Canada and the Looming US Financial Meltdown

[The Flying Dutchman]

Listening to the US news lately I'm quite frightened by how fragile is the US economy, simply dependant on adversarial politicians with the ability to play chicken with the future of their country and ultimately the world.


Can the same thing happen to Canada ? Can opposition parties make the government refuse to honour debt and/or other financial obligations ?

[Martin Hyde]

In Canada if the Prime Minister failed to get something like this done my understanding is they'd have new elections, which presumably would break the dead lock.

[emacknight]

Listening to the US news lately I'm quite frightened by how fragile is the US economy, simply dependant on adversarial politicians with the ability to play chicken with the future of their country and ultimately the world.


Can the same thing happen to Canada ? Can opposition parties make the government refuse to honour debt and/or other financial obligations ?

No, can't happen. The Conservatives have a majority, so if they want to pass a budget there is nothing to stop them.

The issues in the US are essentially centered around a division of power between Republicans and Democrats. As exemplified by Minnesota, where the governor is a Dem while the Republicans control the state legislature, yet both seem to have equal authority over the budget.

Thankfully neither the Canadian senate nor our head of state stop legislation.

[emacknight]

In Canada if the Prime Minister failed to get something like this done my understanding is they'd have new elections, which presumably would break the dead lock.

Kind of makes me wonder what would happen right now if the US was forced to have a snap general election, all seats (including White House) up for grabs.

[BrainGlutton]

"Looming"? The axe fell four years ago.

[Gorsnak]

Looming, as in the looming crisis if the US statutory debt ceiling isn't raised within a couple weeks.

The situation is just impossible in a Westminster system government. A government that can't get its way on a money issue in Parliament doesn't have the confidence of Parliament. Time for an election.

[Bryan Ekers]

Thankfully neither the Canadian senate nor our head of state stop legislation.

Well, they can, though it's absurdly rare. It was just such an unlikely chain of events that led to Canada's current abortion laws, i.e. we don't got none.


I figured the real key to stability was a well-regulated banking system. I kinda chuckle when I see Sam Waterston doing commercials for "TD Bank, the most trusted in America..."

[penultima thule]

Kind of makes me wonder what would happen right now if the US was forced to have a snap general election, all seats (including White House) up for grabs.
On this side of the puddle we can knock it over in 4 weeks, from calling the election to calling the result. It'd be a ball-tearer to do that in the US!

[matt_mcl]

On this side of the puddle we can knock it over in 4 weeks, from calling the election to calling the result. It'd be a ball-tearer to do that in the US!

Same here; the minimum is 35 days, the most recent one lasted 37, and the longest one in recent memory was 58 or so because it happened over Christmas.

Echo what other people said. This is pretty much the textbook example of denial of supply. Any Westminster government in this situation would have long since fallen.

(Actually, if the Congress were a Westminster system parliament, this wouldn't have happened in the first place because the Democratic government would have fallen once the midterm elections had given the Republicans control of the House. This analogy is difficult to continue, though, since the President is elected and responsible, the Speaker is more akin to the leader of the majority party/Prime Minister than to the Speaker of the House of Commons, the Cabinet isn't allowed to consist of Representatives, etc., etc.)

[RickJay]

Listening to the US news lately I'm quite frightened by how fragile is the US economy, simply dependant on adversarial politicians with the ability to play chicken with the future of their country and ultimately the world.


Can the same thing happen to Canada ? Can opposition parties make the government refuse to honour debt and/or other financial obligations ?
1. It's theoretically possible that the Canadian government could go back into a minority status so unstable that no government could function or pass a budget.

2. Obviously, it's unlikely to the point of impossibility, but you should still worry, because

3. The catastrophic potential of a US meltdown will screw the entire industrialized world anyway.

Same here; the minimum is 35 days, the most recent one lasted 37, and the longest one in recent memory was 58 or so because it happened over Christmas.
I guess it depends how you define recent memory, but the 1984 general election was a 61-day campaign for some reason. I remember that and I ain't that old.

[Gorsnak]

1. It's theoretically possible that the Canadian government could go back into a minority status so unstable that no government could function or pass a budget.


