New finance minister gets some wise economic guidance: Don Pittis

If our brand new minister of finance, Joe Oliver, is looking for a little economic advice in his new job, he doesn’t have to look far.

It just so happens that on the very same day that Mr. Flaherty stepped down after nine years at the helm of federal finance, Bank of Canada Governor Stephen Poloz was giving a very important, and I think wise, speech about the future of the Canadian and global economies.

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As a roadmap to what the new minister needs to do, there could be few better guides.

And while the prescriptions offered herewith are not all things that the bank governor said directly, they are all an extension of his analysis.

Boomers

The first thing Poloz observed is something Joe Oliver should be able to absorb pretty easily.

"First, we are all getting older every day," said Poloz. "And second, the baby-boom generation - yes, I am among them - is Canada's largest population cohort."

A lot of the warnings in Poloz's speech stem from this one fact. Effectively he says that the demographic baby-boom bulge, a subject I raised just over a week ago, means a shrinking workforce, a glut of savings, excessive investment in non-productive capital and sagging productivity.

That's a lot to blame on the boomers, but the governor's arguments make sense. And of course it's not really their fault, it is "Mother Nature at work," as Poloz said.

But natural or not, they are things that Oliver must try to manage.

Workforce

At a youthful-looking 73, Joe Oliver is a poster boy for one of the most obvious solutions to the shrinking workforce. And that is to create policies allowing and encouraging older Canadians to stay on the job, potentially by motivating businesses to keep them there.

As Poloz says, when the labour force gets smaller, the contribution of labour to the economy shrinks with it.

Helping older Canadians who want to work is a no brainer. But Oliver could also hold his nose and try to set aside the cash for universal daycare.

Helping older Canadians who want to work is a no brainer. But Oliver could also hold his nose and try to set aside the cash for universal daycare. Places like the Scandinavian countries that have such systems not only liberate women to participate in the workforce, but they tend to have more children to better replace and support the elder bulge.

One place to look for the money? The income splitting plan, which will have the opposite effect, offering an incentive for spouses of well-paid partners to depart the workforce.

If we need workers, obviously immigration will have to continue, but Oliver must also realize that Canada cannot remain a high productivity, high-wealth economy if it tries to create a low-wage industrial and service sector. 

The only way to compete industrially with the countries that have huge low-wage populations is to welcome the robots. Otherwise jobs and productivity will simply flow overseas.

If we are worried about too few workers rather than too many, money must be set aside to encourage robotics and automation in all walks of Canadian life, investing in university research and training programs. More automation means each high-skilled worker is more productive.

Consumption

The next gloomy outgrowth of the demographic spare tire, says Poloz, is a failure to consume.

As the youngest boomers turn 50 this year, retirement looms closer and suddenly they rush to tuck cash away. Spending dries up as the boomer bulge robs cash from the consumer economy and they "get into serious nest-building mode."

Poloz warns this creates a glut of savings, much of which does little to help the economy. Low interest rates and the nesting instinct, he says, have pushed increasing amounts of capital into real estate, assets that store value but fail to "add to the productive potential of the economy."

With Oliver's close ties to Bay Street, dealing with the real estate problem could be more difficult than the employment issue.

With Oliver's close ties to Bay Street, dealing with the real estate problem could be more difficult than the employment issue. Despite his early error of liberalizing mortgage policies, Jim Flaherty has recognized for years that too much money has been flowing into property. But with a glut of cash floating around in the world economy, banks just can't resist lending to Canadians at the lowest possible rates, encouraging them to pour even more money into real estate.

Until interest rates begin to rise, the only way to discourage this flood of money into Poloz's "unproductive investments" is to continue Flaherty's policy of using legislative and regulatory tools to make property less appealing as an investment. Oliver will have to face the fact that that may not be politically popular.

Meanwhile, the glut of cash savings will continue to compete for a shrinking number of productive investments, keeping interest rates low even as central banks reduce stimulus.

Excess capacity gap

Another difficulty for the new Finance Minister is that some of the solutions to the problems Poloz foresees require activist policies that may conflict with a conservative laissez-faire ideology. And most difficult of all for this Conservative government would be the most activist policy of all, to solve what Poloz called "our excess capacity gap."

That’s central bank speak for all the things our economy could produce with the existing piles of money and workers, if only we were able to put them to work. It is this excess capacity he says that is keeping global inflation dangerously low.

"In the broader global economy," said Poloz, "the possibility of secular stagnation needs to be taken seriously."

Canada could grow more quickly if only someone would invest to put that excess capacity to work. Despite tax cuts and the cheapest money the world has ever seen, the private sector just can't seem to do it.

There are still plenty of problems to solve in Canada begging for investment. We have a growing aboriginal population that isn't getting a world-class education. We have clogged transit systems that act as a bottleneck on the economy. We have clever young people wasting their talents in underemployment. That's to mention just a few.

Joe Oliver could help small business and Bay Street and the entire Canadian economy if he could only bring himself to do one thing. And that is to tax away a small portion of the money that isn't being put to work and pour it into investment in education, research and infrastructure, preparing Canada to be a leader once the world economy finally returns to what Poloz calls "pre-crisis trends."  

Despite Jim Flaherty's many wise decisions during his years at finance, that's one thing he could never bring himself to do. I'm afraid it's hard to imagine Joe Oliver doing it either. But maybe the next finance minister will.