Harper at the tiller of an ark with an empty till

Benj Gallander and Ben Stadelmann
Friday, October 17, 2008

“It wasn’t raining when Noah built the ark. Which is why when the rain came Noah didn’t need to panic and he didn’t switch boats.” — Stephen Harper

This pithy allusion to the biblical boat builder was made by our prime minister to assure the folks down at the Canadian Club that, due to his government’s stewardship, the Canadian economy was well prepared to ride out the storm emanating from the financial crisis in the United States.

A few days later, he told the CBC’s Peter Mansbridge that the severe drop in stock prices represented a “buying opportunity.” What’s next, we wonder? An appearance by the PM on BNN’s Market Call, taking your questions about large-cap investing? Perhaps Mr. Harper will kindly suggest exactly which corporations we should buy?

We’re not religious types, but we get the gist of the ark story and can see that it is a handy reminder that precautionary measures can help one weather the extremes of the business cycle. But as pleasant as this notion might be, a glance at the record tells a different story than Mr. Harper’s.

For starters, the architect and general contractor of the ark was the former steamship magnate, Paul Martin. In the mid-1990s, Canada was in the grips of a severe financial crisis. Not the kind that shakes the world and hogs the global headlines, but one of the pernicious, slowly strangling variety, which threatened to bankrupt our country and send us, cap in hand, to the International Monetary Fund, the fate that has now befallen Iceland and Hungary.

By 1995, the accumulated national debt had risen to the point where 36 percent of all federal revenue was devoured by interest alone. And it took a bucket of beleaguered Canadian loonies to cover the cost of buying a Starbucks coffee and sandwich in the United States.

When we buy troubled companies, we look for management that can make the tough decisions needed to comprehensively restructure their corporations and set them on the path to profitability. Mr. Martin took such a tack with the public purse, cutting expenses, increasing revenue and changing the prevailing culture of “hope for the best” budget planning to a vigilant approach that featured a large “contingency reserve.”

Those were unkind years, and many Canadians suffered, as did provincial governments that were left holding the bag for chopped services. But a $42 billion annual deficit was replaced with surpluses that had knocked $36 billion off the national debt by 2004.

With the Liberals mortally wounded by the sponsorship scandal, a new political party was minding the store and tax cuts were high on the agenda. But what kind? Advice from such varied economic think tanks as the Fraser and C.D Howe institutes, not to mention everyone from the IMF and OECD to the Canadian Auto Workers, was unanimous: reducing taxes on consumption was a bad idea. Nonetheless, Mr. Harper chose political expediency over fiscal prudence and reduced the Goods and Services Tax by a percentage point in July 2006.

That was tantamount to firing a torpedo into the hull of the ark. A year and a half later, a second charge was sent on its way as the GST was reduced a further point to 5 percent. To date, this action has kept about $19 billion out of federal coffers.

Worse, it further stimulated consumer spending at the very time when the economic cycle was cresting. More imports flowed into Canada, while consumers went deeper into debt. Rather than letting the air out of the bubble slowly, Mr. Harper’s tactics inflated it more.

If the mantra of real estate is “location, location, location,” the equivalent for fiscal policy is surely “timing, timing, timing.” We at Contra the Heard advocated higher taxes on gasoline and diesel in 1998, when oil was at $11 (US) a barrel and everybody wanted to run out and buy a SUV. There’s nothing wrong with government cutting sales taxes — if it happens to be in the midst of a stubborn recession and consumers need to be coaxed out of their bunkers to release pent-up demand.

Government can’t repeal the business cycle, but with good timing and a little finesse, it can help put the brakes on an economy that is in bubble territory, or mitigate the misery when times are tough.

As for Mr. Harper’s advice to buy stocks now, we agree that prices are much more attractive, but we fail to see the point of rushing in. The problem is that the recession is just getting started — or, to put it in biblical terms, we’re probably around Day 6, with another 34 days of rain to go.

Even if you happen to be fortunate enough to be sitting on the deck an ark whose holds are stuffed with cash, looking smugly out the window at those nasty drowning sinners, doesn’t it seem a little early to open the wallet?

Granted, waiting until the floodwaters recede and a new sparkly day has dawned means you’ll miss some deep bargains. But many will still be there, even as the weather starts to clear.

Given that the Conservative government squandered the opportunity to fill the granary during a time of plenty, we can expect the recession to be deeper and longer than necessary. To us, that argues in favour of being patient about converting precious cash into beat-up equities.

While they wait, many Canadians are tabulating the cost of an unnecessary election — roughly $300 million (Canadian) — to return a government that appears, very much, to be at the helm of the same old leaky boat.