Today, the Government of Saskatchewan announced that it is engaging the Conference Board of Canada to analyze the proposed Potash Corporation of Saskatchewan takeover.

My first thought is to hope that the Conference Board does a better job on potash than it did on TILMA.

My second thought is, “Doesn’t Saskatchewan have a civil service?” Presumably, the provincial government already employs people who have far more specialized knowledge of the potash industry and provincial potash royalties than a generic economic consultancy.

If the Government of Saskatchewan genuinely lacks such in-house expertise, then it should do some hiring. But one fears that it is not seeking expertise, so much as an external validator.

The Jurist has more.

The Government of Saskatchewan wants nothing to do with a state (read China) corporation takeover of Potash Corp.  The Globe reports:

“The Saskatchewan government signalled Wednesday that it is unlikely to support a takeover of the Saskatoon-based company by a sovereign wealth fund or other state-owned firm from China or other large potash-buying nation. The fear is that the new owner’s primary motive – to supply food and fertilizer for their populations – would conflict with the province’s goal of supporting its people through higher potash prices.

“It would seem to us at first glance that their interest and the interest of taxpayers of Saskatchewan may not be aligned,” Saskatchewan Energy Minister Bill Boyd said in an interview.”

Perhaps I am missing something but is this more logical than saying a propos of BHP Billiton or other foreign capitalist suitors:

“The fear is that the new owner’s primary motive – to maximize profits for non Saskatchewan residents  – would conflict with the province’s goal of supporting its people through higher potash prices.

“It would seem to us at first glance that their interest and the interest of taxpayers of Saskatchewan may not be aligned.”

Be the purchaser capitalist or state capitalist, the province still owns the resource and can set royalties as it sees fit. If that power is not enough, then perhaps the province should take over the company itself.

For those involved in social change work, these days can be frustrating ones. Just as the neoliberal order of tax cuts, deregulation, resource extraction and free trade seems to be maxed out, like the Energizer bunny it keeps coming back. Meanwhile, progressive forces (academics, unions, NGOs and political parties) can give a good fight from time to time, but overall are as fragmented as ever.

So how do we move ahead to create a movement for change that will excite people about the world that could be, and put our ruling class on the defensive? For starters, we need to better focus our energies on articulating a vision and some clear highly strategic “game changing” steps towards that vision.

Second, we need to name and challenge capitalism as an economic system, the manifestations of which are the root of most activist causes. Given the Spirit Level evidence on the health and social problems associated with inequality, a full-frontal assault on the causes of inequality is badly needed. And radical changes are also required that stop our economy from trashing the planet (or the planet will soon find its own ways of stopping us).

Third, it is worth remembering the lessons of the Regina Manifesto, which set out a list of key demands that were outrageous in the 1930s. But many of the ideas in the Manifesto were in fact implemented over the course of several decades. That is, the Left needs a long game, and is too often distracted by reacting to short-term policy issues.

The game changers need to be measures that fundamentally alter the balance of power between corporations (and compliant governments) and ordinary people, building on the successes that have remained resilient to the onslaught of expanding markets for for-profit enterprise (in BC, public auto insurance, BC Hydro, BC Ferries, the Agricultural Land Reserve, public health care and education are all examples that have held their own against right-wing governments; perhaps bruised but still very much alive). Game changers, almost by definition, need to be bold, and ordinary people need to see that such moves will improve their day-to-day lives.

Here’s a list of (and a short rationale for) a number of ideas that would fundamentally change the nature of the “game” rather than seeking modest improvements at the margins (many of which have had lengthier discussions previously on this blog):

Guaranteed income – The creation of a basic or guaranteed income at a sufficient level would greatly enhance the bargaining power of workers by removing the fear of destitution that forces people to take crappy jobs (or worse) in order to survive. It therefore puts upwards pressure on wages at the lower end of ladder. It might lead to a lower employment rate and reduced average hours of work, not necessarily a bad thing, but could also be a means by which society supports artists and other professions that are more marginal economically. A guaranteed income would have to be federal due to mobility issues, and probably would be best modeled on the OAS or CCTB with a long phase-out period, rather than a universal demogrant. This would also eliminate provincial welfare bureaucracies and the federal EI system, but importantly would consolidate all income support programs federally. This transfer would also be adjusted upwards to compensate for price changes arising from carbon taxes, higher energy prices and higher food prices, all of which are likely consequences of aggressive climate action plans.

Sectoral bargaining – Unions have made some headway in the low-wage service sector, but small shops and high turnover confound organizing. Sectoral bargaining is an approach to unionizing the service sector that would give broad sectors (retail, restaurants, security, etc) a vote on whether to demand collective bargaining and if approved, different unions could then make their pitches on ability to represent those workers. This would quickly increase union density across the economy and lead to wage compression. For employers, it puts all work on a level playing field, so that there are no competitiveness issues, and wage increases would generally be passed on to consumers in the form of higher prices. Another related model to study is the German model of regional wage-setting institutions, which goes even deeper to include works councils (shop-level management practices that include workers in decision making) and co-determined boards (that give workers in large companies half the seats on the board).

Reigning in corporations – As documented by the Aurora Institute and the film, The Corporation, reforms to the way corporations are chartered are necessary. Currently, shareholders and executives benefit from limited liability (e.g. in the case BP oil spill, shareholders’ losses are limited to the price they paid for their shares), free speech (in advertising and politics), and deductions for entertainment and meals (boxes at hockey games, for example) – all of which should be eliminated or modified. A maximum level of executive compensation (related to the pay at the bottom of the company) could be established. Corporations also benefit from an expensive legal system that allows them to sue individuals (or intimidate by threat of lawsuit) for all manner of things. Corporations can be a useful organization form but they should have to prove their benefit to society, with sunsets on their corporate charters and a process for renewal. And to the extent that their useful economic activities could be performed by public enterprises, worker-owned enterprises or cooperatives, so much the better.

Abolish intellectual property – Copyright and patents create monopolies that raise prices for consumers. Historically, laws have tried to strike a balance between the right of creators to benefit economically from their work and the rights of society to benefit from that work (which is inevitably the product of a whole society). It is not obvious at all that artists and inventors only create in the presence of strong IP laws. And in a world of large entertainment and pharmaceutical corporations with massive advertising budgets and huge upfront costs of production, this logic gets put on its head anyway. The result is that IP as we know it is a huge contributor the rising share of income going to the very top of the income distribution. Economist David Levine argues for going the opposite way: make Canada an IP haven where people from around the world can come specifically to innovate on the work of others, meaning this could create a lot of interesting tech jobs in Canada.

Reclaim the new “Commanding Heights” – Key sectors of the economy should be brought into the public sector through aggressive regulation, nationalization or creation of public competitors. In telecommunications, for example, Canada has the most expensive prices in the advanced countries due to the oligopolistic practices of a handful of large telecom companies. This could be remedied by regulating prices, nationalizing the “pipes” or using the CBC to create a low-cost public competitor that would force companies to reduce their massive profit margins. Similar cases could be made for banking, oil and gas, pharmaceutical drugs, forestry, mining – although the specific form and strategy would differ depending on the specifics of the industry.

