(Paul Sancya/Associated Press)

For those of us in the brotherhood of armchair economists, watching economist-ying go after economist-yang is like the Superbowl. A really, really lame Superbowl.

Yesterday we saw socialist flag-bearer, CCPA golden boy and CAW-payrolled Kenyesian Jim ‘Jimbo’ Stanford go toe-to-toe with supply management’s worst enemy, the Thrilla from (the) Austria(n school), avowed Friedman-ist Mike 'Mike’ Moffatt. 

It all sprung from an op-ed that Stanford wrote for the Ottawa Citizen yesterday that looks at Canada’s ’Dutch Disease.’ Here’s the relevant bit

There is no doubting the statistical correlation between oil prices and the loonie. Econometric analysis indicates that since the turn of the century, oil prices explain 86 per cent of the dollar’s rise. The precise reasons for this correlation are unclear. It certainly is not due to a strong trade balance. In fact, Canada has experienced a deepening international payments deficit in recent years, because non-petroleum exports are falling faster than our energy exports surge. My own research suggests it is foreign takeovers of petroleum companies and reserves, not current production and export of the stuff, that is driving the loonie up…

…At par with the greenback, our loonie is overvalued by 25 per cent — making everything we produce look artificially expensive in the eyes of foreign customers…And recognizing that speculators in oil futures and foreign exchange markets might not be the best arbiters of economic reality should hardly be shocking in light of the financial chaos we’ve all endured for the last five years.

In my books, the best way to short-circuit the damaging link between oil prices and the loonie would be to carefully regulate foreign takeovers of resource companies. 

Moffatt, in Ayn Rand-ian glory, was having none of it.

The truth, I think, lie somewhere in-between.

As Moffatt points out, Jimbo’s editorial is rather myopic on the auto industry - which is his field - and its foreign-dominated market. You want to talk about over-inflating the dollar? The untold fortunes in capital spending by the government in the auto sector is no doubt a good place to start.

On the flip-side, Stanford raises a point that I always revel in (and did, to great lengths, here, here and here) - why do we own so little of our own natural resources? 

'Dutch Disease’ is phrase in vogue these past few months, having become somewhat of a battle cry for the left-leaning like Thomas Mulcair.

But is that’s really what’s happening?

For those of you operating without a definition;

In economics, the Dutch disease is a concept that explains the apparent relationship between the increase in exploitation of natural resources and a decline in the manufacturing sector. The mechanism is that an increase in revenues from natural resources (or inflows of foreign aid) will make a given nation’s currency stronger compared to that of other nations (manifest in an exchange rate), resulting in the nation’s other exports becoming more expensive for other countries to buy, making the manufacturing sector less competitive. While it most often refers to natural resource discovery, it can also refer to “any development that results in a large inflow of foreign currency, including a sharp surge in natural resource prices, foreign assistance, and foreign direct investment”

Is this happening in Canada?

Yes. No. Maybe.

First off, here’s a really important consideration - the Canadian dollar hasn’t been high for all that long.

Image Source.

Tracing Canadian natural resource extraction and exports go back much farther than 2001. And direct foreign investment/ownership is hardly new. It has certainly become a reality to a much greater extent, no doubt, but it is not a new phenomenon.

Furthermore, Stanford is using a dollar linked to PPP (purchasing power parity) as the basis for a lot of his calculations. As Moffatt points out, that doesn’t make a lot of sense. When your argument is implicitly that your currency has become overvalued, and your goods are too expensive because you are selling your natural resources for a deflated price, why use a normalized currency rate? Surely the currency differentiation are important? 

Nevermind the countless other influences and impacts destroying the manufacturing sector in Canada - the relative ease of outsourcing, the high wages, good benefits, etc. Why not just do it in Mexico?

Let’s consider Mexico.

Here’s the country’s manufacturing output;

And it’s dollar’s exchange rate;

Note that this is Pesos (y axis) to American dollars. (i.e. 8 Oct/08, it was 11 pesos to $1USD. Therefore, the lower the number, the stronger the Peso.

Now you can choose to look at the peek in the Peso’s exchange rate in mid-2008, and it’s bottoming-out in early 2010 - and the subsequent rise and fall of its manufacturing sector - as evidence that the Dutch Disease is very much alive. However, there are just as many trends that are not explained by this. And notice that the US dollar/manufacturing rate seem to follow the exact same trend, suggesting the issue is bigger than the internal Mexico economy.

But this isn’t me trying to explain economics.

No, my point here is just made by saying this - our economy is too damn complex to be summed up with such an easy correlation. I’ve read Stanford’s work, I know his smarts could easily give mine a TKO in a streetfight. But I think buying into this dialog of 'Dutch Disease’ is a bit of an easy out.

That’s not to say that we shouldn’t be talking about foreign ownership.

On the contrary, we should be having a big national discussion about it.

Foreign ownership of resource extraction companies that operate here in Canada is something that should make us very nervous. I have absolutely no doubt that it does, indeed, inflate our currency (though I’m skeptical that it happens to the extent that Stanford suggests) and that’s a bad thing, no just for our manufacturing sector.

The unfortunate thing about having such a surplus on the capital account is that you have a great opportunity cost. The capital flows in, and the revenue flows out. While you may collect some from basic taxes and royalties, it’s nothing compared to the government income that could be captured by making sure that they operate entirely within your tax system.

That means more government revenue, and more cash flowing through your banks. 

You want to talk about kickstarting the manufacturing sector? That’s how you do it. If the banks have more cash-on-hand, they’re more likely to loan it. If the government can increase revenue and decrease, say, small business tax rates or increase direct investment schemes, that we have ourselves a good old fashioned make-stuff-athon.

But the tarsands development need not be government-run. We merely need some more comprehensive controls over who gets to own a chunk of Canada. 

Now I may just be a simple blogger/journalist/amateur-economist, but I reckon it’s about time we set Moffatt and Stanford up into a public arena where they may fight to the bitter end for our amusement/control of our governing economic policy.