Thomas Mulcair, the leader of the Official Opposition, has in recent weeks declared his belief that the oil industry has turned the Canadian dollar into a “petrocurrency”, increasing it’s value and making manufacturers in Ontario and Quebec. There are a number of reasons why Mr. Mulcair is completely incorrect and in my mind foolish.
1. Causes of Increase in CAD vs. USD / EUR
The increase in the Canadian dollar from USD 0.62 to parity is due to a number of factors:
- The fiscal discipline started by Chretien and Martin in the 1990s. Lowering Canada’s debt to GDP ratio made our bonds more attractive to investors when compared to countries that did not balance their books. Clinton did in the 1990s as well, which is why our dollar didn’t rise against the USD at that time. Presidents Bush and Obama have run up the US debt, thus making their debt less attractive. Surprisingly, the massive printing of money by the Federal Reserve has not yet devalued the US dollar, but it will have that effect and the CAD will continue to rise, perhaps dramatically.
- The expansion of the petroleum industry in BC, Alberta, Saskatchewan and Newfoundland
- The expansion of the mining industries in BC, Saskatchewan and Labrador.
2. Decline in Manufacturing
The decline in manufacturing employment in Ontario and Quebec is not solely due to the rise in the CAD:
- There has been a similar decline in manufacturing employment in adjacent US states, such as Michigan, Ohio and Indiana. If the decline in Canada was due to the currency, then employment in America should not have behaved the same way. In should have at least been unchanged to been driven upwards as they got relatively cheaper. But it didn’t. Manufacturing employment in North America has been declining for thirty years or more, due largely to significantly lower cost labour in Mexico, China and the rest of the developing world.
- The decline in manufacturing employment in the US is not indicative of a decline in manufacturing itself. Through automation and other efficiency increases, the US today produces twice the value of manufactured goods as it did in 1980 with one third the labour force. Canada has NOT had the same increase in productivity.
- Canadian manufacturers were artificially shielded from the need to be more efficient through the 1980s and 90s by a low currency. They remained competitive even as output per worker got much better in other places, including the United States. When the currency rose, these manufacturers were not in a good position to change their behaviour as a generation of leaders had been conditioned to be cautious and conservative. Retooling, re-engineering and modernizing are not conducive to that attitude.
- Shortage of young people who are willing to work hard. The demographics of the baby boomers mean that we have had fewer young people, and our society has made it less attractive to young people to do jobs that don’t involve sitting in front of a computer in an office. More young people should go into the trades, and more young people should be entrepreneurial. But government largesse, social attitudes demanding university education and cheap tuition have driven students away from taking risks or doing what are now perceived by some as “undesirable” jobs.
3. Why it is Foolish
Mulcair’s attitude is driven by his environmental agenda and his desire to attract voters in Ontario and Quebec over the those in the growing provinces where he has a low probability of winning significant seats anyway. This is foolish, given the coming boost in natural resource opportunities in the most populous provinces in the country. As the Mining industry starts pursuing major investments in open-pit metal mining in Nunavut, Northern Ontario and Northern Quebec (i.e. Plan Nord), is he going to deride those projects for their potential environmental impacts? Is he going to complain that those projects, which will be primarily for export and will have a similar currency effect as petroleum, are detrimental to the manufacturers in between Windsor and Quebec City? I highly doubt it. But it will look very stupid and make his case very difficult to be credible as these mining projects get moving.
Another reason it is foolish is that many firms in the region he is claiming to speak for are providing materiel to the oil industry. In fact, the manufacturers in Ontario supplying the oil sands employ more people than does the auto industry. I wonder if Mulcair would care to bail them out?