Even then, the caretaker government leftover from the last functioning parliament would continue to honour the sovereign debt. The only way I can see Canada defaulting on its debt is if a government with the confidence of parliament did so intentionally, in some sort of Greece with no Germany to bail us out scenario. I can't see any way that political impasse could result in a default in the over-the-cliff scenario our southern neighbours seem to be heading towards at full steam.

[Malthus]

What I want to know is WTF is going to happen to Canada's economy if the US *does* default.

I'm guessing "nothing good". :(

[hansel]

What I want to know is WTF is going to happen to Canada's economy if the US *does* default.

I'm guessing "nothing good". :(Canada has a strongly export based economy, and the primary customer for Canadian exports is the U.S. We'll go down with the U.S. Because of our basically more healthy position with respect to public finance, I think we're better able to weather the storm, but that's like saying "don't worry about the hurricane because we've got plenty of batteries stocked up."

Trudeau once famously said that living next to the U.S. is like sleeping next to an elephant: Every move it makes affects you a lot.

[Susanann]

The collapse of the United States and the US dollar becoming worhless will cause a world wide depression. Canada, especially, will be hurt since Canada relies so heavily upon the USA. Canada will go down with everyone else.

The good news, is that "if" Canada can untie itself from the USA AFTER the collapse, and if Canada can redirect its economy and its trade toward/with Asia then Canada will come back fast and strong and Canada will soon be wealthy, mostly because Canada has so much natural resources combined with an uncrowded small population.

[Lord Feldon]

...Canada has so much natural resources combined with an uncrowded small population.

Canadians are more likely to be "crowded" than Americans are. Canada only has a truly low population density if you fail to look at where most Canadians actually live.

[Leaffan]

We're fucked if the US goes down. Totally fucked, but so is pretty much everyone else.

No, the US will reach a compromise and things will move along, albeit slowly. In 10 years economies will be booming again. That's my prediction anyway.

[Susanann]

No, the US will reach a compromise and things will move along, albeit slowly. In 10 years economies will be booming again. That's my prediction anyway.
I think you are doing a lot of wishing and hoping with no evidence at all to support your dream.

In 10 years the USA debt will double, another 20 Trillion dollars of federal spending debt, AND another 10 trillion dollars of balance of trade deficits, the US dollar 10 years from now will be worthless, there will not be any more jobs than we have now but the population(people on welfare) in America will have increased by another 15 million people ( to 320 million people) mostly from immigration , and Communist China by then will stop lending money to the USA.

There is no one in American government who is smart enough to understand what is wrong, and who is smart enough to bring back all of our manufacturing jobs, to stop immigration, and to stop borrowing and pay off the federal debt - therefore a very dismal future for the collapse of the US dollar and then a gigantic world-wide Depression caused by the destruction of the USA 10 years from now is certainly inevitable.

[Northern Piper]

News item: U.S recession would broadside Canada (http://cnews.canoe.ca/CNEWS/Canada/2011/07/13/18415106.html).

Experts say Canada would benefit in the short term if the U.S. defaults on its debt, with an immediate rise in the value of the Canadian dollar as investors look to the loonie as a safe haven.

But if the U.S. falls back into recession, Canada would get squeezed like it did a couple of years ago.

There would be a drop in exports from reduced U.S. demand, manufacturing optimism would wane and private sector job losses would lead to higher unemployment. And consumer confidence would drop.

"Canada's economy would be very sluggish or anemic against this backdrop,"

says Arlene Kish, principal economist with IHS Global Insight, one of the world's largest economic forecasters.

"A Canadian recession, therefore, would be possible."

Fortunately, Canada's economy is on better footing than those of the U.S.

and other G-8 countries and could better weather an economic gale.

While the U.S. has a unemployment rate of 9.2% -- having only regained 1.75 million of more than 8.5 million jobs lost during the recession -- Canada's rate is steady at 7.4%, and the country has regained more than the 400,00 jobs lost during the same period, though many are part-time.

[emacknight]

Something else that often gets overlooked/forgotten is that Canada went through a very painful period of austerity during the 90s. Government spending was slashed across the board, all departments were simply told they'd get 15% less. Our medical system went to shit, military shrunk, a social services are reduced. Meanwhile taxes were kept extremely high: 15% sales tax in most areas, I believe income tax on the middle class was in the 35% range. Gas cost twice as much, food cost more, and our dollar was worth 67cents to the US dollar.

