These are unusual times. There’s a trade war on, given special intensity by Donald Trump’s threats to use “economic force” to bend Canada to his will. To counter the U.S. administration’s crude attempts to divert capital south of the border, governments across the country are mobilizing resources in ways they might not otherwise contemplate. A sort-of wartime economy, fit for fighting a sort-of war.
Fair enough. But just because economic logic might have to be stretched here and there to fend off the depredations of a lunatic administration does not mean it should be thrown out altogether. The answer to the economic nationalism of the Trumpists is not to descend into our own fever-swamp of economic nationalism, for which there is an all-too-enthusiastic constituency at the best of times. Alas, they happen to have a convenient platform at the moment.
Hence the release, within a couple of weeks of each other, of two high-profile reports rooted in some of the most enduring obsessions of economic nationalism: the value-added fallacy, and pension conscription.
Export Development Canada is responsible for the first. The federal Crown corporation has issued a report (“From Resources to Resilience: How Canada Can Capture More Value Through Trade”) based firmly in the “hewers of wood, drawers of water” tradition of nationalist laments, albeit dressed up in more technocratic jargon.
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But the argument is the same as always: Canada’s economy is too focused on exporting raw resources, when we should be producing more “sophisticated” and “complex” products – products with more, you guessed it, value-added. As the language suggests, a lot of this is based on a kind of advanced-industrial snobbery – a vague feeling that certain kinds of industries are simply infra dig for an economy of Canada’s place and station.
But it’s also based on a simple economic error. A chart on page eight of the report is a classic of the type. Canada, it notes, sells yellow peas for $30 a tonne, when we could be processing them into snacks or pasta and selling them for $3,000 a tonne.
Put like that, you’d have to wonder why Canadian businesses would be so dumb as to leave all that money on the table. But of course a lot of other resources go into turning those $30 peas into $3,000 snacks. What determines the profitability or otherwise of a good is not simply the sale price, but the difference between the price of the good and the cost of the resources used to make it.
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That same arithmetic applies at any stage of production. At any stage of production, profits can be high or low, and at any stage of production a firm’s workers can be relatively efficient in their use of resources or relatively inefficient. It’s profits that matter to investors’ returns, and productivity that matters to workers’ wages – not where they fit in the “value-added chain.”
If firms in this country decide to concentrate on selling the raw resource, rather than process it into something more “sophisticated,” possibly they have a good reason. The mere observation that they are not doing what the writer of a report might prefer they should is not evidence in itself that they don’t know their own business. Absent some demonstrable market failure it’s just an aesthetic preference masquerading as economic analysis.
But the EDC report is Nobel-worthy compared to the other recent report, from the Canadian Shield Institute, an offshoot of the Council of Canadian Innovators, with much the same techno-nationalist leanings. Their report attempts to resurrect one of those zombie ideas that refuse to die: forcing Canada’s pension funds to invest a certain percentage of their assets in Canada.
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Sorry, did I say Canada? Actually, the report is against such simplistic solutions: “It would miss the mark to simply direct pension funds to allocate more of their assets to Canada.” Rather, it would force the funds to invest in Canadian “growth” companies, defined as Canadian-controlled firms “with 10 or more employees, growing at 20 per cent or more per year, on a three-year average annualized rate.”
Why yes, that definition does rather fit the members of the CCI, now that you mention it. Beyond the outrageous self-servingness, beyond even the distortion this would imply in pension funds’ fiduciary duty to obtain the best possible risk-adjusted return for their beneficiaries, there is the usual opportunity-cost objection: The Canadian Shield Institute’s proposal to tax pensioners to fund risky growth companies would divert capital from other companies that might represent a better risk-return trade-off.
Again: Where’s the market failure? If there are genuinely superior returns available in Canada, fund managers are at least as capable of recognizing it as anyone else. And yes, that includes the CPP.
Editor’s note: A previous version of this article incorrectly attributed a proposal that pension funds be forced to invest in Canadian “growth” companies. The proposal was made by the Canadian Shield Institute.