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The stark choice facing Canada’s economic gatekeepers

Fiat SpA, the parent company of Chrysler Group LLC, has a market cap of $14.1-billion (U.S.) and employs about 225,000 workers worldwide. Google Inc. has a market cap of $409.4-billion, about 40 times Fiat's, and employs one-10th as many people, at 30,000.

The central dilemma of Canadian economic policy is contained within these simple statistics. The best way to create sustainable wealth is through the modern digital economy, but it doesn't generate employment.

Here's a fun game: Pretend that tomorrow you will be named Canada's Economic Emperor for Life. What would you do?

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One option is to maximize employment. Slam the door shut on foreign imports (all Japanese and German cars, for instance) with tariffs and huge subsidies, and watch businesses arise to make the things that were previously imported. Employment rises immediately and economic growth gets a boost from the Keynesian multiplier.

But there's a catch. Economists highlight productivity growth as the number one factor behind higher standards of living over the long term. Nothing kills productivity like protectionism – the lack of competition from imports means businesses are not incentivized to invest in efficiency. Foreign investment disappears, of course, as the economy both refuses imports and becomes less competitive.

The lack of foreign competition means that inflation, probably crippling inflation, would also become an eventual problem for Fortress Canada.

Your other option as Emperor is to focus solely on the new economy: Free tuition for computer science students, don't stop government stimulus until governments at all levels have better IT hardware and software networks than the NSA. Export that expertise both throughout the domestic economy and globally with Made in Canada software and consulting.

If this strategy were executed perfectly, GDP growth would be tremendous and the health care system might work like a Swiss watch, but there'd be mass unemployment. Government bureaucracies would be so efficient that, in a politically frictionless environment, the number of employees could be cut by a third or more.

In the real world, economic policy will attempt to find a balance between these two extremes. But there's no pain-free answer. As the Chrysler subsidy issue clearly shows, maintaining existing employment levels in the face of globalization is extraordinarily expensive for taxpayers. The Ontario government is already staggering under the weight of excess debt.

Even with the ongoing subsidies, the future of Canadian manufacturing is uncertain enough to look unsustainable. By the same token, BlackBerry Inc.'s struggles underscore that technology growth is not a sure bet, either.

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In fifty years, the percentage of the Canadian population employed in manufacturing will likely fall dramatically. Low-wage countries and robotics will build the vast majority of products people use. With driverless cars on the verge of viability, it's not hard to envision an almost-completely automated agricultural sector.

At some point, the life support system of government subsidies for the 20th century domestic manufacturing industries will end. The Canadian economy will focus in areas – engineering, technology, resource management – where we have a competitive advantage.

The road ahead dictates that manufacturing be supported with subsidies in the short term, but only until the economic baton can be passed to the new economy. A significant portion of the wealth generated by higher-margin technology (and other 21st century businesses) will necessarily be redistributed to combat the inevitable structural unemployment.

Some type of guaranteed income plan is, in my opinion, most workable and likely – not least because it minimizes the kind of ham-handed, Soviet-style industrial policy tinkering by politicians that has been so disastrous in the past. Regardless of what form it takes, wealth redistribution will be more important as time passes. Otherwise, near-limitless production capacity will be met with no demand.

The politics are daunting, a challenge on par with the 1930s when agriculture's dominance of the North American economy ended. But we made it through that. And besides, we'll have no choice – the status quo is no longer an option.

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