Take a look at gdp per capita growth
http://www.google.com/publicdata?ds=wb-wdi&met_y=ny_gdp_pcap_cd&idim=country:USA&dl=en&hl=en&q=gdp+per+capita#ctype=l&strail=false&nselm=h&met_y=ny_gdp_pcap_cd&scale_y=lin&ind_y=false&rdim=country&idim=country:USA:CAN&hl=en&dl=en

That long flat part is what I'm talking about. But the result was a balanced budget eventually leading to a surplus, allowing for tax reduction and increased spending. When the recession hit Canada decided to allow some deficit spending, with the goal of being balanced within (IIRC) 5 years.

[Jas09]

Canada also collects about 5% more of their GDP in revenue than the US (it varies according to the reference source, but that seems to be the average - this is for provincial and federal revenue). If we managed to add 5% to our revenues the deficit would be basically gone.

Now if we could just get Canada's health-care system down here we'd be sitting pretty.

[RickJay]

Canada also collects about 5% more of their GDP in revenue than the US (it varies according to the reference source, but that seems to be the average - this is for provincial and federal revenue). If we managed to add 5% to our revenues the deficit would be basically gone.

The nominal U.S. GDP is about $14 trillion. Five percent of that doesn't make up the deficit.

[HamishBlake]

So when is Canada going to start building a wall, like America has built on the border with Mexico, to stop all the Americans from illegally fleeing to Canada for "the good life"?

[Bryan Ekers]

Well, we do have some Americans sneaking in to mooch off of our health coverage, but since we lack the panic-reaction Americans have to illegals mooching off their health coverage, I expect no wall is imminent.

[elbows]

How soon they forget.

Don't you remember the 60's?

All those peaceniks and conscience objectors were warmly welcomed.

'What's that? You don't want to go and kill people, don't like war? Sure you can stay with us!'

[RickJay]

How soon they forget.

Don't you remember the 60's?

All those peaceniks and conscience objectors were warmly welcomed.
That's just simply not true; in fact, a great many Canadians didn't like draft dodgers. The welcome was quite varied indeed - however, it being hard to tell who was and wasn't a draft dodger (since dodgers were treated as ordinary immigrant applications) you could get by without anyone really knowing anyway.

[waterj2]

The nominal U.S. GDP is about $14 trillion. Five percent of that doesn't make up the deficit.Not currently, but before the recession, government revenues were somewhere around 18% of GDP and spending was around 21% of GDP, from what I've seen.

[elbows]

in fact, a great many Canadians didn't like draft dodgers.

Cite?

What you're saying here is totally at odds with my experience, which is why I ask.

[Martin Hyde]

Cite?

What you're saying here is totally at odds with my experience, which is why I ask.

Are you really asking for a cite for that? How do you define "a great many" unless say over 90% of Canadians were thrilled with American draft dodgers coming to Canada you could still have a great many individual Canadians that did not like draft dodgers.

Looking at your location I would remind you that your reality is not everyone's reality. I'm no Canadian but even I know there is quite a conservative cowboy culture in large parts of the more sparsely settled Canadian plains, people of that stock probably wouldn't be too happy with American draft dodgers. Even if they didn't care for the Vietnam war they would be people who look questionably on those who flee their responsibilities.

[Sam Stone]

Something else that often gets overlooked/forgotten is that Canada went through a very painful period of austerity during the 90s. Government spending was slashed across the board, all departments were simply told they'd get 15% less. Our medical system went to shit, military shrunk, a social services are reduced.

I don't recall the medical system 'going for shit' and my wife was a nurse then. What I recall is that she took a small decrease in pay, and then went through three years of frozen pay. Waiting times went up a little bit in some provinces, but there was no measurable effect in aggregate health outcome measures.

The nurse's unions squawked and screamed and threatened, but frankly my wife knew she was making a better wage than she'd earn outside the government and we thought the tiny cuts were eminently fair.

Meanwhile taxes were kept extremely high: 15% sales tax in most areas, I believe income tax on the middle class was in the 35% range. Gas cost twice as much, food cost more, and our dollar was worth 67cents to the US dollar.

