About that record current account (not trade) deficit - Macleans.ca

About that record current account (not trade) deficit

  1. OH COME ON! What on earth did the CPC *do*?!

    And what is it they are doing to improve budget balances except to cut services? What are they doing anything to stimulate growth?


    • Lower taxes stimulate growth, and they’ve been doing that since they’ve taken office. Or are you suggesting they somehow balance the budget without cutting services AND stimulate private sector growth? Because that’s not possible.

      • Growth was stimulated in 2010 because of the stimulus package the Liberals and NDP forced on the Harper Government (3.2% GDP growth.) But growth fell to 2.5% in 2011 when the stimulus ended and is falling below 2% for this year. (Flaherty is now talking about more possible stimulus spending…)

        So I don’t see how tax cuts are stimulating growth. Fact is Harper slashed corporate taxes by $14B/yr but corporations are hoarding all the money. Now Carney and Harper are telling them to give the money back to investors.

        The $30B/yr in tax cuts Harper brought in have done nothing for the economy; but they did blow a gaping hole in the budget. Harper has also raised spending by 60% ($100B/yr) which is a worse record than Bob Rae’s according to conservative columnist Andrew Coyne. He’s a complete incompetent on all things economic…

        • So I don’t see how tax cuts are stimulating growth”

          Enough said. You don’t believe that lower taxes increase economic activity. You can believe that, but most people know otherwise.

          You can claim that growth in 2010 was “stimulated” by the government “stimulus” package, but you can’t claim that growth in 2010 wasn’t also “stimulated” by the earlier GST cut, which makes doing business cheaper, and gives people more money to spend.

          The Harper tax cuts have done plenty for the economy, because as you stated, it’s put $30B/yr back in the hands of Canadians and businesses. You might believe that government is the most efficient investor of an individuals money, but I’d rather place my trust in my fellow Canadians and businesses to make better investment decisions.

          And you know what else blew a gaping hole in the budget? “the stimulus package the Liberals and NDP forced on the Harper Government”.

          • That tax cuts stimulate growth irrespective of economic conditions and structures is naive at best. If we produce little or no manufactured goods, how exactly does increased consumption benefit the Canadian economy?

            Frankly, the stimulus package that Harper employed was a load of unfocused horse-hooey. Anyone who attributes focused and targeted spending as somehow equivalent to the unadulterated BS that the CPC instituted needs to stop the kool-aid.

            Fiscal conservatives, these guys are not. Small timers for sure.

          • How are higher taxes going to increase Canada’s manufacturing base? If we want to attract manufacturing, lower taxes will be the key.

          • “You can believe that, but most people know otherwise.”

            Sure they do…

            “but you can’t claim that growth in 2010 wasn’t also “stimulated” by the earlier GST cut,”

            Economists hated Harper’s GST tax cut, which was fully implemented in 2008 before the recession hit. In order to save $500, one has to spend $25,000 on taxable items. Few people were encouraged to buy because of a 2% savings. Not only that, Harper’s move to cut the tax was based on politics, not economics: he was catering to the anti-sales-tax sentiment in Western Canada.

            “The Harper tax cuts have done plenty for the economy, because as you stated, it’s put $30B/yr back in the hands of Canadians and businesses”

            Americans have been cutting taxes for 30 years. Their economy is a mess and they are bankrupt: 103% debt/GDP. Successful economies have not adopted the tax-cutting ideology…

            ‘And you know what else blew a gaping hole in the budget? “the stimulus package the Liberals and NDP forced on the Harper Government”.’

            That was $20B/yr for two years. Harper has cut taxes by $30B/yr. He has also raised spending by $100B/yr — excluding the stimulus package that ran out in 2010. While he is jacking up spending importing the Republican war on drugs and US-style militarization, he is gutting public benefits and services. In other words, it’s $100B/yr on things of no value to Canadians.

  2. It’s not so much that Harper and the posse are running a deficit it is the fact that they ran on a a promise not to run a deficit. Anybody with even a slight amount of real world experience would have known that making that promise then was stupid at best and most probably deceitful.
    They lied. Then as the situation got worse they cut taxes at just the wrong time.
    So not only are they liars they are self defeating liars.
    Now we are having to pay interest on something that need not have happened to the extent it did. People who live off of others are called parasites or bludgers.
    So not only are they self-defeating liars, they are self defeating, lying bludgers.

    • No, they didn’t cut taxes at the wrong time, they cut the wrong taxes. There’s a subtle difference. They cut corporate taxes which do nothing to stimulate economic growth. Why? Because corporations don’t spend money just because they have it. They spend money when they need to to make more. If nobody’s buying because we’re in a recession, a corporation is not going to see reasonable returns by spending the money — so won’t.

