Thursday, May 24, 2012

Delivering the Death Blow to Thomas Mulcair's "Dutch Disease" Theory

NDP leader Thomas Mulcair is a man with a theory. And like many previous men with many previous theories, he isn't willing to get go of it.

His theory is that the strength of Canada's resource sector -- particularly the energy sector, especially the oil sands -- hurts Canada's manufacturing sector. In greater detail, he argues that exports of energy resources have "artificially" inflated the Canadian dollar, making manufacturing exports more expensive to international buyers.

When Mulcair first floated this thesis, response to it was fairly tepid. But it has slowly picked up steam, and revealed to Canadians precisely how ill-suited Mulcair is to become Prime Minister. Even as all the evidence disputing Mulcair's thesis has trickled out, Mulcair refuses to back down. No matter how many economists dispute his thesis, Mulcair simply insists that "everybody knows" that Canada is suffering from Dutch Disease. Despite the fact that this can immediately be seen to be untrue.

There was Jack Mintz in the Financial Post pointing out that the so-called decline of the manufacturing sector in Ontario and Quebec closely mirrors that of US rustbelt states like Michigan and Ohio -- two states that don't have booming resource sectors to blame for their plight. Then there was the Institute for Research on Public Policy pointing out that Canada has a mild case of Dutch Disease at best, and that the symptoms suffered by the sectors of manufacturing that have struggled can actually be attributed to their products, and to their failure to reinvest in capital. Mulcair simply pretended that the IRPP report supported his thesis -- it doesn't -- and pro-NDP hacks on Twitter attacked Mintz on an ad hominem basis. Neither is what anyone would expect from people who are confident in their own theories.

Now, Philip Cross has delivered the death blow to Mulcair's thesis, pointing out that a stronger dollar is good for Canada, and that the benefits far outstrip any harm that a stronger currency would do. Cross points to the addition of low-wage, manufacturing jobs in Canada during the 1990s -- manufacturing products such as textiles, clothing and furniture -- at a time when other countries were shedding those jobs in favour of adding high-wage jobs. It's certainly no coincidence that those are the very manufacturing sectors that are suffering under a stronger Canadian dollar.

It's in the wake of this particular point that it becomes clear that Thomas Mulcair never heard of a man that you may have heard of... a man by the name of Steve Jobs.

Steve Jobs was a person who never bothered making products of low differentiation and low complexity, even in compared to his immediate competitors. Nor was he a person who focused on making a product that was less expensive compared to his competitors. What the success of Steve Jobs, Apple, and their various products -- particularly the iPod, the iPad and the iPhone -- is that if someone wants or needs a particular product badly enough, they will buy it at a more expensive price. Certainly, nobody ever bought any of these products because they were less expensive. They weren't. Therein lies the shortest logical route in demonstrating Mulcair's thesis to be both shortsighted and foolish. And it applies to Canadian manufacturing just as much as it applies to resource exports.

In fact, the success of the oilsands, even with a stronger Canadian dollar, proves that people will buy what they need at a comparatively higher price if they want or need it badly enough. The United States badly needs Canadian oil. China badly needs Canadian oil. India badly needs Canadian oil. And they're all buying it, despite the strength of the Canadian dollar, and despite the detail that this makes Canadian oil more expensive for them to buy. As it turns out, the same has turned out to be true for Canadian manufacturing. Sales in most of Canada's manufacturing sectors have actually climbed, despite the strength of the Canadian dollar.

There's a reason for this: it's because in these particular cases Canada is making what consumers -- whether they're individual household consumers, companies, or entire countries -- want and need. And when that is the case, consumers are buying it despite any additional expense. This is what Thomas Mulcair clearly doesn't get: is that a lower Canadian dollar isn't a substitute for innovation in Canadian manufacturing, creating a quality product, or even simple competitiveness. It's been made clear that these are the things that are wrong with the sectors of Canadian manufacturing that struggle under a stronger dollar.

But Thomas Mulcair has clearly never heard of Steve Jobs. So Thomas Mulcair doesn't know that.

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