You blame austerity for all that? The fact is, we trimmed the size of our government from 53% of GDP to a low of 35% of GDP, which is a massive reduction, and yet I don't think most people in Canada regret us taking that step.

And while our taxes were higher than the U.S.'s, they were, and are, significantly less progressive. That's the case because we fully fund our entitlements with significantly higher payroll deductions, and we raise more revenue through sales and excise taxes than does America. Canada has lower corporate, dividend, and capital gains taxes than the U.S., and our top marginal rate is lower (29% federally). Now, depending on what province you live in you may or emay not not have a significantly more progressive structure. Here in Alberta, we hav lower overall taxes than any other jurisdiction in North America.


Take a look at gdp per capita growth
http://www.google.com/publicdata?ds=wb-wdi&met_y=ny_gdp_pcap_cd&idim=country:USA&dl=en&hl=en&q=gdp+per+capita#ctype=l&strail=false&nselm=h&met_y=ny_gdp_pcap_cd&scale_y=lin&ind_y=false&rdim=country&idim=country:USA:CAN&hl=en&dl=en


What I see on that graph is a country that had a massive debt and deficit that was dragging the economy down, and a government that was too large. We redirected our social surplus towards correcting those problems, and as a result once we had achieved a surplus situation with a smaller government, our per-capita GDP took off and outpaced the U.S. throughout the 2000's.

Or look at it this way: We cut government by 20% of GDP, and yet by the start of the recession our GDP per-capita had caught back up to the U.S., except we weren't borrowing money to do it.

And right now, Canada is creating more jobs in absolute numbers than the U.S. is, with 10 times our population. Our unemployment rate is 2 points below the U.S's, our dollar is stronger than the U.S. dollar, and we're forecast to be turning in surpluses again by 2014.

As for Canada collecting more in tax than the U.S. - we're really not. You have to consider the deficit and the under-funding of U.S. entitlements as implicit taxation, and between the two that currently amounts to something like 12% of GDP, which would put overall U.S. taxation higher than Canada's - and dramatically higher if Obama gets the tax increases he's looking for.

The bottom line to look at is how big the government is as a percentage of GDP. One way or another, than govenrment has to be paid for, either through taxes or borrowing. The U.S. passed Canada in overall size of government in 2009, and the trend is for that gap to continue increasing.

That long flat part is what I'm talking about. But the result was a balanced budget eventually leading to a surplus, allowing for tax reduction and increased spending. When the recession hit Canada decided to allow some deficit spending, with the goal of being balanced within (IIRC) 5 years.

That's correct, and it's why we weathered the recession better than any other country in the world, despite being tidally locked to the country that has weathered it the worst. Canada now has the strongest economy in the G8. Does anyone think we'd be this strong if we had listened to the NDP and continued borrowing money and running up deficits and growing the size of government in the 90's? I can tell you where we'd be - we'd be where Greece and Italy and Spain are today - broke.

As for the consequences to Canada of a U.S. fiscal default - I'm not so sure it would be disastrous in the long run. I suspect what we'd see is a flood of investment money from the U.S. into Canada, seeking a more stable business environment. And don't forget - while the U.S. is our largest export market, it's also our biggest import market, and so a devalued American dollar cuts both ways.

The fact is, our recession didn't go as deep as the U.S.'s, and our recovery happened faster, (in spite of / because of) us having a much smaller 'stimulus'. I'm sure we'd feel significant short or medium term damage from a U.S. meltdown, but in the long run it could possibly work to Canada's benefit.

Oh, one more thing - the 'grand deal' that's supposedly being offered right now in the debt ceiling talks is $3 in future spending cuts for every $1 in tax increases next year. In Canada, we did $7 in spending cuts for every $1 in tax increases, and we reversed the timing - the spending cuts started immediately, but the tax increases phased in over several years. So don't think the Democrats are offering anything particularly groundbreaking here. They need to go much farther.

[BrainGlutton]

N.B.: There is a looming government-fiscal crisis in the U.S., there is no looming financial meltdown, we had the financial meltdown four years ago and it will be some time before the industry gets overheated enough for another.

[Bryan Ekers]

In the interest of politeness, we could start spending ridiculous amounts of money on something, maybe our own nuclear weapons program.