      Making it worse, at around the same time, the CPC raised EI premiums. That means that individuals (who do spend more when they have it) had less, plus it’s an additional disincentive to the corporations to hire more people.

      Cutting taxes is actually a very good thing during a recession, but cut income and payroll taxes, so that those people who still have jobs have more to spend, and thus buy more things, which is what encourages corporations to start hiring again.

      Then just to top that off, what cuts they did make to personal taxes were specialized niche cuts. Cuts that affected relatively few people, and only affected them if they already spent the money on things that people who are in need simply aren’t able to afford in the first place. I mean, hell, at least George Bush was up front about wanting to cut taxes for the rich. Mr. Harper doesn’t trust us enough to even tell us that’s what he’s doing, and instead tries to sneak them through.

  3. The more fundamental problem isn’t the number; it’s the fact that the NDP sees a current account deficit as a problem in the first place.

    I think part of the perception “problem” is that in both of your graphs, balance of payments, and Balance of payments: Per cent of GNP finally go into positive territory around 1999, and remain there until 2009, a period many generally relate to relative prosperity.

    Your second last paragraph suggests there is some validity to this belief:

    Eventually, the current account will adjust: government budget balances will continue to improve, and savings levels will improve as incomes recover and when interest rates start increasing back to normal levels.

    But true, not much to do about it. Que sera, sera.

    • Good post, I forgot to add.

  4. I wish Maclean’s had a centrist Keynesian economist to give the other side of the story, especially considering free-market trickle-down ideology caused the global economic meltdown and all the problems we are facing today. (Neo-conservative macroeconomics are certainly dismal, but they don’t remotely resemble a science.)

    Gordon, like Coyne in the NP, is using weasel-economics to try and obfuscate the issue. The fact is economists use the current account when discussing trade balance. It’s not a “casual” reference, but according to Nobel Laureate Paul Krugman, “a broad measure of the trade balance including income on investments”

    Gordon, Coyne, Harper, etc take the position that trade deficits don’t matter. But what do the facts suggest?

    If one looks to the bankrupt US PIIGS (100% debt/GDP club: America, Portugal, Ireland, Italy, Greece, Spain) they all ran huge trade deficits before their debt crises hit. If one looks to countries by trade balance, the strongest economies are running big trade surpluses; the weakest big trade deficits.

    There is no free lunch. When a country has more wealth flowing out than coming in, the money has to come from somewhere. The net result is usually debt.

    • If one checks out Canada’s trade balance over the past 20 years, it appears to be closely related the budget balance. The Mulroney Conservatives left behind big trade and budget deficits. The Chretien-Martin Liberals turned this situation around producing big trade and budget surpluses. In a few short years under Harper, both plummeted to big deficits.

      When a country consumes more in imports than it earns in exports, the end result is debt. The money has to come from somewhere.

      BTW, the third deficit that doesn’t matter according to neo-cons? The $125B infrastructure deficit.

      IMF: Canada, US PIIGS trade balance (current account) 1990-2012

      • The Twin Deficits theory has some merit. Too bad you don’t have any ability to really grasp it.

        • Considering I don’t know you from Adam, I highly doubt you know anything about me or my capabilities.

          But all ignorance aside, here’s what the Wiki article on “twin deficits” says:

          “An economy is deemed to have a double deficit if it has a current account deficit and a fiscal deficit. In effect, the economy is borrowing from foreigners in exchange for foreign-made goods.”

          In other words, that’s exactly what I was saying.

          Another thing about the “twin deficit” theory: Mulcair and economists who are worried about the high trade deficit are right: a big current account deficit is just as bad as a high budget deficit.

          • What Canada’s current account deficit says about our vulnerability to a global slowdown
            “Many experts, including economists at BMO, National Bank and the OECD have pointed to the strong Canadian dollar as responsible for much of the deterioration in Canada’s trade balance.”
            “There isn’t such a thing as a free lunch: to the extent that a country continues to live beyond its means—i.e. runs large deficits with the rest of the world—it is being bankrolled by foreign creditors.”
            “The current account deficit is getting at least as ugly as that other kind of deficit.”

            Canada’s current account deficit is a huge drain

          • I know only what you post. And thus far it’s been overwhelming in volume, and entirely underwhelming in content. I believe that stems from an overestimation of your own knowledge, but there might be other reasons. You sound a lot like me…. when I was 20 years old or so. I once believed I knew everything too.

          • I guess we’ll just have to agree to disagree about your lame generalizations and poor judgment…

      • Me conservitive me no like faks.

