk within a speculative-based economy where financial indebtedness is common across households and commercial ventures.

Industrial Diversity & Complexity

Voices promoting industrial and technological diversification and greater community-based economic development have often been ignored in Canada. The last Conservative government made a high-stakes and environmentally willful bet on the oil sector, seeking to turn Canada into a petro-economy. The lopsided dependence this has created on carbon exploration and shipment is tragic. The aim of a country such as Canada ought to be to move “up” the value chain – to produce increasingly sophisticated and sustainable products that reflect our advanced educational system and high levels of human capital. Winning capitalist economies in an era of global free trade are not those that specialize in just a few sectors or resources, but those that have a high level of economic complexity and diversity. Canada should not just export oil or bitumen or any other product or commodity that is ubiquitously available. Ideally Canada should strive to produce a variety of increasingly more complex and innovative things that build upon proximate links to other intermediate-level goods, products and technologies and then, in turn, recombine this critical mass of differentiated knowledge into new, more sophisticated and smarter products. These insights flow from the work undertaken by researchers at Harvard and MIT who have developed an Atlas of Economic Complexityin the last few years. They conclude that “complex economies are those that can weave vast quantities of relevant knowledge together, across large networks of people, to generate a diverse mix of knowledge-intensive products.”

The Economic Complexity Index (ECI) formally measures the knowledge intensity of an economy by considering the knowledge intensity of the products it exports. So how does Canada fare in this regard? In 2016 Canada ranked 35thin the world, with an ECI of .696. Perhaps most concerning for Canada, though, is the trend line. Over the five- year period from 2012 to 2016, the Canadian ECI dropped each and every year. Having made our petro-gamble and staked our future on non-renewable energy resources, we took our eye off the indices of innovation, technology and productivity which, according to the ECI authors, are strong predictors of future economic growth. In many ways, despite some progress towards higher value-added diversification in the 1990s, Canada is reverting to deriving its wealth once again from the extractive, resource, and raw material sectors that were traditionally associated with our status as a “staple” economy.  Given the advantages that accrue to first movers and incumbents in the knowledge economy, we may have reason to regret this decision.

R&D Effort from the Canadian Business Sector

A forward-looking economy plans for the sustainable future prosperity of its people and the health and viability of the natural endowment of lands, soils, oceans and fresh water bodies upon which it is critically dependent. Over three decades ago, the Minister of State for Science and Technology in the government of Pierre Trudeau, for whom I worked, wrote of his dismay at the apparent failure of our private sector to appreciate “the substantial role which is played by technology, new knowledge, innovation and skill in the improvement of productivity and the achievement of economic growth.” The fundamental tenet of a responsive market economy is to bring forward new products, processes, organizational methods, and ideas that enhance our collective quality of life. Accordingly, we incentivize our companies through generous tax measures, the provision of trained university and college graduates and researchers, and through assistance from our grant-dispensing scientific and research councils. But, as John Roberts wrote, “in Canada not only do we do proportionately less research and development than other countries, but more of the research is undertaken by government and less is pulled forward by market forces.”

Fast forward to the situation today and a 2018 report by the Council of Canadian Academies entitled Competing in a Global Innovation Economy: The Current State of R&D in Canada. It finds that the situation has indeed worsened. R&D as a share of GDP is now well below the OECD average. As the report notes, low and declining business R&D expenditures are the major reason for this trend. Despite generous tax credits and access to collaborative opportunities with university research laboratories and institutes, the report records that Canada ranks 33rdamong leading countries in relation to the “magnitude, intensity and growth of industrial R&D expenditures.” About 50% of Canada’s R&D spending is in high-tech sectors, compared with the G-7 average of 80%. The authors go on to state that “most Canadian industries are now spending less on R&D than in the previous decade.” In an era marked by transformational change, Canada’s industrial strategy reveals a mindset of “business as usual.” In effect, the Canadian economy is dominated by industries in which R&D is not a core component of business strategy, and Canadian business R&D expenditures accordingly replicate long-standing patterns of economic activity. Environmental imperatives notwithstanding, Canada’s nexus of resource companies and their financial lenders see little reason to change. The report confirms the assessment that, for the past twenty years, we have doubled-down on the “oil and gas, construction, real estate, and finance industries… which rely more extensively on natural resources, capital, and talent than on R&D”. They are also sectors which are, respectively, non-renewable, relatively low-skilled, transitory, and highly mobile in nature.

