Smoot-Hawley; Trump-Ross

Be honest now: did you really think that Donald Trump was going to play by the rules on trade and NAFTA?  If so, you've got quite a lot of company in Canada, particularly on the left of the political spectrum. Trade union economists and a good segment of the media were never big fans of the NAFTA deal to begin with, and not without good reason, given the havoc it created in Canada's manufacturing sector.  Many of them have viewed the possible collapse of the pact with equanimity, noting that the US tariffs that would come back into effect in a post-NAFTA world would be generally in the range of 2.5 percent -- regrettable, but entirely manageable.

So much for that.  Trump and his uber-geriatric Commerce Secretary, Wilbur Ross, have come up with the idea of levying much higher tariffs on the grounds of "national security",  starting with 25 percent levies on steel and 10 percent on aluminum. The targets of the tariffs, which include the EU and Mexico as well as Canada, are righteously angry.  In Canada's case the anger is partly based on the "national security" ruse, which Prime Minister Justin Trudeau has portrayed as "insulting", given the past history of the US and Canada fighting wars together. (Trudeau refrained from pointing out that Canada entered both World Wars years ahead of the US).

A further source for Trudeau's anger is that the US actually runs a trade surplus in steel with Canada, making it a very strange starting point for a trade war.  In any event, the Canadian government has responded with tit-for-tat tariffs of its own on a wide range of US products, including steel and (who knew?) maple syrup.

I haven't actually read Trump's "Art of the Deal".  I don't think this places me at any disadvantage in understanding his thinking, since he didn't actually write it.  It seems clear, though, that Trump sees his unpredictability as his key advantage in negotiations -- just ask Kim Jong-Un.  That unpredictability, however, is tactical rather than strategic.  One of the things that has to be recognized about Trump is that what he does largely reflects what he says.  During the election campaign he promised to do all manner of bizarre and reckless things, which the media (and the Republican Party) dismissed as so much hot air. It's now very clear that he meant every word, and as the second year of his term rolls on, he seems to be coming more emboldened by the day.

Media commentators in Canada in the last day or two have noted that Canada is the "junior partner" in the trade deal with the US.  Some have argued that this means that retaliating against Trump's tariffs, as the Trudeau government has done, will simply invite still more retaliation from Washington.  Responding to bullying by just sitting back and taking it is not a tactic that often seems to work.

In any case, there's no reason to think Trump will wait for an invitation.  Today he has tweeted about Canada's restrictive practices in agricultural trade, an issue that came up during the election campaign. It has to be said that Trump is on much firmer ground here than he is with steel.  The arcane "supply management" system in the Canadian dairy sector is one of the most egregious examples of "producer capture" to be found anywhere in the developed world, as anyone buying overpriced milk or eggs in Canada can attest.

Breaking up that system would be a big favour to Canadian consumers, but that aside, it's hard to see any upside to what looks more and more like a nasty trade war, the US against everybody. And we know from history how that's likely to end.

Finger on the trigger

As expected, the Bank of Canada left its overnight rate unchanged at 1.25 percent today.  However, it is clear from the statement released after the Governing Council meeting that the next rate hike will not be long in coming.

The Bank notes that headline inflation is running just above the 2 percent target and could rise further in the near term as a result of rising gasoline prices. The Bank's core measures of inflation are all close to 2 per cent, which the Bank sees as consistent with an economy operating close to full capacity.  There are signs that the economy performed rather more strongly than the Bank expected in the early part of this year: export volumes were strong, and increased imports of capital goods may be indicative of an improving outlook for business investment. 

So what's holding Governor Stephen Poloz and his colleagues back?  One factor is undoubtedly the continuing uncertainty over the NAFTA renegotiations, though in the short term this may be outweighed by the evidence that the US economy is starting to pick up steam in response to the Trump administration's tax cuts.  The biggest restraint, however, is the state of the housing market and the excessive level of household debt.

In reporting their latest quarterly results, the major Canadian banks showed little concern over the possibility that further rises in interest rates could tip increasing numbers of households into default.  Indeed, somewhat surprisingly, a number of banks have been aggressively promoting floating rate mortgages to borrowers turned off by rising fixed term rates.  Even so, there is mounting anecdotal evidence of households living payday-to-payday.  For the moment, the Bank of Canada appears to believe that the strong labour market, with unemployment at a four-decade low, will get the housing sector back on track as the year progresses, but the situation remains finely balanced.