Localize food – New arrangements that promote enhanced local food supplies, with sustainable agricultural practices would help in both mitigation of greenhouse gas emissions and adaptation to peak oil and climate change. This should build on farmers’ markets, buyers’ coops and community shared agriculture projects to include broad-based procurement of local food by public sector (schools, universities, hospitals, prisons, social housing units, BC Ferries, etc) combined with the extension of supply management to fruits, vegetables and perhaps other areas. This would be a benefit to farmers in terms of higher incomes, and, if well-designed, would end hunger and improve nutrition if in combination with an attack on fast food and convenience store junk (i.e. make unhealthy processed food the new tobacco).

Expand the scope of the existing public sector – This is similar to reclaiming the commanding heights but builds on areas where the public sector already has a strong presence. This would include developing an integrated system of early learning and care with the K-12 system, community centres and libraries (”hubs” of local public services with hours that extend well beyond the standard business day). It would expand the umbrella of public health care to dental care, vision care, physiotherapy and other preventative health services. It would bring natural gas distribution back into the public realm to re-create (in the case of BC) an integrated public utility for managing energy and demand-side management programs. It would create a consolidated Crown corporation to manage recycling in BC to close the loop on waste. It would create new housing stock for households of all incomes to build complete communities, and massively expand public transit and infrastructure for bikes.

Radical democracy – 19th century democratic institutions are not adequately meeting the needs of 21st century citizens. Redefining democracy could include deliberative processes, referenda, participatory budgeting, lower the voting age to 16, campaign finance reform, etc (Judy Rebick’s book, Imagine Democracy, is a good starting point). Like the New Politics Initiative of 2001, this is about asserting a new way of doing politics, rather than just a suite of policies. The new democratic regime must also create new powers for municipal governments to act in the interests of local citizens.

Public money creation – There is no reason why money creation (i.e. the expansion of credit) should be the sole domain of the chartered banks. The status quo means money is created to support enterprises that will be profitable (but not necessarily socially or environmentally beneficial), upon which taxes must be levied in order to support public services. Delinking public services from capitalism would mean creation of money would follow democratic priorities. The potential for inflation would be a concern, so implementation would require a phase-in period. But it is worth noting that in 2007, new money created through chartered banks was about $200 billion (an expansion of 10%, and equivalent to 12% of aggregate demand that year, but consistent with low inflation), an amount about the size of the total federal budget. The 2008-09 financial crisis revived the idea of money creation (rather than bond sales) to finance public sector deficits, and while the crisis has died down, looming deleveraging could make make public money creation a necessity.

Tax bads – Public money creation need not preclude good tax measures that alleviate other social and environmental ills. These include higher top marginal income tax rates to reduce inequality, Robin Hood taxes to reduce financial speculation, carbon taxes to reduce greenhouse gases, inheritance taxes to deter dynasties, and taxes on junk food, alcohol and tobacco. On the environmental side these taxes are instrumental to achieving prices that reflect the true costs of extraction, processing, distribution and consumption, and a shift towards closed-loop manufacturing systems.

Legalize pot and most other drugs – Perhaps this is not a substantive game-changer but this issue would allow the left to reclaim some space on the civil liberties side of the fence (and have some fun, too). It makes little sense to continue with prohibition, a system that fosters organized crime (which causes more harm than any health-related impacts of drugs), and criminalizes millions of consumers who are not doing any harm to others. Prohibition is a crusade that does not work in spite of massive public resources dedicated to it. Indeed, legalization would shine daylight on underground activities, create new work in Amsterdam-style “coffee shops”, and provide another source of tax revenue.

Carbon quotas – This is an alternative approach to carbon pricing (carbon taxes) that would allocate to households (or individuals within a household) a share of the annual (and shrinking each year) carbon budget. Because high-income families lead much more carbon intensive lifestyles than low income families, they would have to buy quota from households that had an excess – that is, the system is inherently redistributive, while providing greater certainty about GHG reductions than a carbon tax.

That’s my 12-step program, for now anyway. I’m not particularly hung up on any of these ideas and am interested in others’ thoughts on game changing initiatives. Over to you.

Yesterday’s GDP numbers were worse than they seemed.  And they highlighted a curious feature of modern capitalism.  Nowadays, non-financial businesses have become major net lenders to the rest of the economy.  Instead of borrowing money (in various forms: debt, equity, etc.) from other sectors to finance real investment, non-financial businesses are not even reinvesting their own cash flow.  The surplus cash is channeled back into financial markets.

At a moment deleveraging is holding back growth, and  both governments and consumers are cutting back spending, this upside-down behaviour by the business sector makes things far worse.  Canada’s non-financial businesses have saved almost $100 billion during the current recession.  That almost perfectly offsets the $100 billion increase in debt taken on by Canadian governments in the same period.

Below is my full G&M column on this.  Mario Seccarreccia has also raised this point in analyzing Canadian flow-of-funds data.  Michael Hlinka (CBC Toronto) called this argument nonsense on Metro Morning today — so then I must be on to something!

Tepid GDP numbers released yesterday by Statistics Canada confirm that Canada’s economic recovery, such as it was, is sliding completely into the ditch.  We’re clearly heading for stagnation at best, and quite possibly another “double dip” downturn.

The headline number was disappointing, to say the least.  Real GDP grew just 2 percent (annualized) in the spring quarter.  That’s just a hair faster than the U.S. economy (which everyone knows is still deeply in the soup).  Two percent doesn’t keep up with population and productivity - implying higher unemployment ahead, not lower.  Typically, at this stage of recovery, the economy should be growing 3 times faster.

Dig a little deeper, and the picture looks even worse.  Half the growth reported yesterday was a statistical “shadow” of the faster expansion experienced in the first quarter (earlier growth which automatically boosted the second-quarter numbers, whether GDP kept growing or not).  From March through June, actual growth was weaker: about 1 percent annualized.

Moreover, that growth which did occur was due solely to inventory accumulation, as businesses began restocking the shelves in hopes of stronger market conditions.  Strip out new inventories, and real GDP actually declined.  But consumer spending is already slowing down, and now those inventories will drag down future growth.

Another worrisome sign is the continuing deceleration of inflation, as measured by Statistics Canada’s broad GDP deflator.  Inflation fell to less than 1 percent in the spring - and in the consumer sector, prices were falling (deflation).  That further erodes confidence, and increases real debt burdens for consumers and governments.

Yesterday’s data confirm another curious and worrisome trend.  Every economic recovery needs somebody to borrow and spend.  That’s where new purchasing power comes from.  So far, this recovery has been precariously dependent on households and governments to do all the borrowing and spending.  The spirit of growth has yet to infuse the private sector, and consequently Canada’s recovery remains both narrow and precarious.

Debt-happy consumers accounted for much of last year’s rebound.  Their spending was largely channelled into Canada’s short-lived housing bubble (which popped audibly last spring).  With total personal debt now equal to 150 percent of disposable income, we know that consumers must retrench.  Indeed, they’re already cutting back, as evidenced by a big uptick in the saving rate.

Governments, of course, have been the other key source of spending power, through deficit-financed stimulus programs.  Those injections will also start to ebb, as governments at all levels pull back (hopefully not too quickly, or else the threatened double dip will become a sure thing).  So with both consumers and governments tightening their belts, who will lead the next phase of recovery?  It should be business.  But so far, the private sector is still sitting firmly on the bench.

