It seems like American commentators have a new found interest in Canada. The other day one of my colleagues flipped to me Richard Edelman’s blog post The New Approach Up North. Edelman runs a fine shop in Toronto led by my former colleague Heather Conway. Heather and I co-authored an article 25 years ago on foreign investment and I am still writing on the topic today!
Since the great recession Americans have been looking for answers to what caused its economic meltdown and a few looked north of the border for inspiration. Writing in the New York Times, Paul Krugman has called Canada a ‘very important role model,’ a ‘quiet success story’ that ‘got it right’. Paul Volcker, the former Fed Chairman and even President Obama have piled on saying that the US has much to learn from Canadian success.
Truth is our relative success has little to do with new approaches. The Canadian way is to evolve our economic, social and political policies. Change is rooted in the first phase of the written portion of our constitution – ‘peace, order, and good government’. This highly conservative credo contrasts with the classic ‘laissez faire’ approach of Liberal America with its ‘life, liberty and the pursuit of happiness’. In difficult times, the values of prudence and moderation that so characterized our economy look quite admirable. In prosperous times they can look meek and cautious.
For Canada, the next ten years offer a window of opportunity to out-hustle the US as a destination for capital investment and skilled labour. While we will never be able to compete with the US on market size, American advantages of less regulation, cheaper credit, and low taxes are no longer as compelling as they once were. The trend to add regulatory complexity to business in the US has been fairly constant since Sarbanes Oxley.
The passage of the financial reform bill this year has added to this regulatory burden. Though interest rates are low, credit is definitely tighter – with the housing market in a prolong funk. While levels of household debts are coming down, government debt has skyrocketed to 14 trillion this year, with a 1.3 trillion deficit. This is widely out of proportion to Canada’s 600 billion and 54 billion debt & deficit. In the absence of growth this will surely drive taxes higher – all though this will be a prolonged battle. Opposing tax increases is deeply entrenched in the American psyche (remember the Boston Tea Party). But with the gap widening between rich and poor, there is only so much social spending that can be cut. The biggest opportunity is likely ‘pork barrel’ spending on infrastructure and defense. This is easier said than done.
Underpinning the policy debate in the US is a dysfunctional and divisive political system. The checks and balances put in place by the founding fathers means that there is no strong government authority to take charge. While command and control economies like China take a long term approach on growth, a very diffuse democracy like America will have a more difficult time building policy consensus than even parliamentary democracies like Britain and Canada. No wonder the US looks to the private sector to pull the economy out of malaise.
Finally, as an observer of the US, it seems that America has entered into another period of self-doubt, typical of the 1970s. Dysfunctional government, slow growth and economic disparity are all contributing to this. The US must face up to the reality that it is increasingly one of a number of influential economic voices. Its ability to dictate economic policy like it did after the second world war has eroded.
It is flattering to have reputable observers to take note of Canadian success. It remains to be seen if this country and its corporate leaders can capitalize on the competitive opportunity it has in North American and beyond. The US will work itself out of its current challenges. Its entrepreneurial spirit and individuality will generate growth and the fundamental decency of the American people will sooner or later get its social inequities right. It is too great a nation to think that it is not going to get its mojo back . In the meantime Canada has the unique opportunity to be a comparatively more interesting place to invest and to grow its influence in North America in friendly competition with the US.