The 1.25 percent rate target is way below anything that might be regarded as a "neutral" rate.  The Bank says it thinks a neutral level would be near 3 percent, but the combination of 2 percent-plus real growth, 2 percent-plus inflation and a tight labour market would suggest the correct level is even higher than that.  Markets are looking for a 25 basis point rate hike at the Bank's next Council meeting (July 11) and a further 25 basis points by the end of the year.  That looks about right, but would still leave the Bank with more work to do in 2019.

Do the math

Election day in Ontario is just ten days away now, but the electorate has still not seen anything that could be called a coherent plan from any of the major parties, particularly as regards fiscal policy.  The leftist-by-conviction NDP, led by Andrea Horwath, and the leftist-by-convenience Liberals. led by Kathleen Wynne, have been strewing wildly expensive promises all across the Province like so much confetti.

The right-wing Conservatives, led by the populist Doug Ford, haven't been much better and, unlike the other two parties, haven't even issued an actual policy manifesto.  Ford is basically making it up on the fly -- cheaper gasoline, cheaper power, even cheaper beer.  They all admit they will be running budget deficits right from the get-go, with only Ford making even the vaguest noises about eventually balancing the budget.  In the most indebted non-sovereign jurisdiction in the world, voters are being offered more of the same.

But wait!  Here's Kathleen Wynne with a new pledge, one that she describes as the "anchor" of her party's entire platform.  Ready?  Wynne promises that a Liberal government will "introduce legislation forcing any budget surpluses to be directed to pay down the province's debt".  That sounds good for about half a second, and then you realize that it's more or less equivalent to legislating that 2+2=4.

If a government runs a surplus in any given year, then by definition the public debt burden goes down, either because you actually pay off some of your liabilities or because you accumulate cash on the other side of the balance sheet.  It may be that Wynne is trying to say that if a future Liberal government realized it was about to run a surplus, it would refrain from micturating the money away on new spending, but that's not the same thing.

Of course, Wynne's pledge is meaningless not only logically but also practically.  Wynne and her predecessor, Dalton McGuinty, presided over a doubling of the Provincial debt over the past decade, and if the Province's dogged Auditor-General is correct, the real picture is even worse than the government is willing to admit.  The idea of Ontario running a budget surplus and starting to pay down debt is a purely theoretical one, whoever gets elected next week.  Wynne's pledge is entirely meaningless, but if the opinion polls are to be believed, she won't get the opportunity to put it into practice anyway.

Taking a punt

Sorry about the lack of posting lately. Family wedding, visitors from the UK, that sort of thing.  Anyway to ease myself back in gently, here's a little story about lawyers and flat-bottomed boats.

Ever visited Cambridge, my alma mater?  Decades ago, when I was studying there, it was a sleepy backwater, far less popular with tourists than Oxford, even though both cities are about the same distance from London.  No more.  It's now arguably the high-tech capital of the UK, the major retail centre of its region, and --as tourists have come to recognize -- at least as interesting a day-trip destination as its rival to the west.

One of the fun things to do in Cambridge was always the punt ride on the River Cam. (Same at Oxford on the River Cherwell, but for some unaccountable reason Oxonians punt from the wrong end of the boat, ignoring the flat platform at one end that's clearly there for the pole-wielder to stand on.  But that's another story).  It used to be that you could do your own punting, or hire someone from the rental company to do the hard work for you (you wimp), but in either case you would be in the same, narrow boat, seating about eight.

I'm not sure when this happened, but at some point the rental companies realised they could make more money with bigger boats. Now, people trying to make their own way along the Cam in the traditional punts have to run the gauntlet of landing-craft-sized punts used by the rental companies to squeeze in as many visitors as possible -- see the picture above.   As the linked story relates, one of these companies has been mooring its craft and soliciting patrons from a spot on Garret Hostel Lane, a medieval street near Trinity College.  After protests from the college, which claimed its property rights were being infringed, the company has been forced out of business.

That's tough on the sixty or so people who may be losing their jobs, though it may at least give them an opportunity to learn some of the actual history of the city and university before their next gig: some of the entirely fictitious nonsense I've overheard these people telling innocent visitors over the years has been quite amazing. Anyway, if you're heading to Cambridge or Oxford any time soon and fancy a punt ride, think about doing the punting yourself.  It's not difficult, as long as you keep in mind a sign that I saw a year or two ago, on Garret Hostel Lane as it happens: "Punting and selfies don't mix"!