Despite a few signs of life (mostly in the oil and gas industry), overall business investment spending has not bounced back at all.  Business capital investment is only 6 percent higher than in the trough of the recession a year ago.  Yes, profits shrank during the downturn, but are recovering.  And businesses aren’t even re-investing what they get, let alone taking on new debt.  Cash flow (profits plus depreciation) continues to outstrip new capital investment by almost two-to-one.

The odd result of this private-sector passivity is that non-financial firms have actually saved close to $100 billion since the recession began.  That almost perfectly offsets the $100 billion in new debt taken on by our governments over the same period.  In other words, governments (and the taxpayers who fund them) are taking on debt to try to restart a sick economy.  But for every dollar they put in, private firms take a dollar out - in the form of idle, uninvested cash flow, used to pay down their own debt or (worse yet) speculate in the paper markets.

Business should be leading economic recovery, borrowing money (from households and banks) to fund new investments and jobs.  That’s how capitalism is supposed to work.  In today’s lean-and-mean world, however, business is free-riding on the spending efforts of others.  Despite tax cuts and other business-friendly policies, the private sector isn’t taking on the risks, and taking on the debt, necessary to fuel broader recovery.

That longer-run imbalance, not just the weakness evident in the shorter-run economic data, will hold back Canada’s economy for years to come.  Governments clearly need to keep stimulating through budget deficits and low interest rates (rather than choking off recovery with premature tightening).  But in the absence of business leadership, they’ll also have to take on a bigger task: finding ways to directly expand output and create work, filling the vacuum left by the private sector’s continuing failure to borrow and spend.

UPDATE (September 1): Quoted in The Toronto Star.

Canadian Gross Domestic Product (GDP) grew modestly in the second quarter, but that modest growth returned GDP to a level not seen since before the economic crisis.

Recent Developments: The Second Quarter

Canada’s output expanded at a quarterly rate of 0.5%, which corresponds to an annual rate of 2.0%. Such growth would be acceptable in normal times and is somewhat ahead of the US, which recently reported an annual rate of 1.6% for the second quarter.

However, one would hope for stronger growth coming out of a recession. The second quarter pales compared to the first quarter, in which Canada leapt forward at a 5.8% annual rate. (Today, that impressive first-quarter number was revised down from the 6.1% originally reported.)

International trade was the main drag on Canadian growth in the second quarter. A huge rise in imports withdrew far more demand from our economy than a modest rise in exports added. While both imports and exports have been recovering since mid-2009, imports seem to be accelerating while exports appear to be decelerating.

Canada’s domestic economy grew much as it had in the first quarter. Consumer spending and inventory restocking continued to be the main drivers of growth.

Government spending and investment again edged up only slightly. Stimulus spending appears to have peaked by the end of 2009.

The most striking difference from the first quarter is that business investment in machinery and equipment belatedly started to recover in the second quarter. In terms of the overall growth in business investment, a slowdown in residential structures offset the pick-up in machinery and equipment. However, it is good that corporate Canada is finally investing in productive assets instead of real estate.

The Longer View: Saved by Stimulus

Since overall GDP has returned to pre-crisis levels, now is an opportune moment to examine how the different components of GDP changed during the recession:

Canadian Gross Domestic Product ($ billions)

2008Q3  

2010Q2 

Change 

Total GDP   

$1,321   

$1,321  

$0   

Consumer Spending  

$ 813  

$ 839  

$26  

Gov. Purchases  

$263  

$280  

$17  

Gov. Investment  

$43  

$55 

$12  

Housing Construction 

$78  

$79  

$1  

Business Investment 

$203  

$162  

($41)  

Business Inventories 

$13  

$13  

$0  

Exports  

$485  

$446  

($39)  

Imports  

($586)  

($564)  

$22  

A couple of GDP components, namely residential structures and business inventories, dropped during the recession but have now recovered to pre-recession levels. These components have simply returned to where they started.

Governments did the heavy lifting. Together, government purchases and investment increased even more than consumer spending (+$29 billion vs. +$26 billion). This contribution to the recovery was disproportionately large, given that government purchases and investment were only 38% the size of consumer spending before the recession.

Meanwhile, business investment and exports are still far below pre-recession levels. This shortfall has been offset by lower imports, higher consumer spending, and more government purchases and investment.

The public sector is the most significant offsetting factor. Without stimulus, our economy would still be under water.

With the US on the brink of a relapse into recession or, at best, a period of very slow growth and rising unemployment, all eyes are on the Federal Reserve. After all, it seems to be the only show in town. The conventional wisdom is that there will be no second round of fiscal stimulus forthcoming from the US Congress anytime soon - unless you count the weakest possible stimulus which would be an extension of the Bush tax cuts for the rich. Republicans will veto any major round of public investment, and there is no sign that the Rubinomics team will shift in that direction in the brief time they have left before the Congressional elections to shift the economic policy agenda. 

So that leaves monetary policy. There seems to be an emerging consensus that a new round of quantitiative easing should begin- see for example FT columnist and US correspondent Clive Crook in today’s FT who Krugman claims as an ally in his blog. But what kind of easing should progressives support?

 My old friend Tom Palley has weighed in on the subject in the FT. 

 I was more than a little surprised to see that he calls for a modest increase in interest rates, albeit combined with further Fed purchases of financial assets via renewed quantitative easing. 

I tend to agree with his point that extended ultra low interest rates risk inflating new asset bubbles.

“Raising interest rates in this fashion would also diminish tendencies towards speculation and excessive risk taking. Prolonged very low interest rate environments encourage yield chasing that over-inflates asset prices, and this process often ends in tears.

By chasing yield, households stand to suffer large losses should policy succeed in guiding the economy out of recession, thereby triggering higher interest rates. This risks a vicious double blow to households whose savings and pensions have already suffered from the financial crisis. Moreover, poorer, less financially sophisticated households are likely to suffer most from rising interest rates as the searing effects of the crisis have tilted money flows toward safe investments such as Treasury bonds. Banks are also at risk to the extent they have been parking excess reserves in longer bonds to exploit the slope of the term structure of interest rates.”

He has a point here.  But surely the key point should be that we need expansionary fiscal policy. If we are not going to get it, then do we really want higher interest rates? I think not.

 Palley calls for a new round of purchases of mortgages securities to help revive the moribund US housing market which may make sense, especially for distressed home owners.  It does, however, seem unlikely that we are going to get much impact on the real economy as the housing bubble works its way out.

He adds sensibly that:

“Purchases of state government bonds would lower financing costs for states at a time of large state budget deficits. That could help avoid cutbacks to state and local government employment.”

I was, however,  surpised that he goes on to call for an end to Fed purchases of long term federal bonds, on the rather dubious grounds that higher incomes from higher interest rates would boost consumption.

“Moreover, government interest payments are an income transfer to the private sector, a form of tax rebate. Consequently, increased interest income on government bonds would stimulate consumption spending, especially among households (such as retirees) that rely on such income.

The same logic holds for raising the federal funds rate. This would raise money market and deposit account interest rates, thereby helping savers. To the extent that such financial assets are disproportionately held by lower income households and retirees who spend most of their income, this would boost their income and consumption spending.”

Since when were interest bearing assests disproportionately held by the lower end of the income spectrum, as opposed to pension funds and other large institutional investors?

