Our Obama opportunity

In his first 100 days in office, President Barack Obama favoured us with a visit, said very gracious things about us, made supporting our Afghan mission politically respectable again, offered to help out our economy by buying maple leaf cookies for his daughters and hit approval ratings not seen since Trudeaumania. On the other hand, no sooner had Air Force One landed back in Washington than his Agriculture Department announced new meat-labelling rules that will hit our exporters hard. Still, Mr. Obama has subsequently made clear that his campaign promise to renegotiate NAFTA is no longer operative, which is good for us.

If the President’s direct effect on Canada has been minimal, his sideswipe effects have been substantial and his post-100 Days influence offers up new strategic possibilities for us, including repositioning ourselves as North America’s market-friendlier half.

The sideswipe effects include quasi-nationalization of two car companies, which forced us to follow suit or lose plants to the United States, and his continuation of the Bush policy of mega-bucks for banks, which induced the Bank of Canada to provide comparable loans to our supposedly much healthier banks lest free money for U.S. banks cause them competitive disadvantage.

But if the sideswipes have forced greater intervention here, Mr. Obama’s long-term influence may move in the other direction. You may have been as struck as I was by the graph Jason Clemens and Neils Veldhuis published here yesterday (reproduced above). It shows government expenditure in Canada and the United States over the last 60 years as a share of the two countries’ respective GDPs.

From 1950 to about 1968, when the afore-mentioned Trudeaumania hit us, the Canada and U.S. lines track pretty closely. For the 25 years after that, while the U.S. line continues on a very gradual upward trend, ours climbs a mountain. We peak in the early 1990s with public spending at Scandinavian — and scandalous! — levels of over 50% of GDP.

But then our spending starts declining (as a share of GDP, though not in absolute terms). Some of the improvement is cyclical, reflecting recovery from the early-1990s recession. But the decline continues on into good economic times, to the extent that now public spending is virtually the same share of the two countries’ GDPs.

Just how far apart the two shares remain depends on precisely which data series you use to track them. Different definitions of “public spending” give slightly different results. But the general message holds no matter which series you use: Expenditure-wise, we’re now more like the Americans than we have been in decades.

What will happen to those expenditure lines over the next few years? President Obama is pushing for big increases in health care and education and he’s piling on a lot more government debt — which means higher future interest payments—than we are.

It’s not inconceivable that in five years’ time, we’ll be spending less through our public sector than the Americans are through theirs. And if both countries get back to balanced budgets, that means the tax drag will be less here than it is there.

Getting your mind around the possibility that we will be the lower-tax jurisdiction in North America takes some doing, but in fact that was the case during the 1950s, some of the best economic years in our history.

If you’re on the Canadian left, you see the Obama opportunity as a chance to hike public spending, make the state bigger, and restore our recently traditional bigger-than-American government.

If you’re not on the left, you don’t believe we should choose the size of our government by following the rule that it must be at least five percentage points of GDP bigger than the U.S. government or else we have lost our Canadian identity. Rather, you conclude that a government that spends 40% of GDP is still too big and, once the crisis is past, you go back to cutting away at it.

Former Reform Party leader Preston Manning always said 30% of GDP was about the right size for the Canadian public sector. At bottom, it’s not clear why government is entitled to any particular share of economic activity, but that’s a good enough target to start with.

The tax rate isn’t the only reason companies decide to set up in a jurisdiction, or why companies already here decide to invest more, but it’s surely one reason. If we can have a lower tax rate than the Americans and still provide the public services that suit our own Canadian needs, that’s going to give Canada an important economic advantage.

Thank you, President Obama, and may you do even better in your next 100 days.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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