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American dysfunction threatens Canada’s economy

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VANCOUVER —Many Canadians will be revelling in U.S. President Barack Obama’s inauguration on Monday. Polls showed that Canadians overwhelmingly supported Obama’s re-election. Despite such enthusiasm, however, Obama’s re-election coupled with a divided Congress poses real risks to Canada’s prosperity.

To understand why, consider a recently released collection of essays by Canadian and American scholars. In The U.S. Election 2012: Implications for Canada, the dominant theme was economic "uncertainty" and its effects. Whether it’s taxes, deficit reduction, interest rates, inflation, energy, or trade, American policy uncertainty was shown to be adversely affecting the U.S. economy as entrepreneurs, businesses, and investors delay making decisions. But it’s not just a U.S. problem; such uncertainty south of the border will also threaten jobs, income, and general prosperity here.

For example, Nicholas Bloom, an economics professor at Stanford University, explains how government-created uncertainty in the United States between 2006 and 2011 caused both GDP and employment to be substantially lower, stalling an already anemic economic recovery. Critically for Canada, Bloom concludes that "much of Canada’s current economic policy uncertainty is due to contagion from the U.S."

There are also more specific risks to the Canadian economy. For example, the former president of the Cleveland Federal Reserve Bank, Jerry Jordan, points to the prospect of higher inflation in the future as a serious risk for Canada.

Jordan argues that as the U.S. and Europe become more tolerant of inflation, their currencies will likely depreciate while the currencies of smaller, trading economies like Canada’s will likely appreciate. That in turn makes our goods and services more expensive, which at the very least makes exporting more challenging.

In addition, Jordan explains that such currency challenges often lead to even worse policies such as protectionism.

Contributors on the state of Canada-U.S. relations identified Canada’s low ranking on the priorities list of the Obama administration as a major problem. Both the Keystone XL pipeline and the Beyond the Border Action Plan (joint initiative to improve the movement of cargo and people between borders) need strong White House backing to withstand Congressional, lobbyist and bureaucratic resistance.

Energy expert Christopher Horner identifies yet another threat to Canadian prosperity, namely the threat that a number of U.S. regulations implemented or being drafted, which adversely affect the energy sector, will be replicated in Canada. The risk for Canada is simply that we import bad regulations from the U.S. in our push to harmonize rules and regulations.

Then there are the new financial regulations in the U.S. based on the Dodd-Frank Act, which carry another set of risks for Canada. University of Edmonton professor Moin Yahya estimates that about half of the expected regulations have been written with the remainder coming over the next few years. While the impact of Dodd-Frank on the U.S. financial system is highly uncertain, the impact on Canada’s financial system is even more unclear. That is because specific provisions which deal with foreign banks do not yet have final rules confirmed. Moreover, other provisions will apply inadvertently to Canadian companies that happen to be doing business in the United States.

According to Yahya, Dodd-Frank will likely reduce the efficiency and profitability of Canadian financial institutions just as it has with American banks.

Finally, Obama’s re-election means that Obamacare will be the law of the land. What may surprise Canadians is that this new law will likely require Canadian provincial governments to spend more money on health care.

Western Washington University professor Steven Glober-man argues that Obamacare will likely reduce rates of health-care research and development in the United States, which will reduce the availability of new health-care technology to Canada. In the past, Canada has "piggybacked’ on U.S. innovation. Canadian health-care providers, for example, benefit by waiting until new procedures and techniques are proven effective in the U.S. before adopting them.

The ability of the Canadian sector to acquire technology and knowledge from the U.S. reduces the need for Canadian investment in expensive R&D and clinical testing, thereby making state-of-the-art health-care services less expensive for Canadians. If Obamacare reduces innovation in the United States, Canada will presumably need to spend more on health care innovation to improve the quality of its health care.

While Canadians celebrate Obama’s historic re-election, we should recognize the perilous policy path he and Congress are on and the negative effects for the Canadian economy. Understanding the risks and costs being imposed on the Canadian economy by U.S. policies will, at the very least, allow us to better manage such risks.

 

Jason Clemens and Alexander Moens are the editors of The U.S. Election 2012: Implications for Canada, released recently by the Fraser Institute and available at http://www.fraserinstitute.org

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