Concluding Thoughts

Canadians are a remarkably resourceful, generous and trusting people.  They have been compelled in recent years to adapt to a harsh, neoliberal regime of corporatized free trade deals, transnational finance, rentier-style economic arrangements and the withdrawal of the state from its fiduciary duty to assert a robust defense of the ‘public interest’ and the general welfare. From the mid-1980s on, our leaders have essentially rolled over before the demands of large corporations, wealthy domestic and offshore investors, and a chorus of voices in economics and business schools and the business pages of the mainstream press. Fearful of not being part of the alleged rising tide of prosperity that globalization and financialization would inevitably bring to all comers, we staked our future on synthetic financial engineering, takeovers and mergers, share buybacks,  short-term commodity plays and real estate deals aggressively promoted by banks, hedge funds, energy interests and offshore investors. The idea of patient public capital wedded to the promotion of industrial independence, community economic and infrastructure development, or investments in cooperatives and the social economy, is viewed by champions of the neoliberal model as a quaint relic of the past. The post-war compact that had produced a mixed market economy and welfare state of considerable international renown, a focus on employment and public infrastructure, along with an enviable quality of life for many (with the shameful exception of our Aboriginal peoples), was summarily jettisoned in the 1990s and 2000s by Liberal and Conservative governments. This was done to make way for a theoretically “superior” model of financialized wealth creation, involving extensive reliance on exotic financial products and the new orthodoxy of “price stability”.

As this piece has demonstrated by referencing the concrete outcomes resulting from these choices, our political leaders have embraced siren voices peddling tropes and dogmas regarding the superiority of free markets and the “virtues” of global capital mobility. At first, a credulous Canadian public went along with it. Now, as they witness the foundering of the much-vaunted Canadian quality of life, extreme disparities in income equality and health outcomes, and the vanishing of opportunities for their children, there is considerable disquiet being expressed.

Canadians are presently indebted to a staggering extent and vulnerable to a potential contagion of deleveraging that may be brought about by rising interest rates or a severe asset price deflation occasioned by internally- or externally-generated shocks. The possible failure to renegotiate NAFTA and the imposition of tariffs on key Canadian exports may be just such an exogenous shock.  Our national personal savings rate has deteriorated from an all-time high of 19.90 percent in 1982 to 4.2 percent in 2017, revealing just how financially stressed Canadians have become in the years since the ascendancy of the neoliberal economic model. Meanwhile, the rent-seeking economic forces that have been unleashed in Canada relentlessly seek to pursue short-term profits whether in the form of unrefined bitumen exports or through the exploitation of real estate assets as a vehicle for wealth creation, the latter with the assistance of wealthy foreign buyers. In sum, the growth of a financialized economy with a conspicuous reliance on debt finance has increasingly concentrated assets such as stocks and real estate in the hands a privileged few and been directly responsible for the massive growth in inequality afflicting Canada and other western states.

Upon closer scrutiny, there is evidence to suggest that this approach has failed to create the conditions conducive to economic diversity and complexity which, according to the latest research, is a hallmark of an economy’s longer-term viability. Furthermore, our research and development investments largely support lower technology industries and the extractive sectors of an earlier time but show little evidence of meaningful forays into promising new fields areas such as nanotechnology, renewable energy sources or materials science. The narrow scope of our economic and industrial strategy can be seen in the latest current account figures (Q1 2018) which show Canada running a CDN$19.5 billion deficit, one of the highest shortfalls in the balance of goods and services in the G-20.

With Canada experiencing climate volatility and its associated impacts in the form of increasingly frequent droughts, floods and wildfires, habitat and species loss, damage to nutrients in soils, and increasing incidences of pollution and biodiversity loss in our oceans, the environmental case for change is also becoming urgent. Viewed in this light, the recent decision by the Trudeau government to facilitate the purchase of the existing infrastructure and planned expansion of the Kinder Morgan Trans Mountain Pipeline Project in order to transport bitumen is further confirmation of the paucity of new approaches to economic diversification in this country. The inertia and incrementalism that routinely tolerates large public petro-chemical subsidies ($), or in this case a multi-billion dollar expenditure for an outright purchase, is flawed public policy.

Canada has a responsibility to protect the Global Commons by restricting activities that run the risk of generating harmful externalities through their production, shipment or end use/consumption, either here in Canada or overseas. Bitumen sourced from northern Alberta is one of those commodities inherent in which are significant real or potential externalities (ranging from the incremental energy used to produce it to the risks to human and animal health of land- or water-based spillage). The noted Australian scientist Tim Flannery has written: “where externalities have grave environmental consequences, such investments may cost humanity dearly.” Clearly, the current approach of plundering carbon-based resources such as the oil sands in order to extract short-lived revenue streams and profits that mainly accrue to foreign-owned energy companies has little long-term upside.  Moreover, implicit in the expenditure of billions of public funds on a climate-damaging infrastructure such as the proposed Kinder Morgan pipeline is the opportunity cost of not investing in new ‘sunrise’ technologies and industrial processes that might set us on a path to genuine sustainability.  Furthermore, at this stage a great many Canadians want to see an end to the instrumental attitude that sees us thinking about nature solely in terms of its end-use value. A new model of economic and industrial diversification is long overdue in this country as the present one appears no longer to be working for Canadians or our fragile ecosystem.

Christopher Jones has worked for eighteen years as a government affairs and policy specialist for various Canadian associations and not-for-profit entities in Ottawa.

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