It strikes me that even though US long term bonds are at historic lows, it remains important for the Federal Reserve to maintain the space for a renewed round of fiscal stimulus. Borrowing costs for the US government are currently so low that a longer term public investment program which could have a major impact on jobs and on growth could be readily financed and increase potential growth moving forwards.

The bottom line is that I am dubious that quantiatitive easing can avert a double dip alone, Rathe, expansionary fiscal policy is the only effective means to ensure that quantitiative easing actually expands real demand in the economy.  The US needs both ultra low interest rates and an active fiscal policy rather than the unwinding of the current anaemic stimulus package which is expiring. 

I fear that even US progressives are starting too place too much faith in what monetary policy can do.

Here’s a fascinating finding from an NBER study: “The Economic Crisis and Medical Care Usage,” by Annamaria Lusardi, Daniel Schneider, and Peter Tufano (NBER study #15843).

They undertook a broad public survey across 5 countries (the U.S., Canada, U.K., Germany, and France) on the economic and social impacts of the recession.  The survey covered over 6000 individuals (over 2000 in the U.S., and over 1000 in each of the others), and asked a range of questions regarding how the recession changed their behaviour.  It was administered last June.

One question they asked was whether or not respondents had reduced their use of routine medical care services.  This result was striking.  Here is the proportion of respondents in each country who reported reducing their use of routine medical services, in descending order:

U.S.: 26.5%

France: 12%

Germany: 10.3%

U.K.: 7.6%

Canada: 5.6%

The authors make the obvious conclusion: namely, the higher are the out of pocket fees associated with medical care, the more individuals will cut back care when they are worried about their employment and economic security.  Canada and the U.K. have the lowest user fees among the five countries surveyed; and in those countries, there was virtually no change under the recession in patterns of care utilization.

Ironically, of course, there’s no better time to get medical care than during a recession:  Disruptions to normal work are reduced, and the stimulus to spending is helpful macroeconomically.  Think of getting a medical “tune-up” as the personal equivalent of an investment in public infrastructure (which is also highly appropriate during a recession).  Yet market-based care produces the opposite result: a pro-cyclical trend in health care utilization that denies care when individuals (and the economy) need it the most.

This study is striking testimony to the success of Canada’s universal system, and the dangers of privatization, user fees, and the other “reforms” parroted so loudly these days by the CMA and other conservatives.

A key issue arising from the proposed potash takeover is BHP Billiton’s musing about leaving Canpotex, the agency that has long marketed Canadian potash offshore. (Growing up near the railroad tracks in Regina, Canpotex train cars were a familiar sight.)

Perhaps BHP believes that it alone has sufficient clout to manage supply and negotiate overseas prices without Canpotex. But other Saskatchewan potash mines for which BHP is not bidding also rely on Canpotex.

Perhaps BHP believes that it could generate more profit by exporting a significantly larger quantity of potash, without significantly depressing the price. If so, the implication is that Potash Corp management has misjudged the demand curve.

Or maybe BHP plans to flood the offshore market with cheap potash and accept lower profits in the short term. If BHP could thereby put competitors (in Saskatchewan or elsewhere) out of business, it might achieve even more pricing power and greater profits in the long term.

Saskatchewan political leaders, the companies currently mining potash in Canada, and their employees have raised concerns about these possibilities. So, BHP has been backpedalling on the prospect of withdrawing from Canpotex. This backpedalling took an hilarious turn in Wednesday’s Globe and Mail:

Graham Kerr, president of BHP’s potash operations, said if the company’s bid is successful it will study the Canpotex agreement more closely. “I am not close enough to the insights of how Canpotex operates to say if it’s a good, bad or indifferent organization.”

Does Kerr actually expect anyone to believe that BHP bid US$39 billion for Potash Corp without studying Canpotex first? As BHP’s potash president, has he really not formulated any views on Canpotex?

Anyway, if BHP is looking to hire a potash president who has some sense of how Canpotex operates, just e-mail the job posting to: “info [at] progressive-economics.ca”.

As sometimes happens, I started writing a comment on Jim’s excellent post and then realized that there was enough material for a new post. I agree with Jim that Ottawa’s $130-million settlement with AbitibiBowater deserves more attention, but I have been waist-deep in potash.

I think that my initial take on Abitibi’s NAFTA challenge still holds up pretty well. But here are three further thoughts:

1.) Jim writes, “There is no constitutional way for Ottawa to force Newfoundland to pick up the tab.” Constitutionally, it would actually be quite easy for the federal government to deduct $130 million from its transfer payments to the provincial government. But that would be politically toxic.

2.) It is not unusual for governments to contribute to the restructuring of economically significant, but financially bankrupt, companies like Abitibi (which has many operations in other provinces). So, I wonder to what extent Harper is using the NAFTA challenge to characterize the $130 million as compliance with trade obligations rather than as a “bailout.”

Of course, an explicit federal bailout of Abitibi would be preferable because Ottawa could attach public-interest conditions to the money, obtain equity in the company, and not set such a rotten precedent for future NAFTA challenges. But as Jim notes, federal Conservatives probably view that precedent as “a desirable loss of sovereignty.”

3.) Harper has set another precedent: provincial governments can disregard NAFTA with impunity (although I am not convinced that Newfoundland really violated NAFTA in this case). If “foreign” investors challenge a provincial policy, Ottawa is left holding the bag.

I believe that is one of the federal government’s main motives for encouraging inter-provincial “free trade” deals like TILMA. The goal is not to remove unidentified inter-provincial trade barriers, but to have provincial governments directly commit to NAFTA-style rules.

PS - The old ABC was Premier Williams’ “Anything But Conservative.”

I have the following op-ed in today’s Regina Leader-Post. Below it is a table supporting my statement that “the mines that PCS owned in 1989 still account for 80 per cent of its potash production and capacity.”

Privatizing Potash was a Costly Mistake

The greatest tragedy in BHP Billiton’s $38.6-billion (U.S.) bid for the Potash Corporation of Saskatchewan (PCS) is that the Government of Saskatchewan previously sold PCS for just $630 million. This privatization was the worst fiscal decision in the province’s history and has been aggravated by subsequent royalty giveaways to private potash companies.

PCS was created in 1975 as a provincial Crown corporation. The Saskatchewan government privatized it in 1989, selling all of its shares by 1994.

Presumably, the proceeds were deducted from the provincial deficit. Borrowing $630 million at 10 per cent interest, compounded over two decades, would have added $4.2 billion of provincial debt by now.

In fact, provincial bond rates have fallen far below 10 per cent since the early 1990s. Also, had PCS shares not been sold, dividend payments to the government would have partly offset interest charges on its additional borrowing. Therefore, $4.2 billion is a very optimistic estimate of privatization’s fiscal benefit.

The fiscal cost of privatization is the amount that PCS would be worth had it remained a Crown corporation. Since privatization, PCS has acquired additional potash mines in Saskatchewan and New Brunswick, phosphate and nitrogen facilities in the U.S. and Trinidad, and shares in other fertilizer companies.

During the 1990s, Crown corporations were encouraged to invest outside the province. Therefore, PCS could have made the same acquisitions and developed along the same lines had it remained a Crown corporation. If so, the fiscal cost of privatization is at least $40 billion (the Canadian-dollar value of BHP’s offer), which is about 10 times the maximum fiscal benefit. 

