Trains and Trucks

By Jim McNiven

The simple notion underlying international trade is that every country has to have a balance. Only three things are counted in this balance—goods, services and capital. Canada tends to run a surplus in goods, a deficit in services and capital inflows or outflows make up the difference. We export cars and oil and import films and travel. Yes, I know it sounds odd, but our snowbirds ‘import’ their sun and even take themselves and their money down to the ‘exporter’. Capital is imported to build mines and factories and exported to buy US banks. Exporting stuff is vital for us.

This came to mind when my wife and I spent 8 months at Michigan State University in 2010-11. I was the Fulbright Professor attached to their Canadian Studies Center. Early on, I noticed that there was a railroad line going through the East Lansing campus and on into Lansing, the State Capital. It turned out to be the CN line that started in Halifax and went through to Chicago. It was a busy line and I soon realized that most of the rail traffic was coming from the Port of Montreal and going straight through to Chicago. Both Nova Scotia and Michigan were left out. We Nova Scotians watch the cargo ships go by while Michiganders hope for the trains to stop and unload some of their cargo. Later, back in Halifax, a couple of interested friends and I tried to develop a relationship between these two places to maybe find some way to help each other out, but the effort fizzled. That’s another story, someday.

While I was at Michigan State, I ran across another goods export transportation story. In 1929, a bridge connecting Detroit to Windsor, called ‘the Ambassador Bridge’ was completed. Eighty-odd years on, this has become the busiest international crossing in North America, if not the world. A serious chunk of Canada’s goods trade is tied up in the movement of autos, trucks and parts from Michigan to Ontario and back. The 20/401 expressways following the St. Lawrence watershed to Detroit has become Canada’s eastern ‘main street’. Today, the bridge is too small and too old to perform its intended function. Up to this point, everyone agrees, but then things get sticky. Really sticky.

The Ambassador Bridge is privately owned, unlike most others which are part of the public road infrastructure. The owner, Manuel Moroun, a Detroit businessman, has been interested in adding a second span right next to the original bridge, which exits into the University of Windsor campus. As well, the connector from there to the 401 is one of the City’s main shopping streets. Nobody on the Canadian side wants the existing traffic coming through this route, let alone more. The Canadian governments (federal and provincial) have proposed an alternative location downstream on the Detroit River that can easily be connected to the 401 and, on the other side, to the US Interstate network.  Some householders would be affected, but nothing like the miles of homes and businesses were the existing bridge exits to be upgraded.

In 2010, a new State legislature and Governor were elected. Many or most of the new Republican legislative majority enjoyed campaign contributions from Moroun. The new Republican Governor is a former Gateway Computer CEO and has a commitment to bring jobs to a State that had never recovered from the recession of 2000-1, let alone that of 2007-8. By and large, the Michigan corporate community, and especially the auto industry, backed the the Detroit River International Crossing (DRIC).

Things got stickier when the new Governor went off to Washington and came back with a commitment from the Obama Administration that they would count half of the DRIC bridge expenditure as credit toward Michigan’s share of other federal-state highway expenditures. Round One to DRIC.
Republicans like roads, especially rural Republican legislators, but they didn’t want the bridge. Moroun was a friend. Round Two to Moroun.

Then Moroun hired Dick Morris, a bare-knuckled Republican ‘strategist’ to help out. His people began a campaign to tell people that there was a secret agenda that would cost Michigan taxpayers serious money for DRIC, even though the Canadian government had agreed to finance the whole thing and recover the cost from tolls. Morris’ people also went to the downstream neighborhood that would be affected by DRIC and posted fake ‘eviction notices’ on all the houses. Round Three to Moroun.

The Governor then found some legislation passed for other purposes that allowed him to declare that a facility or piece of infrastructure was vital to the interests of the State and go ahead without legislative approval. Round Four to DRIC.

The Governor met with the Ontario Premier and the Canadian Prime Minister in the summer of 2012 to sign on to the deal. Round Five to DRIC.

By now it was run-up time to the 2012 election and Moroun sponsored a ballot initiative to prevent the construction of any significant infrastructure facility without taking it to the people in a referendum. He got the Koch brothers’ ‘Americans for Prosperity’, one of the most powerful conservative organizations in the country, to back his fight against DRIC. Round Six to Moroun.

In the 2012 elections, Obama won and this sealed the roads deal he had made with the Governor. Surprisingly, in spite of a serious funding mismatch, Moroun’s ballot initiative was soundly defeated, 60-40. Round Seven to DRIC.

On April 12 of this year, the US government issued a presidential permit that allows the construction of DRIC, renamed the New International Trade Crossing, to proceed. Round Eight to DRIC.

