22 January 2009

The fault, dear Wade…

Wade Locke doesn’t like a story in the Thursday Telegram. He dislikes it so much he called a local radio talk show to set the record straight.

Locke didn’t accuse the reporter of misquoting him in exactly those words, but he did end the conversation with the radio host by suggesting that maybe his comments were deliberately misrepresented.

Locke said something along the lines that he couldn’t imagine anyone reading the comments and coming to the conclusion he was suggesting the economy might be headed for disaster.

Locke went out of his way in the Open Line call to repeat phrases along the lines of “the future is bright” and “the future is rosy.”

The root of the issue is in comments Locke made for a news release from the Atlantic Provinces Economic Council. The headline on the story by Peter Walsh reads “N.L. economy facing disaster: experts”. The rest of the story summaries the comments from Locke and fellow economist Scott Lynch.

Here’s exactly what APEC attributed to Locke before getting into the specific suggestions Locke and Lynch had for the federal government’s budget:

Depressed commodity prices continuing throughout the year and longer would have a disastrous impact for Newfoundland and Labrador from a fiscal perspective and for the continuation and expansion of major resource projects within the province. A continuation of the existing tight credit market conditions will adversely impact small export firms and fishing enterprises and will be felt disproportionately in rural parts of the province.

If the U.S. economy continues to lose jobs as it did last quarter, then real GDP would decrease by 5% on an annual basis, which would produce a significant deep and prolonged recession. Forecasts of U.S. growth at -2.5 to -3% with recovery in late 2009 assumes that the Obama stimulus package removes deflationary expectations and returns the economy to its trend growth rate. For this optimistic scenario (successful stimulus and late 2009 recovery) Canada could experience a 1 to 2.5% decrease in real GDP, with the earliest recovery in September/October.

However, should the U.S. recession reflect the 5% decline in real GDP then Canada, as a small open economy, will follow the U.S. and be faced with a significant period of rising unemployment and declining economic activity, with recovery occurring in 2010. If, on the other hand, the recession in the U.S. is closer to the pessimistic scenario, then this may produce a decoupling of the Canadian/U.S. trade relationship and in that case, predicting possible outcomes becomes very murky.

It’s hard to imagine anyone reading that and not coming to the conclusion the boys were suggesting there could be disaster out there.

In fact, that’s exactly what Locke said in the very first sentence:

Depressed commodity prices continuing throughout the year and longer would have a disastrous impact for Newfoundland and Labrador from a fiscal perspective and for the continuation and expansion of major resource projects within the province.

Locke’s problem likely isn’t with the Telegram, Peter Walsh – who wrote the story – or indeed with APEC.

Rather his problem is that his APEC stuff wasn’t on the same page as the line being pumped by Locke and the provincial government before Christmas. The government crew have been in lock-step with one of their favourite outside consultants on this economic bubble thingy since the get go.

They were matching up word-for-word before Christmas and Locke this morning and the APEC suggestions sounded almost like a replay of what the Premier delivered to the feds last week. [edited to clean up the sentence jumble; link added to Premier's comments.]

Number One thingy: reform employment insurance to give people more money for longer.

Number Two thingy: Build ships and dole out the money so Newfoundland shipyards can get the work.

Number Three thingy: Lower Churchill. Never mind that the thing is shaky, let’s get people out there cutting brush and doing stuff of some possible, theoretical kind.

The odd thing is that Locke’s APEC assessment is actually closer to the truth than anything else. If commodity prices stay down for the rest of this year, into next year and maybe a few years after that, then there will be disaster.

But it won’t be a disaster necessarily for Newfoundland and Labrador, as in the province. It will be a disaster for Newfoundland and Labrador, the provincial government.

There’s a difference even if some people tend to forget that in these “l’etat c’est moi” days. That’s not to say there won’t be problems in some sectors of the local economy. Tight credit is going to force the fishing industry to sort itself out once and for all. Lower prices for minerals will mean that mines will shut down for periods and lay people off.

And let’s not forget that a slow down in Alberta will mean that remittance workers will either roost here and agitate for government help or leave altogether, permanently.

But still, there are mines that will be working away. There’s a new project coming for Long Harbour and the oil industry will continue to do very well, despite lower prices and reduced production. After 2009, production will pick up again. If we look farther out, then Hebron will come along.

The disaster Locke noted in his very first sentence for APEC (unless APEC misquoted him terribly) is really one for the provincial government’s treasury. Their disaster is entirely self-made. They boosted spending based solely on highly unreliable commodity prices and foolish predictions of ever higher or constantly high prices. They did very little to pay down public debt (accumulated borrowings) or sock away money in a rainy day fund. The provincial government also committed to a raft of borrowing to support the oil plays.

That put the provincial finance minister looking at 2009 with a shortfall of over a billion dollars in cash and demands for higher spending. Downturns in the market put extra costs in there to cover pension shortfalls. The 21% wage increase promise looked great politically but it was way beyond the rate of inflation even in the headiest of commodity price days over the past couple of years.

That sounds pretty much like a disaster to anyone who cares to take a look at it either from an economic or public policy standpoint.

It’s hard to imagine anyone could look at that and not see the disaster waiting to happen. Now the disaster doesn’t have to happen if the government shifts its policy direction in a number of significant ways.

That would require people in power to look at the world as it is and take appropriate action. But if think we live in a bubble, you’d be almost guaranteed to head down the wrong track.

You’d keep smiling all the way to disaster.

And it would be your own fault.