Of course, privatization supporters would claim that PCS has been better managed as a private company. Had it remained a Crown corporation, PCS might have lacked the initiative or financial ability to expand.

However, the mines that PCS owned in 1989 still account for 80 per cent of its potash production and capacity. Since 70 per cent of the company’s current gross margin is from potash (rather than phosphate and nitrogen), these mines still provide at least 55 per cent of overall profits today.

If PCS had simply held onto those historic assets, it would now be worth more than half of today’s value. Even assuming that PCS would have completely stagnated as a Crown corporation after 1989, the fiscal cost of privatization was still more than five times the maximum fiscal benefit.

Depending upon which assumptions one accepts, the costs of privatization exceeded the benefits by between $18 billion and $36 billion. In other words, the Saskatchewan government gave up between $17,000 and $35,000 for every man, woman and child in the province.

Saskatchewan’s potash reserves still belong to the public. Unfortunately, the provincial government has been slashing the royalties charged to PCS and other companies that mine these reserves. Saskatchewan’s misguided royalty holidays on increased potash production in 2003 and 2005 simply prompted the U.S. and New Brunswick to cut their potash royalties.

This race to the bottom has robbed Saskatchewan residents of an appropriate return on their resource. The potash industry extracted the same tonnage from Saskatchewan in 2005 and 2008. Entirely due to price increases, this output was worth $4.7 billion more in 2008 than in 2005.

Most of this gain should have accrued to the people of Saskatchewan, who own the resource. Yet provincial potash royalties rose by only $1.1 billion between the 2005 and 2008 fiscal years.

The provincial government then refunded much of this money to PCS and other potash companies following the economic crisis. As a result, royalty revenues actually turned negative in the 2009 fiscal year, even though the dollar value of potash sold from Saskatchewan remained higher than it had been in any year before 2007.

Of course, profits in excess of royalties are subject to corporate income tax. However, the Canadian government is slashing its corporate tax rate from 29 per cent in 2000 to just 15 per cent by 2012.

Between 2006 and 2008, Saskatchewan cut its rate from 17 to 12 per cent. Wholly or partially reversing these corporate tax breaks would give the public a more significant fraction of future potash profits.

The prospect of a PCS takeover underscores the folly of having privatized Saskatchewan’s crown jewel. Whether or not a takeover occurs, governments should strengthen their royalty and tax regimes to collect a fairer share of potash revenue for the public.

Erin Weir is a Saskatchewan expatriate working at the Canadian National Office of the United Steelworkers union, which represents most of Saskatchewan’s potash miners.

PCS Potash Mines (millions of KCl tons)

 Mines  

 Capacity   

 Production   

 Pre-1989   

 Nameplate  

 Operational  

 2009   

 2008 

 Lanigan   

 3.8   

 3.6   

 0.7  

 2.1   

 Rocanville   

 3.0  

 2.8   

 0.9  

 2.8   

 Cory  

 1.4  

 0.8  

 0.4   

 0.4   

 Esterhazy*   

 1.3   

 0.9   

 0.3  

 1.1   

 60% Allan   

 1.1   

 1.1   

 0.4   

 0.7   

 Sub-Total   

10.7   

 9.2   

 2.8   

 7.2  

 Post-1989  

 40% Allan   

 0.8   

 0.7   

 0.3   

 0.4   

 Patience L.

 1.0   

 0.5   

 0.1 

 0.3  

 N. B.  

 0.8   

 0.8   

 0.3   

 0.8  

 Total        

13.3   

11.2   

 3.4   

 8.7     

1989 / Total 

 80 %

 82 %   

 82 % 

 83 %  

* Operated by IMC (now Mosaic) on contract with PCS.
Note: Due to rounding, the sum of mines sometimes differs slightly from the “Sub-Total” and “Total.”

            Canada’s federal government made an important announcement this week.  It was kept deliberately quiet: with a news release issued at 4:45 pm on a calm Tuesday in the middle of the late-summer news “dead zone.”  But it should set alarm bells ringing for anyone concerned with the anti-democratic direction of global trade law.

            Prime Minister Stephen Harper’s Conservative government reached a $130 million out-of-court settlement with the bankruptcy trustees overseeing the restructuring of AbitibiBowater Inc., a failed forestry and paper giant.  The settlement relates to a claim that Abitibi brought against Canada under NAFTA’s notorious Chapter 11 process.  This process is a bizarre kangaroo court in which investors from one NAFTA partner (and only investors - normal people aren’t allowed in) can sue another NAFTA government for actions which are deemed to break NAFTA’s broad investment rights provisions.  If a Chapter 11 tribunal rules against the offending government, it can order damages be paid to the aggrieved investor.

            In its 15 years in existence, the court has interpreted those investor rights clauses very expansively.  Not just outright expropriation is prohibited and subject to penalty.  Any measure which is seen to impose an unfair or unjustified burden on the profitability of a company (whether it has anything to do with the nationality of the investor or not) can be considered “tantamount to expropriation,” and hence subject to penalty.

            In the AbitibiBowater case, the provincial government of Newfoundland and Labrador (led by feisty Premier Danny Williams, a Conservative) took back Abitibi’s timber and water rights in 2008 when that company abandoned its mill that processed wood from that tract.  The company laid off 800 people and destroyed the isolated community of Grand Falls in the process.  Williams’ move was both morally and economically justified: he said if AbitibiBowater wasn’t going to productively use those rights, someone else should have access to them.  The Newfoundland government offered to pay fair value for the real assets (including the plant’s hydro dam) caught up in the action, minus expenses for worker severance and environmental clean-up of the company’s abandoned facility.

            Indeed, today Williams stands by his audacious act, which was hugely popular in Newfoundland.  He recently said, “Of the many things that I’ve done … in government, this is probably one of the actions that I’m the most proud of.”  But Abitibi, predictably, raised a hue and cry.  But they didn’t complain to a Canadian court of law: what Williams’ government did was unusual, but hardly illegal.  Instead, they went straight to NAFTA’s kangaroo court.

            Since NAFTA is an international treaty, it is the federal government who speaks for Canada - even when the claim is directed against a provincial government.  Usually these Chapter 11 cases drag on for years.  Amazingly, however, Canada’s federal officials settled the case out of court this week.  They agreed to pay damages of $130 million, only 6 months after Abitibi formally filed its NAFTA complaint.

            There was no “national treatment” aspect to the seizure of Abitibi’s rights (it was Abitibi’s socially irresponsible actions, not its nationality, that sparked the Newfoundland action).  Indeed, Abitibi is functionally headquartered in Montreal, Canada, and is, for most intents and purposes, a Canadian company (its U.S. “identity” merely reflects a Delaware incorporation - no doubt for tax avoidance reasons).  This makes it all the more bizarre that it could use the NAFTA process (rather than normal courts) to sue its own government.  There should have been plenty of grounds to fight the case as a dramatic over-reaching of NAFTA’s rules (which in theory are supposed to protect one country from discriminating against investors from another country on the basis of their nationality).  Even if Canada eventually lost, it could clearly stretch the process out for years.