Moroun is continuing to oppose the project through the courts, claiming he has a ‘perpetual and exclusive right’ to build a bridge across the River, but this is seen by the Governor as a delaying tactic. Construction of the DRIC/NITC is expected to begin in 2015 and be completed in 2020. Round Nine to DRIC.

There is probably another round of this battle left to go. It would not be surprising to see a move in Republican circles to try and replace the Governor in 2014, though this may only give the election to a Democrat. There may be more ballot issues and even hope that a new Administration in Washington in 2016 might overturn the NITC permit, but these are long shots.

Canada’s ability to move its Eastern goods to market has been strengthened by the victory for the NITC. Now, we have to see if its rough equivalent in the West, the Keystone XL Pipeline, will also get Washington’s approval.
 




 

Don’t Worry, Be (Demographically) Happy!

By Jim McNiven

Back in the early 1980s, when the entrance of the Boomers (b.1946-64) was reaching its peak in the Canadian economy, youth unemployment was seen as a major crisis. A whole generation, probably including yourself, was predicted to end up on the trash heap of the economy. Governments created programs to employ youths, initiated training programs to make youths ready for the job market and pressured employers to add young people to their workforces. Universities added extra years to things like teacher education, not really because this might produce better teachers, and community college work hour requirements for advancing from apprenticeships to journeymen were increased, not because higher skill levels were needed, but because these kept students out of the job markets for an extra year. A student is defined as not being unemployed—get it?

As well, governments and the media touted the joys of retirement, especially early retirement. Remember ‘Freedom 55’? With every economic slowdown in the 80s and 90s, workers were given financial settlements to go off to the golf course or the beach and live in bliss during their ‘golden years’. Only farmers and corner store owners stayed on until they died, but these were seen as eccentrics.

Eventually you and your peers found work and prospered. Now, as the first Boomers reached 65 in 2011, a different tune has been starting to play. Seventy is the new sixty: pensions weren’t meant for the young-old of today, because they live too long and cost too much. Bismarck set the first public pension age at 70 in 1889 because it looked like something was being done for the elderly, even though few German workers made it to that age. Clever politician, that Bismarck. We are told today that we need to raise our retirement age from an absurdly young 62 (partial) to 67 and maybe higher (70-75?) and get back to his example. You have to be almost dead to qualify.

You might wonder what all of  this is about. It is simple. In the 1980s we had youth unemployment and in the 2010s, we have a youth shortage, a result of 40 years of not producing enough kids. So Canada has to keep its 1980s youths in those jobs that opened up when a lot of the Boomers’ elders were forced or enticed out of the workforce. There’s no bliss hanging around the golf course anymore. It all resides in the fun and friends you have in the office. Just look at today’s stories of people who are working into their 80s. Those farmers and corner store owners had it right all along.

Around 1995, the proportion of people over 65 in the Canadian workforce hit a low and it has gradually been rising. That is why Boomerswork.ca is in business. A couple of the reasons for the rise are physical and social: people in their 50s and 60s are in better health and nobody is giving them weird looks because they want to continue working. As well, strictly by coincidence of course, pension plans are being changed and not to the advantage of the pensioner. The old defined benefit pension is being phased out in favour of the defined contribution plan. Returns on savings are so low that companies and governments are beginning to shed these old obligations in favour of workers assuming the risk for their own retirement income. Sounds like the ‘nanny state’ is backing off in favour of personal responsibility. Oh yeah. The point is that crappy pensions mean people will have to work longer now, just when the Canadian economy finds itself on the edge of a decline in its workforce numbers and needs them to keep working. The Japanese showed us the way. They have the oldest society in the world and the largest proportion of a workforce made up of 65-70 year-olds. And they have a crappy pension system to boot.

So, the youth unemployment crisis of the 1980s will be mirrored by the youth under-replacement crisis of the 2020s, or before. We will dump the remnants of the 1980s programs and incentives to get rid of World War II Vets and replace them with vigorous young people with new ideas. Then we’ll develop new programs and incentives to keep on the savvy, experienced workers who are really not all that old and who bring discipline and a 9-5 work ethic to their jobs.  Let the young people be the eccentric entrepreneurs with their artsy and electronic start-ups. Once the Boomers pass through their 18-year cycle in 2030, these younger ones can take over nd the story will change.

I know this sounds cynical—it is. But there’s a ‘bad moon rising’ if we don’t get this transition right in Canada and keep playing around with nostrums. Go back and read one of my February blogs, ‘Who’s a Boomer?’

If you want to see what a mess Canada could get itself into by papering over its similar demographic problem, spend an hour on Japan with hedge fund manager Kyle Bass. He gave a lecture recently at the University of Chicago. He got the 2007 crash right, and the commodities boom right and I wouldn’t bet against him. Consider along with him what ignoring demographics has done to create two lost decades of flat economic performance and a crushing debt in Japan.

