The Canadian Perspective - Let’s hope Obama doesn’t keep campaign vows

[mobes]

Let's hope Obama doesn't keep campaign vows

By NIELS VELDHUIS and ALEXANDER MOENS
Wed. Nov 26 - 4:46 AM

WHILE Canadians overwhelmingly favoured Barack Obama over John McCain in last month's U.S. election, many have likely not considered how an Obama presidency will affect the Canadian economy. One thing is certain: How President Obama addresses trade, environmental initiatives, government spending and taxes, labour regulation, and many other policies will have a significant impact north of the border. While it is much too early to determine which election promises will be implemented and which will end up on the cutting-room floor, Canada faces economic risks as a result of Obama's victory.

The primary concern for Canadians should be the overall health of the U.S. economy. There is a remarkably high degree of interdependence between the economies in Canada and the U.S. For example, nearly 80 per cent of all Canadian exports go the U.S. and 55 per cent of all Canadian imports come from the U.S. In addition, the U.S. accounts for the lion's share (58 per cent) of foreign direct investment in Canada.

Not surprisingly, changes in economic growth rates in Canada have nearly mirrored those of the U.S. over the past 30 years and there is simply no way for Canada to escape the effects of a prolonged U.S. recession. Given that the U.S. economy is expected to decline for much of 2009 and possibility longer, depressed U.S. demand for Canadian goods and services does not bode well for our economy. In addition, any reduction or slowdown in U.S. investment in Canada will have longer-term implications for Canadian productivity and wage growth.

Therefore, the critical issue for Canadians is whether the incoming Obama administration will implement polices that will impede or expedite a U.S. economic recovery and influence longer-term U.S. economic growth. If Obama does indeed follow through with many of his election promises, Canadians have reason to worry.

First, consider Obama's positions on fiscal policy. During the election campaign, Obama showed little, if any, willingness to consider restraints on government spending (McCain proposed a PAY-GO system, requiring any new spending programs to be financed by reductions in existing programs). Instead, Obama proposed $117 billion per year in increased government spending on dozens of new initiatives. Failure to restrain excessive government spending could result in future tax increases as the U.S. grapples with growing government debt and significant unfunded liabilities of government programs such as Social Security, Medicare and Medicaid.

On the tax front, Obama proposed increases to the top marginal personal income tax rate, capital gains taxes, dividend taxes, and corporate income tax rates. Increasing taxes on skilled and educated workers, entrepreneurs and investors will significantly erode the incentives for Americans to save, invest and engage in entrepreneurial activities.

Critically for Canadians, a higher rate of taxation in the U.S. translates to a lower rate of economic growth and thus a reduction in demand for Canadian goods and services.

These tax hike proposals were accompanied by several new refundable tax credits which are aimed at lower- and middle-income families, many of whom do not actually pay any income tax (i.e. these families would receive government payments). The result would be an increase in the number of Americans who are net beneficiaries of government, thereby likely increasing the calls for yet more government spending, redistribution and higher taxes on businesses, as well as on prudent, hard-working and successful individuals.

Obama has also courted unions and environmental groups with numerous prosperity-damaging promises.

For example, Obama has publicly stated that as president, he would make the deceivingly titled Employee Free Choice Act (EFCA) reality. The EFCA would make labour laws significantly more pro-union by allowing unions to certify workers without giving workers the right to choose privately through a secret ballot vote (i.e. a card-check system). Such laws have been shown to increase unionization rates which in turn lead to lower levels of employment creation, investment and productivity.

To attract environmentalists, Obama proposed a carbon cap-and-trade system aimed at reducing emissions. Canada is particularly sensitive to arbitrary caps on carbon which would directly affect Canadian oil and manufacturing exports. Furthermore, Obama has railed against Canada's so-called "dirty oil" and expressed a desire to reduce U.S. reliance on foreign oil.

No less worrying for Canada were Obama's protectionist trade comments, especially with respect to amending NAFTA to the advantage of the United States.

With President-elect Obama busily assembling his team, Canadians should be concerned about how his administration will impact Canada. While definitive answers are still months, and perhaps even years away, Canadians would be much better off if many of Obama's election promises never see the light of day.

Niels Veldhuis is director of fiscal studies at the Fraser Institute. Alexander Moens is a professor of political science at Simon Fraser University and a senior fellow at the Fraser Institute.

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