            So how do we understand the federal government’s utter and premature surrender, not even bothering to try to defend the Newfoundland actions?  Canada’s strange jurisdictional division of responsibilities comes into play here: it’s the federal government’s responsibility to defend Chapter 11 cases, and even foot the bills.  There is no constitutional way for Ottawa to force Newfoundland to pick up the tab - although Harper threatened this week to try to pass the buck to the provinces for any future Chapter 11 judgements against them.

            The federal government’s expensive white flag will certainly come back to haunt Canada in future Chapter 11 actions.  After all, more claims have been launched against Canada under Chapter 11 than any other NAFTA partner: 28 at last count, claiming total cumulative damages in excess of $14 billion.  (Mexico and the U.S. have each been hit with 19 cases, so far.)  The Abitibi settlement ranks as the largest Chapter 11 payout ever made by any North American government.  Ottawa’s capitulation will clearly encourage more companies to take aggressive action through the NAFTA kangaroo court, over any government action (nationally prejudicial or otherwise) seen to hurt business profits and the interests of any investors, whatever their nationality.

            The only conclusion we can come to is that the hard-line neoliberal Harper government actually wanted to pay this bill, and that’s why they didn’t bother fighting the case.  Naturally they hate the idea of governments taking economic matters into their own hands, like Danny Williams did.  They claim to want to send a signal to global investors that Canada is truly “open for business.”  (Unfortunately in my view, even Williams’ actions haven’t scared off the foreign mining speculators snapping up Canadian resource properties - the latest being the $40 billion takeover war for Potash Corp.)  And they don’t want the Abitibi squabble to interfere with their rush to sign new free trade deals with the EU, Korea, and others.

            Through Harper’s lens, then, $130 million is a small price to pay to reinforce Canada’s full commitment to free trade rules, and free trade ideology.  (So much for this government’s supposed preoccupation with reducing its deficit, at all costs!)  But for Canadians, the bill will only get bigger.  It will get bigger with every new, more aggressive Chapter 11 challenge filed.  With every potential legislation killed by the chilling effect of Chapter 11 (”We can’t do that, we’ll get sued under NAFTA.”).  And with every community that closes down because profit-maximizing foreign conglomerates have no compulsion to consider the social or environmental costs of their decisions - just the way the free trade architects want it.

            Canada should renounce Chapter 11 as an anti-democratic, distortionary, rent-seeking divergence from the genuine processes of trade and investment.  Canadians should be outraged at Ottawa’s $130 million giveaway.  If Abitibi had a genuine complaint, they should take it to a Canadian court (not this unaccountable, shadowy tribunal).  And instead of paying $130 million of taxpayers’ money to a bankrupt company with no promises whatsoever that it will ever create another job in Canada, here are just a few things the Harper government could have done with the money:

• funded the renovation and retrofit of 5,000 units of low-cost public housing - creating hundreds of construction jobs and alleviating the crisis of under-housing.
• funded 370,000 weeks of regular Employment Insurance benefits for Canadian workers (including forestry workers in Newfoundland) who are being thrown off the EI system every week when their benefits expire.
• funded 25,000 child care spaces for a year, creating 3000 or more full-time jobs for child care workers.

Pick your own way that a supposedly cash-strapped government should spend $130 million.  You’d be hard-pressed to imagine one more damaging to Canada’s democracy, independence, and long-run economic security than this one.

P.S.  For a full listing of cases filed under NAFTA’s Chapter 11, and decisions rendered, please see the excellent compilation prepared by Scott Sinclair of the Canadian Centre for Policy Alternatives.

http://www.policyalternatives.ca/sites/default/files/uploads/publications/National_Office_Pubs/2008/NAFTA_Dispute_Table.pdf

Scott is working on an update of this table (which currently includes all cases filed up to 2008), which will be published this fall.

An article in today’s Globe and Mail discusses some new research funding for the University of Alberta.  In particular, the article notes:

The U of A ranks second in total research funding, behind only U of T and up from fifth in 2006. This year, the U of A will spend $514-million on research, more than double its total from a decade ago.

However, the article also hints at the other side of the coin (no pun intended):

 The funding comes at a time when the cash-strapped school is looking for cuts elsewhere – reports surfaced earlier this summer that it cut off phone lines for some professors this year to save money.

I think this second point is very important.  On the one hand, I note that Canadian universities put a lot of time and effort (as well as money) into competing with each other to attract more research dollars and prestige.  On the other hand, this is happening at a time when federal cash transfer payments to provinces for universities are decreasing substantially, student-faculty ratios are increasing very significantly, tuition rates are at an all-time high, and the average student debt load is much higher than it was in the mid-1990s. (I’ve written about this two-sided phenomenon here.)

Let’s face it: if a student can’t attend every class because they have to work three part-time jobs to afford tuition, if they can’t contact their professor because the professor’s  phone is disconnected, and if class sizes are too large for professors to take the time they need with their students, it doesn’t much matter that your university just inched its way one step closer to being home to the next Nobel prize winner!

I think Canada’s universities need less razzle-dazzle and more substance.

Last week, I was in Halifax at USW’s Ontario-Atlantic district conference. It was a great conference in a great city.

But having so many key people out of the office limited our response to BHP Billiton’s bid for the Potash Corporation of Saskatchewan. (Next time BHP launches a hostile takeover, it should better coordinate the timing with interested unions.)

Nevertheless, we got out a press release throwing down the gauntlet for BHP to demonstrate how the proposed acquisition would benefit Canadians. CEP, the second-largest potash union, has also issued a release. Today, we have the following op-ed in The Financial Post (page FP 11):

BHP Takeover of Potash Could Squeeze Workers

Last week’s hostile takeover bid for the Potash Corporation of Saskatchewan (PCS) should raise a red flag for Canadians. However, it is an opportunity for a national debate on the future of Canada’s potash industry, the continuing onslaught of foreign takeovers of Canada’s resources and industries, and the effectiveness of the Investment Canada Act.

PCS is simply the most recent Canadian economic jewel swept up in the relentless surge of foreign takeovers: Stelco, Xstrata, Inco, to name but a few. Canada no longer has a single major steel producer. In 2006 alone, foreign ownership of Canadian mining leapt to 48% from 12%.

PCS began as a Crown corporation, wholly owned by the people of Saskatchewan. The 1989 legislation privatizing the company prevented non-residents of Canada from owning more than 45% of the shares. In 1994, the Saskatchewan government removed this restriction. Although PCS remained a Canadian company, non-residents held just over half of its shares at the end of last year.

BHP’s bid would bring PCS wholly under foreign ownership. There are numerous reasons for Saskatchewan communities to be concerned about its bid, and governments’ unwillingness to protect Canadians’ interests.

BHP has mused about leaving Canpotex, the agency that has marketed Canada’s potash offshore for four decades. BHP may have enough clout to go it alone in world markets. But removing PCS sales from Canpotex would severely undermine that agency’s marketing and pricing power, to the detriment of Canada’s smaller potash producers: Agrium and Mosaic. With less capacity to negotiate high and stable prices for all Saskatchewan potash mines, provincial royalty revenues could be lower and more volatile.

Canadian workers and governments would also have less bargaining power in negotiating with a global mining giant. Currently, PCS generates two-thirds of its profits from unionized mines in Saskatchewan. As a result, Saskatchewan workers, the provincial government and the federal government have some leverage in negotiating the wages, royalties and taxes paid by PCS.