        • Nobody is arguing the current account deficit figures you’ve posted. But your interpretations of the causes and effects of said current account balances are completely laughable. You don’t know as much as you think you know. A little humility might help your learning process along. Otherwise, you’re just going to keep on sounding like a more bilious version of Emily.

          • If someone wants to disagree with my well-supported arguments that I have derived from the works of economists, I have no problem with that. But giving the thumbs down to link that presents straight-up statistics is absurd.

    • Context is everything. A current account deficit can be a bad sign, it can be a good sign, it all depends on how it arose.

      Take a look at the accounting identiy that Gordon posted:

      Current account = Government budget balance + (Savings – Investment
      Now, a current account deficit can exist for one of two reasons, either (i) governments are running deficits or (ii) we’re investing more than we’re saving.
      If you want to know why the bankrupt PIIGS countries ran hefty current accounts deficits, I’d suggest you look at the first part of that equation. You can’t run a government deficit forever. Now, Canada is currently running a budget deficit, but it’s relatively small and shrinking. More to the point, good Keynesian policy suggests that we should be running a budget deficit (do you think either Paul Krugman or Thomas Mulclair would encourage the feds to implement more austerity?). It’s kind of awkward for you to be blasting Gordon for his “free-market trickle down ideology” when he’s pointing out that a current account deficit will naturally arise if you’re implementing good Keynesian policy (and that that’s not the end of the world).
      On the other hand, the second part of the equation suggests that you could also have a current account deficit if foreigners are investing money in Canada (perhaps because we’re an attractive place to invest money, quite possibly because our government finances are in decent shape). That’s hardly a sign of economic weakness in Canada, quite the contrary, it’s quite beneficial for Canadians and Canadian businesses as it reduces the cost of borrowing to invest (debt is not, contrary to some views, inherently problematic, it all depends on what you do with it. If you’re borrowing to invest, great, that’s good debt. If you’re borrowing to consume, that’s a problem). Given the sharp increase in business investment over the past year (which is a key component of future growth) it quite likely that in our context, a current account deficit is a sign of strength rather than weakness.

      • Given the sharp increase in business investment over the past year (which is a key component of future growth) it quite likely that in our context, a current account deficit is a sign of strength rather than weakness.

        Bob, within this context, can you explain if a current account deficit “is a sign of strength” why we were in positive territory from 1999-2009?

      • That’s complete nonsense that a current account deficit will arise by implementing good Keynesian policy. That equation is also ridiculous. The current account is simply the trade balance which includes investment income. The balance depends on which way the money is flowing — it has absolutely nothing to do with the government budget balance.

        For the facts (not ideology) check out the Statistics Canada webpage. There’s no mention of the government balance, just the facts and figures on: a) Goods and Services, b) Investment Income and c) Transfers. The money going in is compared to the money going out; and with simple accounting, the trade balance is produced.

        BTW, beware of free-marketeers talking up current account deficits as a sign of economic prowess. They said the same thing of Greece, Portugal, Mexico and many other countries right before the crises hit.

        Canada’s economy is a house of cards: our value-added sector is withering and dying; hundreds of thousands of good paying jobs have been destroyed; we have a housing bubble about to deflate (caused by Harper’s 40-year no-money-down mortgages); we have record levels of personal debt; productivity growth is at its lowest in recorded history; GDP growth is anemic; and yes we do have big budget problems across the country (because of lost jobs and anemic GDP growth.)

        The only strength is related to the commodities boom. But we all can’t be open-pit miners. Our country’s too big to support on resource welfare checks. Canadians want good job and business opportunities close to home, like we had before Harper.

        • “That equation is also ridiculous”

          It’s a national accounts identity. It always holds.

          • I was looking at the “twin deficit hypothesis” wiki page and the equation looks a lot more complicated than your interpretation.

            But this does bring up an interesting point:

            Current Account = (Savings – Investment) + (Tax – Spending)

            From this it would appear recklessly cutting taxes increases the current account deficit. That might explain how Harper’s $30B/yr in tax cuts caused the current account balance to plummet so quickly. It would also explain why the US went from running a current account balance to a huge deficit over the past 30 years of continuous tax cuts.

            In any case, there is a lot of debate on how those numbers move around from economists of different schools of thought (supply-side, demand-side, etc.)

            From your graph (Balance of Payments % GNP) the sharp drop in “goods and services” from 2003 to 2009 mirrors the 60% rise in the dollar (from 2003 to 2008.) The sharp drop in the “current account” from 2005 to 2009 coincides with the 25% overvaluation of the dollar (from 2005 to 2008.)