[BrainGlutton]

In the interest of politeness, we could start spending ridiculous amounts of money on something, maybe our own nuclear weapons program.

Start small: A national program to rebuild all your football fields so they're the right fucking size.

[detop]

Start small: A national program to rebuild all your football fields so they're the right fucking size.

First, sonny, learn to play a man's game. Only wimps need 4 downs. and our fields were built correctly. They didn't shrink when they were washed :D

[Cat Whisperer]

Someone correct me if I'm wrong, but haven't I been hearing reports of Canada pursuing more Asian markets in the last couple of years? I recall seeing this story on China banning Canadian canola (http://www.cbc.ca/news/canada/saskatchewan/story/2009/10/23/sk-mb-canola-china-exports-blackleg.html) from a couple of years ago.

[Jas09]

Not to doubt your numbers, Sam, but the Heritage Foundation's 2011 Economic Freedom Index (http://www.heritage.org/index/explore?view=by-variables) shows the Canadian tax burden at 32.2% of GDP and government expenditures at 39.7%. For the USA it has those numbers at 26.9% (taxation) and 38.9% (expenditures). So it seems like we are taxed less and spend less, at least according to Heritage.

If those numbers are right (which, it's Heritage so I'm not going to hazard much of a guess) then we clearly need to attack the problem from both sides. I think the 3- or 4-to-1 numbers that the Democrats are at is a perfectly reasonable starting point, but when the GOP wants the revenue number to be zero I don't see how you get there from here.

[Jas09]

The nominal U.S. GDP is about $14 trillion. Five percent of that doesn't make up the deficit.True. Getting revenues back up to historical norms is only part of the problem, and entitlement reforms will absolutely have to be included.

[RickJay]

N.B.: There is a looming government-fiscal crisis in the U.S., there is no looming financial meltdown, we had the financial meltdown four years ago and it will be some time before the industry gets overheated enough for another.
If the U.S. government just halts deficit spending overnight, I think you'll be very surprised how quickly a fiscal meltdown will follow.

[Sam Stone]

Not to doubt your numbers, Sam, but the Heritage Foundation's 2011 Economic Freedom Index (http://www.heritage.org/index/explore?view=by-variables) shows the Canadian tax burden at 32.2% of GDP and government expenditures at 39.7%. For the USA it has those numbers at 26.9% (taxation) and 38.9% (expenditures). So it seems like we are taxed less and spend less, at least according to Heritage.

Now add in the U.S.'s 10% of GDP deficit, and the underfunding of all its entitlement programs, as I said in my post. Those are a form of implicit taxation.

What year is the data from Heritage. They show Canada's government to be .8% of GDP larger than the U.S's, but I've read that growth in the U.S. government relative to Canada caused it to move past us in total size in 2009, when it was 41.76%. But data this new is subject to revision and interpretation, and I'm not sure all sources agree.

If those numbers are right (which, it's Heritage so I'm not going to hazard much of a guess) then we clearly need to attack the problem from both sides. I think the 3- or 4-to-1 numbers that the Democrats are at is a perfectly reasonable starting point, but when the GOP wants the revenue number to be zero I don't see how you get there from here.

I believe the ultimate problem here is that Republicans simply have no faith that Democrats will cut spending, promises or not. In the past, every time Democrats have offered a 'cuts for tax increases' deal, the cuts are either promises to cut in the future or they are vague cuts to be defined 'later', but the tax increases are always specific and to implemented first.

Would Democrats agree to the opposite? I personally think one way to break this logjam would be to invert the timing. What if the Republicans agreed to 1:1 spending cuts/tax increases, but structured so that no tax increases can come until AFTER verified spending cuts? So for example, if the government cuts $100 billion from this year's budget, then next year it can raise taxes by $100 billion. If the cuts don't materialize, then neither do the tax increases. And the cuts would have to be real, baseline cuts - none of this bookkeeping trickery where baseline spending is set at 5% growth, and a 'cut' is lowering the growth to 3%.

Do you think Democrats would go for that? If not, then I have to assume this cuts for tax increases deal is another game like the one they played in 1986 and 1991. If they would, then that offer should be put on the table. Because I suspect there are a lot of Republicans who are currently saying "No new taxes, period", simply because they don't want to be played like they have been in the past.