If the proposed $38-billion-plus takeover occurs, Canadian mines would account for more like one-tenth of BHP’s profits. In the future, BHP could credibly threaten to close Canadian operations to extract concessions from workers and/or governments.

This prospect is much like the unfortunate situation with Vale’s acquisition of Inco, which led to a strike in Sudbury that lasted 100 days longer than the longest Inco strike. Our union still remains on strike against Vale at Voisey’s Bay in Labrador, with the company employing replacement workers and refusing to accept the same settlement that was reached in Sudbury.

Unfortunately, Vale has been cited as another possible purchaser of PCS.

Recognizing BHP’s bargaining power after a takeover, Canadians should drive a hard bargain now in reviewing its bid. The Investment Canada Act gives the federal government extensive power to reject proposed takeovers that would not provide a “net benefit” to Canada. And a deal’s “net benefit” should be understood as more than just what windfall current shareholders might earn as competing bidders drive up stock prices.

Unfortunately, repeated Canadian governments have failed to effectively use this authority. Most foreign takeovers are rubber stamped. All are behind closed doors. Of more than 1,600 proposed acquisitions reviewed under the Investment Canada Act since 1985, only one was rejected. Of all the foreign takeovers, the government has only ever taken one foreign company to court for violating commitments under the Act.

Applications to acquire PCS or other major Canadian enterprises should be subject to thorough reviews, including meaningful opportunities for employees, their unions and the wider community to participate in the process. If such a review approved BHP’s takeover, it might be made conditional on BHP at least maintaining certain levels of employment in Canada and conducting its offshore potash sales through Canpotex.

Such commitments made under the Investment Canada Act should be public so that Canadians know whether or not they are being met and enforced. A major problem with Vale is that we still do not know precisely what promises were made when it bought Inco. As a result, the public has no means to ensure Vale lives up to any commitments it made behind closed doors. Let’s not let the same happen again.

The prospective foreign takeover of PCS is a major challenge for Canada. But it is also an opportunity to improve our policies for reviewing foreign takeovers and protecting Canadian interests.

Ken Neumann is National Director for Canada of the United Steelworkers union, which represents Canadian potash miners employed by PCS, Agrium and Mosaic.

I got this wrong first time round. Krugman commends Nick Rowe over at Worthwhile Canadian Initiative for his spirited views and writing on monetary policy.

Prof.  Myron Gordon was an economist, a long-time member of faculty at the Rotman School of business at the U of T, and a founding member of the Progressive Economics Forum.  Sadly he passed away in Toronto on July 5 of this year.

My Gordon was very influential with me, and I know with many other independent-minded economists in Canada.  In 1998 he helped us found a network of economists determined to broaden the bounds of acceptable debate (which became the Progressive Economics Forum).  He attended many of our sessions, presented several papers, and always challenged us to be both policy-relevant and rigorous.  His work on electricity markets was especially influential with many of us in the trade union movement; we tapped his expertise in this subject several times in our long fight against energy deregulation and privatization.  He also wrote extensively on pharmaceutical policy and financial market structures.  He gave me important advice and comments on my first book (Paper Boom, 1999).

Like many left economists in Canada, I am personally and professionally indebted to My for his dedication, professionalism, and mentorship.  There will be a memorial service for him at the Rotman School on Sept. 11, 1:30 pm, on the 3rd Floor (105 St. George St.).  To attend this event, please RSVP either online at http://www.rotman.utoronto.ca/sept11  or by calling Jennifer Hildebrandt at 416-946-7462.  In lieu of flowers his family has suggested a donation (fittingly) to Doctors Without Borders.  Thank you, Myron, for your contributions to critical economics!

One million. No, it’s not the number of posts that Armine has written about the census. (I count only 32.)

A million is the number of times this blog has been viewed since Marc started it back in the summer of 2006. It has been an eventful few years in Canadian economics: the commodity “super cycle,” financial crisis, Great Recession, swing from budget surpluses to deficits, etc.

I think that this blog has been modestly ahead of the curve in anticipating, and commenting on, some of those developments. “Tomorrow’s conventional wisdom, today,” “we told you so,” and “you read it here first” have become regular taglines.

One million seems like a significant milestone, but what does it actually measure? WordPress claims not to count views by those of us who post.

However, a reader could presumably view (i.e. click on) multiple posts in a single visit. On the other hand, some people probably read our posts in syndication on Rabble, New Democrats Online, etc. without being counted by WordPress at all.

So far, we have utterly failed to use social networking to promote the blog. The upshot is that there is still plenty of room to expand our readership.

To paraphrase Mötley Crüe:

When Marc started this blog
All he needed, needed was a laugh
Years gone by . . .
I’d say we’ve kicked some ass

Paul Krugman agrees with my view that the bond market is signaling  long term economic stagnation rather than experiencing a bubble - and he is, of course, far more influential and cogent than I.

“But the argument has become even stranger recently, as it has become clear that investors aren’t worried about deficits; they’re worried about stagnation and deflation. And they’ve been signaling that concern by driving interest rates on the debt of major economies lower, not higher. On Thursday, the rate on 10-year U.S. bonds was only 2.58 percent.

So how do austerians deal with the reality of interest rates that are plunging, not soaring? The latest fashion is to declare that there’s a bubble in the bond market: investors aren’t really concerned about economic weakness; they’re just getting carried away. It’s hard to convey the sheer audacity of this argument: first we were told that we must ignore economic fundamentals and instead obey the dictates of financial markets; now we’re being told to ignore what those markets are actually saying because they’re confused.”

Tom Flanagan, Steven Harper’s guru in younger days and a political sherpa who helped guide the rise of the New Right in Canada in its early days, has put in his two cents on the census affair.

It is a thoughtful piece, if somewhat predictable. But it leans on two important facts in an erroneous way. In both cases, my guess is that he is simply not aware of the facts, rather than making an outright attempt to be misleading.

First, he suggests that the time is long overdue for census information collecting to move firmly into the 21st century.

He probably does not know that the long form census questionnaire in 2006 was available on-line, as will be the National Household Survey in 2011. After all, only 20% of households would have had the option to answer these questions, in any form at all, last time round. Many households, though, still prefer to fill out forms in hard-copy; and many will still need face-to-face help, as we have heard in witness testimony at the Industry Committee hearing on July 27.

The considerable technological security/privacy issues related to on-line surveys that must, by law, provide full confidentiality were resolved in partnership between Statistics Canada and Lockheed Martin in the run-up to the 2006 Census. Lockheed Martin has been retained for a smaller role this time around.

The involvement of Lockheed Martin, the world’s biggest defence contractor, was the primary reason people in Canada (and the U.S., which followed a similar route) refused to fill in the census questionnaire.

Why was Lockheed Martin was chosen, out of all the private contractors available? The answer deserves and requires more time than I have today; but the point is that census refusniks in Canada did not fail to respond, as the government claims, because they found the state coercive, or the census questions intrusive. They refused because they thought Lockheed Martin was going to be privy to their information. The Lockheed Martin name is undoubtedly a red flag to some, and reasonably so. Turns out it is also a red herring. Statistics Canada takes its duties around confidentiality very seriously. Indeed, it’s known to be a bit of a fetish around the agency. (As fetishes go, this one makes me a little more at ease than not!)