Watch lecture here:

 http://media.chicagobooth.edu/mediasite/Viewer/?peid=f15d95d054e8442ab0cc1c60321383101d

Canada needs a more sensible discussion about this problem than we get through advertising spin and government social marketing, or we risk imitating the Japanese ‘lost decades’ and their probable result.

A Tale of Four Islands

By Jim McNiven

Let’s pretend that Nova Scotia is an island. Part of it is an island, of course, but the rest is attached to the North American mainland by a strip of land less than 10 miles across. Having pretended that, let’s look at some of the financial messes that islands are having and compare them to Nova Scotia.

We don’t have much to fall back on, economically—no big resource wealth to tap for extra added income, a small economy and a small population. In fact, we represent perhaps 1/500th of the North American economy. We have a sizeable public debt, though not as bad as it was a decade and more ago, but the social safety net is wearing thin and the desire to improve it by borrowing is strong.

Now, let’s look at some other islands with few people and few prospects for wealth. Iceland is an independent country with its own currency and access to a lot of fish. It has a population of ½ of Halifax County, a bit more than PEI. In the early 2000s, some Icelanders figured they could tap a lot of money in other countries and put it to good use. Soon, a lot of Icelanders were seeing fortunes made from bringing in money from Scotland and elsewhere and using it to pay themselves and to buy a lot of assets all around the world, including a lot of sophisticated instruments created on Wall Street and blessed by ratings agencies. We know what happened then—the roof fell in-- and the Icelandic banks, which had assets maybe 100 times the size of the local GDP, couldn’t meet the demands of their depositors trying to get their money out, and went ‘bankrupt’. The lenders/depositors looked to the Icelandic government for compensation, but were told they were big boys and to get lost. Nobody would lend any more money to Iceland, their currency fell to a fraction of its previous value and local financial experts went back to fishing. The hangover was not pretty, but it is pretty well over now.

Then there’s Ireland. It is bigger than Nova Scotia by a factor of 3 or 4, but still small potatoes. However, it is in the EU and the Eurozone. Now the Eurozone is a strange beast. It is a common currency without a central central bank. It has as many central banks as there are countries plus a European Central Bank, which I suppose some hope will soon become a real central bank. Some enterprising Irishmen decided that the game of high stakes finance was for them and away they went. A lot of overseas money came into the country and was lent out to finance domestic real estate development. Office buildings and housing tracts sprang up, far in excess of local needs. There were fantasies that expatriated Irish and others would come to the island for summer homes. There are palm trees in Dublin, as I can attest, but it does rain a bit more than is normal for an island full of vacation homes. When it all went bust, the depositors came running and in a fit of public pride or maybe fear of their place in the Eurozone, the Irish government said it would make good the debts, which, of course were once again big multiples of the size of the local GDP. The EU was there to help a bit. There are a lot of deserted houses and neighborhoods in Ireland and the people are resignedly trying to pay the money back, but it’s a sad place now.

Then there’s Cyprus. It has a many people as Nova Scotia minus Cape Breton and an even relatively smaller economy. Nothing there but the sun that Ireland needs. Maybe there’s a decent offshore gas field, if things can get sorted out about who owns what in that part of the Mediterranean, but not much else. Cyprus is in the EU and the Eurozone as well. The bankers and the government tried a different strategy. They managed to attract a lot of fugitive money from out of Russia, billions of Euros worth, and then used the deposits to invest in some American financial instruments (remember Iceland?) along with a lot of bonds that their sterling sister government (They are all Greeks) had to offer. The Russian oligarchs and other perhaps less savoury characters from that part of the world got a place outside of Russia and in the Eurozone where they could launder their cash, with almost no questions asked. When it all blew up, the Cypriots could not just walk away from their banks’ debts like Iceland did, nor were they about to tighten their belts and try to make good on their regulatory failings like Ireland. Instead, they went right away to the EU for help. The kindly Germans and others suggested that they ‘tax’ all the banks’ depositors enough to pay up on maybe 1/3 of the money owed and the EU would loan them the rest. Of course, the citizenry, in good Greek fashion, rioted and the Cypriot Parliament backed down.  Instead of hitting everybody, they ‘taxed’ only those who had over 100,000 Euros in these banks. So much for the Cyprus safe haven laundering business.  The Russian government seems to be onside, but I doubt the Russian oligarchs are. Tricky business, grabbing money from those guys.

So, what about Nova Scotia? It has no central bank as that is part of the federation. It has the Canadian dollar, analogous to the Euro. It has some fish, some vacation property and even a (good) Russian restaurant on Lower Barrington Street. Its banking system is out of its hands and its Provincial debt is only about 40% of its GDP, not 40 or more times it, as on islands elsewhere. We never had the chance to play with the big boys like Iceland, Ireland and Cyprus did. We just have to plod along, earning our bread the hard way.