Spinning Mr. Carney

For novelty value if nothing else, Mark Carney’s appearance at the CAW convention last week was bound to spark lots of attention.  After all, we could find no other historical example of a Bank of Canada Governor ever speaking to a union convention.  That says something in and of itself, of course.  Central bankers speak to audiences of financial leaders and business leaders all the time.  (To be fair, Mr. Carney and his predecessors have met regularly with labour reps in private sessions.)  Sitting next to Mr. Carney on the podium last week while he waited to be introduced, and watching him listening intently to CAW delegates speaking at the mikes (often using salty CAW terminology!) about their bread-and-butter efforts to improve job security and working conditions in their respective workplaces, I concluded that engaging a central banker in that kind of dialogue was worthwhile in its own right.

There are purists on both sides who thought his participation was a bad idea.  The Calgary Herald’s editorialists seem to believe that central bankers should never commiserate with workers.  (The Toronto Star’s editorialists were more democractic, suggesting that it’s important that leading policy-makers should engage with all stakeholders … what a radical idea!)  A few on the labour side disagreed with inviting someone whose views are not aligned with the labour movement’s, to address a leading labour body.  Most agreed, though, that enhancing the relevance of unions requires engaging in full, honest debate, and being willing to hear from important players who hold different views.

Mr. Carney’s comments, both at the podium and then in a post-speech news conference, set the newswires buzzing.  His formal speech covered a wide swath of policy terrain: reporting on his efforts (as chair of the Financial Stability Board) to strengthen global financial regulations, including the replication of Canada’s successful 20-to-1 macro leverage ceiling to the global playing field; addressing the rise of income inequality (he noted that Canada is the 3rd worst among the OECD on that score, measured by the top 1%’s share of national income); addressing various measures of labour market underutilization; and arguing that Canada needs to find strategies to capture more value-added in our resource industries.  I recommend reading the original speech, not just reports (including this one!) of the speech.

Some reporters set up Carney’s visit as a “showdown” between autoworkers who have been hammered by the high dollar (and would like it reduced as a target of policy), and the central bank which has so far declined to play an active role in reversing the currency’s ascent.  Mr. Carney was not invited to speak about the dollar, nor to be “lobbied,” and his speech addressed this issue only tangentially.  But his comments on that issue (namely, that the high dollar is responsible for just 20% of Canada’s poor export performance, and that devaluation would not be a desirable strategy) captured a lot of media attention.

On that score, it is worth clarifying exactly what Mr. Carney said.  He noted (citing previous Bank of Canada research) that Canada had the second worst export performance of any G-20 country in the last decade (measured by the decline in our share of world exports).  Two-thirds of that weakness, he argued, is due to the structure of our trade: the fact that we export primarily to the U.S. and other relatively stagnant markets, rather than faster-growing emerging economies.  One-third of the poor performance is due to competitiveness.  Within that latter category, the high dollar has been the dominant factor (explaining two-thirds of the erosion in competitiveness).  The remaining one-third of the one-third is due to the combination of faster-growing labour costs and slower productivity growth.

It’s all in the spin, therefore.  Rather than refuting the CAW’s argument that the high dollar has been a strong negative in Canada’s trade performance, I suggest this evidence in fact reinforces it: the high dollar is far and away the most important competitiveness problem affecting our trade, far more important than labour costs.  (That’s exactly what we’ve been saying in our current debate with the auto companies.)  If we weren’t so reliant on the U.S. market, our exports would have done better than they did, despite the dollar.  But that doesn’t change the fact that the dollar has been a strong negative.  That being said, we will obviously agree to disagree on whether the Bank should do anything about it.  (In fact, I have argued elsewhere that the best way to bring down the dollar is not through the Bank of Canada, but through limits on the pace of bitumen developments and foreign takeovers of Canadian resource companies.)

As for the notion that Canada needs to export more to the rest of the world (including faster-growing emerging markets), I agree enthusiastically, and have argued long and hard that export-promotion should be a top goal of economic policy.  The question is how to do that.  Some assume that the only solution is more free trade agreements (including with emerging economies like China and India).  My research, on the other hand, suggests that free trade agreements are associated with slower (not faster) export growth, and with a marked deterioration in net exports (ie. exports minus imports).  In my CCPA review of the likely economic consequences of a CETA, for example, I show (on p.30) that exports grew more slowly with FTA partners than with other countries, yet our imports grew faster.  If the goal is boosting exports and enhancing net exports (both valid goals, although the latter faces the limitations of any beggar-thy-neighbour economic strategy), then signing FTAs is exactly the wrong thing to do.  Instead of this knee-jerk response, I argue, let’s address the true structural reasons for Canada’s poor export performance, which are rooted (for everything other than unprocessed resources) in our failure to develop domestically-rooted, globally-oriented, technology-intensive firms.  That requires an all-around strategy of industrial policy and sector development — a lot more complicated than just signing more cookie-cutter FTAs.

It was Mr. Carney’s comments (after his speech) about the growing hoard of idle corporate cash that generated maximum media attention, however — including front page of the Globe and Mail the next day, and a very Freudian National Post banner headline saying “Stop sitting on your cash piles, Carney tells corporations.”  In response to a question from the Globe’s Greg Keenan (who cited data on corporate cash hoarding from the CAW’s convention document, see p.10), Carney called it “dead money” and urged corporations to either spend it on capital, or give it back to their shareholders.  (That’s not my favoured solution, by the way … since much of that hoard is directly attributable to corporate income tax cuts, I’d prefer giving the money back to governments, who could then spend it on public capital and infrastructure projects, thus generating far more economic benefit than would be derived from pumping more money into the chequing accounts of wealthy investors.)

Carney’s comments unleashed a string of defensive reactions from numerous business-friendly protagonists.  Anecdotes were published from companies which have invested in Canada — as if those specific stories somehow negate the macro data confirming business investment is still lower than in 2008, and much lower than in past years as a share of free cash flow.  On the other side, folks like David Olive at the Toronto Star endorsed Carney’s concern and laced into corporate Canada’s defensiveness.  Mr. Carney’s appearance thus sparked a useful and timely debate about whether corporations are indeed adequately doing the “job” they’re supposed to under capitalism.

On the whole, Mr. Carney’s visit constituted a very interesting aspect to an energetic and inspiring CAW convention.  (See http://www.caw2012.ca/ for full coverage of the convention, including live-streamed speeches, the documents, photos, and more.)  He was a gracious guest, and was received warmly by CAW delegates who didn’t fully endorse his analysis, but were grateful for his willingness to engage.