In May 1983’s G7 Summit, German Chancellor Helmut Kohl asked President Reagan to “Tell us about the American miracle.” Kohl was referring to America’s booming economy while the rest of the world was floundering. Reagan explained that cutting tax rates incentivized citizens and businesses, stimulated economic growth and eventually increased total tax return to the government. The other keys are reducing government spending, reducing government regulation and keeping the dollar stable.*
That was the third time America had employed what is usually referred to as supply side economics. President John F. Kennedy did the same thing in the 1960s. And Presidents William G. Harding and Calvin Coolidge did it in the 1920s. President Trump’s use of supply side economics, while cutting regulations and going for a stable dollar is the fourth use of supply side economics on the U.S. economy. Keynesian economic theory, in which the government runs the economy, favours higher taxes to pump money into the economy filtered through government programs and favours more government control of citizens and its economy, has been tested three times: President Franklin Roosevelt (the Great Depression), Presidents Nixon, Ford, Carter and Obama tried it. It never worked. But it seems we need to learn the lesson over and over again.
We bring this up because two recent articles contrasted the Canadian vs. the U.S. economy. Mind you, I don’t presume to suggest what Canadians ought to do with their economy. But I thought you might find these concepts worth considering.
One article referred to the Canadian “stone cold” investment climate. The Fraser Institute noted that foreign direct investment in Canada had dropped to C$31.5 billion in 2017 from C$71.5 in 2013 (-56 per cent). Since 2014 fourth-quarter peak, total business investment, inflation adjusted and excluding residential housing, was down 17 per cent; private sector factory investment down 23.5 per cent and investment in intellectual property down 13.3 percent.
Canadian business leaders attributed the problems to taxes and regulation (“Canada Backtracks on a Carbon Tax,) Wall Street Journal, 8/13/2018).
The subject came up because Canada’s government reduced the percentage of carbon emissions that would be subject to next year’s national carbon tax. Evidently, the Trudeau government is judging the economy is not strong enough to weather the higher rate. The American political left has made some runs but we have so far escaped a carbon tax.
By contrast, another piece called attention to the supply chain and parts problems many businesses in the U.S. were having. I assumed it was the tariffs that were causing the problems. But the piece noted the supply-chain kinks had to do with labour shortages, cost pressures from transportation problems, as well as the tariffs. You already know about the GDP and job growth resulting from tax cuts and deregulation. Strong sales and profits are clicking and factory hiring has doubled since last year.
But some suppliers have not been able to keep up. Castings for engine blocks and large vehicle parts, another part critical to forklifts and various electronic components are examples. Boeing has two dozen aircraft parked outside around one factory, waiting for parts to finish them. Other manufacturers can’t find the skilled labour they need, having downsized in the 2008 era. Overtime is plentiful in some places and parts lead time has stretched out (“Part Makers’ Shortages Tap Brakes on Industrial Boom,” Wall Street Journal, 8/11-12/2018).
The point is that two countries, next door neighbours, similar in many ways are experiencing totally different economic climates. Could tax rates and government regulation be the difference?
One note: both countries are suffering from pipeline capacity shortages and delayed construction.
Speaking of economic roadblocks, where are we with NAFTA?
After a couple of weeks of increasing optimistic reports, it is looking more likely that by September, the U.S. and Mexico will have hammered out a new NAFTA agreement. The focus now would be on getting Canada to agree to those provisions and thrash out what Canada needs from the new NAFTA. The U.S. and Mexico spent four weeks to get “very, very” close to a deal. Mexican officials were a little less optimistic, but it was notable that the outgoing Nieta Pena administration and the incoming Obrador team seemed to be on the same page, happy with the direction of negotiations. Indications were that chapters that have been negotiated should stay closed and not reopened.
The two countries have been discussing the percentage of auto parts required to come from NAFTA countries, what percentage from American factories and the percentage of cars and parts to come from Mexican labour earning $16 per hour. They inched closer and closer for weeks. If cow buyers operated like this, we’d all starve.
The big questions? What did they do with five-year sunset plans and the dispute resolution process?
* “The New Reagan Revolution,” (Thomas Dunne Books, 2010).