Canada employment data -- ignore the headline

At first blush,  Canadian employment data for April, released by StatsCan this morning, look disappointing.  The analysts' consensus had been looking for a 20,000 increase in employment, but in the event the actual number was a decline of 1,100, well within the statistical error of this volatile data series.  Even so, further analysis of the details suggests that the report is neutral, at worst, in terms of its implications for Bank of Canada policy.  Consider:

• The unemployment rate remained at 5.8 percent, a 40-year low;

• Full-time employment rose by almost 29,000 in the month; the near-flat headline number was the result of a loss of less-desirable part-time positions.  Over the past year the economy has added 378,000 full time jobs, only partly offset by a reduction of about 100,000 in the number of part-time positions.

• Wage gains continue to move higher, with the year-on-year increase in hourly wages up to 3.6 percent.

It is this last factor that is most likely to get the Bank of Canada's attention, particularly with headline CPI (as well as the Bank's preferred inflation measures) all at or above the 2 percent target and set to move higher in the near term.  It remains probable that a further 25 basis point rate hike will come within the next three months.

And after that?  It seems likely that the Bank will be more cautious than the Fed about pushing rates up quickly.  One reason for that is the housing market and the associated high level of household debt.  This week the Bank raised its benchmark mortgage reference rate by 20 basis points, to 5.34 percent.  

Of course, the Bank of Canada itself does not make mortgage loans; this reference rate is designed to allow lenders to assess the ability of new borrowers to meet their mortgage payments, as part of the tighter rules imposed at the start of the year.  Uniquely, it can be described as a "reactive" central bank rate, set in response to the 5-year mortgage rates posted by the chartered banks.  Those rates have been rising in the past few weeks, reflecting rising bond yields, and the Bank of Canada has raised its reference rate in response.  

The good folks at CIBC Capital Markets estimate that a remarkable 47 percent of all Canadian mortgages come up for renewal this year, so rising mortgage rates and the higher reference rate will bite into household spending power.  Add in the fact that the household debt/income ratio remains perilously close to its all-time high, and it becomes easy to see that the all-important consumer sector of the economy could face headwinds this year, even if the job market remains strong.  This week's increase in the mortgage reference rate may well be the most important policy move the Bank of Canada makes this year.  

Racial stereotyping at the Toronto Star

Today's print edition of the Toronto Star contains not one but two articles accusing Canada of being a racist country, both written by women of colour.  Both articles riff off a nasty incident a few weeks ago in which a white woman at a Denny's restaurant in Alberta got into a shouting match with a group of Afghan immigrant men.  That raises an interesting question, of course: if racism is as all-pervasive across Canada as these two columnists claim, how come they both have to rely on the same small incident to make their point?

The woman in Denny's deserves to be named and shamed, which has now very comprehensively happened.  But does the whole country and every one of its citizens have to be called out too?  These columnists are using this one example, appalling as it is, to cast all Canadians in a very negative light.  Isn't that the very definition of racial stereotyping?

Ask yourself this: if a right-wing journalist were to pen a piece saying that all Muslims are terrorists or all Jamaicans are drug dealers or all Mexicans are layabouts, would the Toronto Star publish it?  Of course it wouldn't, and shouldn't -- and it should have thought long and hard about publishing these two articles as well. 

Down with the gerontocracy!

It's pretty depressing to look at the US political scene and consider the ages of the principal players.  Donald Trump is 71.  Hillary Clinton is 70.  Joe Biden? 75.  Bernie Sanders is 76 and Nancy Pelosi clocks in at 78. 

I'm younger than all of these people and I still have most of the marbles I started out with, but I wouldn't dream of running for high political office.  My ability to tolerate fools was never one of my strong points, and now I'm worse than ever.  I might not have as short a fuse as Trump, but I wouldn't have the staying power to do the job properly -- which is, come to think of it, one of the few things that Trump and I have in common.

If you look across to Europe, things are only slightly better.  Angela Merkel is 63, while Theresa May and Jeremy Corbyn are 61 and 68 respectively.  There are a few younger leaders -- Macron in France, Paradkar in Ireland -- but they're still the exception.

I think this matters.  Older people tend to be needy and greedy.  Many years ago a whole generation of older New Zealanders were dubbed "the grey greedies" because, when a financial crisis hit the country, the refused to sacrifice any of their extensive social benefits. Younger political leaders, and younger people in general, have to live with the consequences of their decisions, for good or ill, in ways that the current bevy of oldsters simply won't.

That doesn't mean we should want all our leaders to be contemporaries of Kim Jong-Un.  But it does mean that when the big summit meeting happens, Kim is looking at a much longer time horizon than Trump.  That means he has more to gain if he plays his cards right, and much more to lose if he messes up.