Secondly, Dr. Flanagan raises an important issue regarding response rates among First Nations peoples. He notes, rather derisively, that the response rate is rising, and dramatically so. He does not provide any context or history behind this trend.

It is in large part due to the patient and ongoing process of mutual listening that has been taking place among many (but not all) First Nations, Inuit and Métis communities and Statistics Canada. There has been long-standing antipathy between some First Nations communities and the government, with the census issue falling into a broader “get off my lawn” positioning. But there is also a growing understanding that these data can be put to good use, both within these communities and with others. Indeed, there is precious little systematically collected information other than that derived from the census long form questionnaire about these communities.

The fact that the census is still developing as a reliable source of long-term data for and about these communities is a good sign, not a weakness. Both the process of census-taking and the nature of the questions have changed over time, for these Canadians and for the rest of us. (I provided a link to the fascinating history of the Canadian census in an earlier post.) The iterative nature of this process with First Nations, Inuit and Métis people is still a slow and evolving dance. What everyone involved understands is that, without this information, we have no comparable data between our first nations peoples and the rest of Canadian society; and it is critically important to gauge the progress of all Canadians, particularly those who have been given such a raw deal for so long.

This morning, Statistics Canada reported that the implementation of Harmonized Sales Tax in Ontario and British Columbia helped drive the national inflation rate from 1.0% in June to 1.8% in July. By comparison, the Bank of Canada’s core inflation rate (which excludes tax changes and volatile items) edged down from 1.7% to 1.6%.

However, annual inflation rates are not the best measure of the HST’s impact on consumers. Statistics Canada also released data on monthly price changes, allowing us to compare June (just before the HST) to July (with the HST).

Between June and July, the national consumer price level rose by 0.5% (0.6% adjusted for seasonality). Consumer prices jumped by 0.9% in Ontario and 1.1% in British Columbia.

Nova Scotia increased its sales tax in July, but the remaining seven provinces comprise a control group. Consumer prices ranged from a decrease of 0.3% in Quebec to an increase of 0.5% in Alberta.

Adding up the seven provinces according to their Consumer Price Index weighting indicates an average price change of 0.0% between June and July. Since average consumer prices were flat in the rest of Canada, the HST appears to be wholly responsible for the 0.9% increase in Ontario and the 1.1% increase in British Columbia.

HST advocates argued that the consumer impact would be mitigated by businesses passing through input tax credits as lower pre-tax prices. For example, TD Economics predicted that the HST would increase consumer prices by only 0.7% in Ontario and British Columbia. But today’s numbers showing larger increases indicate that businesses have not (yet) passed their input tax credits along to consumers.

Implications for Monetary Policy

The Bank of Canada has appropriately promised to ignore one-time tax changes in formulating monetary policy. For the next eleven months, annual inflation rates will be comparing post-HST prices with pre-HST prices.

Therefore, headline inflation rates will be significantly above any underlying trend. These misleadingly high inflation rates should not be used to justify higher interest rates.

UPDATE (August 22): On Friday, I appeared on CBC News Network to discuss this topic. My panel starts 14 minutes into this video. (At 16:40, I felt like something was caught in my throat. Fortunately, I had a glass of water that allowed me to recover.)

There are many ways to view the legacy of Prime Minister Harper and his Government thus far, but few offer evidence that the processes and institutions of democracy are held with any esteem.

The selection of the latest Governor General of Canada has been described as one such rare example.

The process of selecting the Governor General was, notably, an invention of the Prime Minister.

Creative and well-suited to the serious task at hand, Harper’s chosen approach took political hands off the wheel, both in optics and in substance.

He named a committee of six eminent persons, each of whom understood the nature of the office and duties of the Governor General: Kevin MacLeod, Usher of the Black Rod and Canadian secretary to the Queen; Sheila-Marie Cook, secretary to the Governor-General; Father Jacques Monet of the Canadian Institute of Jesuit Studies; Christopher Manfredi, dean of the Faculty of Arts at McGill; University of Calgary political scientist Rainer Knopff; and historian Christopher McCreery, private secretary to the Lieutenant-Governor of Nova Scotia.

They were charged with developing a short list of candidates for the consideration of the Prime Minister, who would – as is the tradition – provide his advice to the Queen who would – as is also the tradition – appoint Canada’s new Governor General on this advice.

The selection committee consulted with over 200 people as to who best would fit the requirements of the office in today’s politically charged environment. Among those approached were premiers, former prime ministers and the two leaders of the opposition who address themselves to the issues of the Canadian state as a whole – Michael Ignatieff and Jack Layton.

At the end of this process, the name at the top of the short list was David Johnston – dean of law at University of Western Ontario, long-time principal of McGill University, former president of University of Waterloo, and one of Canada’s most respected advocates for higher education. Harper chose Johnson and his acceptance of this tacit recommendation set off broad-based murmurs of approval.

The importance of this course of action for decision-making cannot be overstated, for three reasons: 1) the high regard with which the current office holder, Michaelle Jean, is held; 2) the unusually important role the Governor General has played in state affairs in the past two years, acceding to the request of the Prime Minister to prorogue Parliament twice in as many years; and 3) a minority government that has mostly governed as if it holds a majority of seats, producing fractious politics in the wake of unusually bold measures and frequent episodes of brinksmanship.

The census affair is emblematic of just this type of maverick behavior, and would benefit from a show of statesmanship by the Prime Minister just about now.

On July 21, three weeks after the Government’s quiet announcement of the decision to replace the mandatory long-form census questionnaire with a voluntary survey, Chief Statistician Munir Sheikh quit. He submitted a sober and elegant letter of resignation to the Prime Minister, who appointed him, and to whom he is accountable. Within hours, the Minister responsible for Statistics Canada, the agency, responded with a short and resolute statement, which could be summed up as saying “Thanks. Next.” It finished thus: “Until a permanent successor can be found Wayne Smith, Assistant Chief Statistician, Business and Trade Statistics, will act on an interim basis.”

A month has passed. The time has come to find that permanent successor to Munir Sheikh.

The process chosen by Prime Minister Harper to select the next Governor General of Canada would be an appropriate model to select the next Chief Statistician of Canada.

It is, in fact, very close to the process suggested by former Chief Statistician, Ivan Fellegi, almost immediately after Munir Sheikh’s resignation.

A group of eminent persons, both national and international, with thorough knowledge of the role of a statistical agency, could provide a highly transparent and visible search process to re-establish the integrity, authority and independence of Statistics Canada.

The committee should include representation from the National Statistics Council, the Statistical Society of Canada, and from an international body that relies heavily on statistics, such as the OECD or UN. It could lean on former Clerks of the Privy Council or Governors of the Bank of Canada, all of whom need census data to do their work. Dr. Fellegi, himself, would be a great choice too, given his unimpeachable credentials, international standing, and over 50 years of service with Statistics Canada, over 20 years of which were as Chief Statistician.

A good selection process would be a solid step towards resolving what has turned into a drama of Shakespearian proportions, a Midsummer Night’s Nightmare for politicians and everyday Canadians alike. It should be launched immediately. And Stephen Harper should be the one to announce it.