            So, if the NDP reverses some of Harper’s reckless tax cuts, raises taxes on the rich and pegs the dollar to the US dollar at 81 cents, we will have a booming economy and sizable current account surplus like Sweden.

        • Right. And the so-called “small and shrinking deficit” depends on that singularly flawed premise: that the commodities contribution will continue to grow.

    • Keynesians aren’t centrist. Most are very left wing. Others just moderately so.

      • Nonsense. Nixon was a Keynesian. Was he a leftist? I don’t think so.

        The Keynesian mixed-market system is right in the center of the left-right economic spectrum (something all hard-right conservatives seem to be ignorant of.) But I’ll explain it: 100% left is communism (full government control of the economy); 100% right is libertarianism (no-government involvement in the economy); the Keynesian system is a compromise between the two extremes.

        America was Keynesian in the post-war era. Then it paid down debt from 135% debt/GDP to 35%. Over the past 30-year “age of greed” predicated on anti-Keynesian free-market reforms, debt is back up to 103% — and the period culminated in a banking-deregulation meltdown it has yet to recover from.

  5. “So why did the current account fall, and what—if anything, should the government have done about it?”

    The plummeting current account balance is directly related to oil-sands exports and development. Foreign purchases of oil and investment in development causes the dollar to become overvalued via a market distortion (high demand for dollars.) Foreign investment itself causes the balance to fall.

    The overvalued dollar (by 25% according to the OECD based on PPP) makes exports and tourism too pricey. They decline and the trade balance falls. Imports become cheaper and increase causing the trade balance to fall even further.

    The job losses mean Canadians are consuming more in imports than they are earning in exports. The end result is high government debt and record levels of personal debt. Clearly not a sustainable position.

    There are many ways to deal with this issue. Canada could do what Switzerland did: peg its currency to prevent a “massive overvaluation” that is “hurting” its economy.

    Harper, however, will do nothing but peddle Alberta’s bitumen no matter how badly the economy suffers.

    • BTW, the dollar soared from 65 cents to parity from 2003 to 2008. In 2005 it was around the 81 cent mark, which the OECD says is the proper value based on PPP.

      According to Statistics Canada, the trade balance was $26B in 2005. By 2009 it was a $45B deficit. Since then we have had deficits around $50B.

      Statistics Canada: Current Account

    • So, let me get this straight. The problem is that foreigners are purchasing too much of our exports (oil) and investing too much money in Canada. Sorry, this is a problem? Are you truly sugesting that we’d be better off if we exported and invested less?
      In any event, looking at the “overvalued” dollar as a Canadian issue ignores the reality that a good chunk in the rise in the value of the dollar has been driven by the economic anarchy in Europe and the US. I suppose we could devalue our dollar the same way they’ve devalued the Euro/US dollar, by nuking our economy, but I’m not sure that’s all that appealing an option…

      • Oil exports and foreign investment is not a problem. The problem is the related market distortion which is causing the dollar to become highly overvalued.

        First thing, there are ways to deal with the currency directly, like pegging it to the US dollar. Oil production doesn’t have to be shut down or any such thing.

        Second, people think the a strong dollar is a good thing for trivial reasons: like a discount on a vacation or national pride. The real problem is that it is destroying the economy. (Switzerland just started pegging its currency to the euro because it said a “massive overvaluation” of its currency was hurting its economy.)

        With a dollar at parity, Canada is in the same position that Greece and Portugal were adopting the euro. They were expected to deflate wages to become as competitive as Germany. What happened? They had foreign investment and imports flowing in. This produced whopping trade deficits which neo-cons said was no biggie. Now they are bankrupt and their economies are imploding.

        Canada will have to downsize wages by 20% across the board in order to restore our competitive position. But since wages are sticky (people are loathe to accept pay cuts) this process can only happen with recession and high unemployment. And when wages are cut by 20%, debt is increased by 25% in relative value.

        So like Greece and Spain, Canadians will find out the hard way it’s a long painful ride down the deflationary spiral and an overvalued dollar is a curse, not a blessing.

  6. Can I say this here?

    Economics is the dismal science of predicting what happened yesterday.

    • “Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again.” (John Maynard Keynes)

  7. So basically the NDP doesn’t know squat about economics – go figure!!

    • The NDP support the Keynesian mixed-market interpretation of economics. To say they know squat is to demonstrate one’s own ignorance of economics.

      During the Keynesian post-war era, America paid down its debt from 135% debt/GDP to 35%. Canada 100% to 17%. Over the past three decades of failed free market reforms (that culminated in a global economic meltdown we have yet to recover from) debt shot back up to 103% in the US; 85% in Canada.

