Economic prospects in North America

Aug.30, 2006

As the summer draws to a close, possibly the hottest on record, politicians understandably are talking about the environment. There is a new leader of the Green party, Elizabeth May who is arguing that NAFTA should be modified. An interesting idea that will attract some definite support in certain circles but she provides no answers or strategies about how Canada could pressure the US to achieve a modification in the agreement.

Despite its drawbacks one has to acknowledge that the total volume of trade between Canada and the US has greatly increased since the agreement was signed(no surprise there since that is the text book outcome of continental integration) and that with the possible exception of the soft wood lumber firms and their shareholders most Canadian business interests would be opposed to abandoning the current agreement if a better one could not be negotiated. Mind you Ms. May would have allies both domestic and foreign who might agree with her on her scepticism about free trade as it is currently practiced in the global economy.

Just have a look at a recent speech in Australia by the CEO of a major Australian company,Kirby Adams of Bluescope steel in which he strongly criticizes the current passion for global free trade as being destructive of Australian jobs and standard of living.Instead he prefers managed trade agreements in which the mutual interests of parties is taken into account when negotiating the reduction in tariffs and barriers.

It would be interesting to compare his position with that of Canadian executives.His speech his available by consulting Bluescope's corporate site on the net via Google.

But apart from the trade question the North American economy shows serious signs of slowing down in response to the much tighter monetary policy excercised by the Federal reserve and the Bank of Canada over the past year.

The steady increase in interest rates has deflated the housing market sharply in the US and many analysts are now talking about a recession.This comes as no surprise to me, as I have stated before, soft landings are a myth and monetary policy a very crude instrument for controlling inflation. Inflation is of course greatly exaggerated in the current climate and aside from the oil cartel and perhaps the commodity boom that originates in China non existent.

The solution does not lie in running the North American economy at slowed down speed.The poor and those who lose their jobs pay a very high price for this.Since they are not responsible for the oil companies' price hikes it is an extremely unfair outcome that violates Pareto optimality. The compensation they receive in the form of welfare and unemployment benefits is nowhere near the price they would think adequate.

We should instead concentrate on improving our supply management of critical materials like petroleum and sourcing them here, rather than abroad.

Ecological improvements also have an important role to play.Gas guzzling SUVs ought to be discouraged and public transportation beefed up substantially in our major cities.