      The reality is that most countries that run big trade deficits end up with big debt problems. The US and the euro PIIGS all ran big current account deficits before their economies crashed and burned. Harper is taking us down the same path the US took using the same flaky “voodoo economics.”

      My bet is that by 2015, Harper will no longer be boasting about the economy saying ridiculous things like “Canada has the strongest recovery on the planet.” He will be looking for someone to blame for all the mess he created.

      • I am taking on that bet. I will gladly donate to the NDP my $1,200.00 that year if that is the case. However, I don’t think that is the case. The NDP made the same mistake as the LPC, choose their leader for the wrong reasons, Mulcair isn’t electable.

        • Harper is electable? It took him 4 shots to get a fake majority on less than 40% of the vote. Fact is Harper’s support is usually around the 34% mark. Full conservative support is 38% (30% core + 8% red Tory.) He only managed to get that and 2% blue Liberal because of the panic caused by the Orange tide. In short, he has a hard time getting even conservatives to support him.

          By 2015, Harper will not have the benefit of a relatively strong economy or a perfect storm. Around the 8-year mark people got awfully tired of Mulroney and Harris. Harper is more controversial than both.

          And the NDP are going to talk economics for the next 3 years offering Canadians a solid alternative to the mess the economy will be in by then. (Carney predicted 2.5% growth for this year. It looks like growth will drop below 2%. Plus there is the eurozone crisis and the US fiscal cliff. China’s economy is slowing and has a shadow-banking house of cards. Not to mention a housing bubble here about to deflate. The economic forecast is grim. Harper is already looking for scapegoats…)

          • Well according to them, the economy would have been a mess by now and last month and six months before that, etc… not so bright there.

            Harper AND Mulroney/Harris have nothing in common. So don’t bet on it.

            Harper will win another majority in 2015. And NDP will have to elect someone else as leader.

          • I guess we’ll find out for sure in 2015.

          • Hey blabber-mouth – the lady’s made ya. Are you in or not? Who runs the book?

          • Hey, knucklehead. How am I supposed take seriously a bet with some person I don’t know over something that is going to happen 3 years from now? Are you going to run the book? Some loud-mouth con crank I never heard of before?

  8. SG, I see on the reactions to this blog, a twitter comment from you:

    Two centuries after Ricardo, and we’re still fighting the seemingly-innate appeal of mercantilism.

    Forgive my ignorance, but my impression of the Fed gov’t (going back to Chretien) and intensified under Harper, was the seemingly single promotion of one resource industry, Alberta’s oil sands, seeking unfettered and unlimited direct foreign investment, the intent to increase Canada’s exports substantially in order to fund our standard of living here.

    How does this not fit what you appear to be denouncing, mercantilism? Or does one need protectionism too?

    • It’s nonsense to suggest the NDP’s policy is mercantilism. They are not pursuing a trade surplus; they only want to eliminate the massive trade deficit before it blows up in our faces like it did the US PIIGS.

      But all ideology aside, countries with big trade surpluses are certainly doing better than ones with big trade deficits: Germany leads the G7 with 3% GDP growth (2011) and has a 6% GDP trade surplus. Sweden has even better: 4% growth, 7% surplus.

      On the bottom of the G7: Canada, US and Italy with -3% GDP trade balance. Canada had 2.5% growth in 2011, which is dropping like a rock this year (below 2%.) The US 1.7%. Italy 0.4%.

      Greece had -7% GDP growth; -10% trade balance.

      No doubt, mercantilism is flawed because we’d have to trade with another planet in order for all countries to run a surplus. But facts are facts: a surplus is a strength; a deficit a weakness.

      • Ron, don’t feel compelled to answer my questions not posed to you. This is the second or third time. I think I understand already where you are coming from.

  9. According to the “twin deficits” theory, a current account (trade) deficit is just as bad as a budget deficit. Neo-cons have also said the that budget deficits don’t matter…


    • Maclean’s: What Canada’s current account deficit says about our vulnerability to a global slowdown
      “Many experts, including economists at BMO, National Bank and the OECD have pointed to the strong Canadian dollar as responsible for much of the deterioration in Canada’s trade balance.”
      “There isn’t such a thing as a free lunch: to the extent that a country continues to live beyond its means—i.e. runs large deficits with the rest of the world—it is being bankrolled by foreign creditors.”
      “The current account deficit is getting at least as ugly as that other kind of deficit.”

  10. Since you quoted it, I read your article with interest trying to find your analysis of Mr. Mulcair’s claim that Canadian “productivity has never been lower?”. Is this per hour productivity? per worker? per year? unionized vs. non-union productivity? Collective bargaining productivity? NHL goals scored?