February 8, 2000
Jobs flourish when businesses earn big profits
by Danielle Smith, Columnist and member of the Calgary Herald Editorial Board
Halifax, Nova Scotia is probably the last place you would expect to find a research outfit devoted to the study of free markets. Finding one, it would be reasonable to expect its commissioned academics to churn out reports that show why markets don’t work (unlike Vancouver’s Fraser Institute that shows why they do).
An Atlantic region institute may even be expected to go further, singing the praises of government equalization schemes, which divert money from “have” provinces to “have-nots,” and calling for more government grants à-la-Jane Stewart (minister of the beleaguered Human Resources portfolio).
But the Atlantic Institute for Market Studies (AIMS) does nothing of the sort.
Its latest publication, The Road to Growth: How Lagging Economies Become Prosperous by author Fred McMahon, is the first in a two-book series dedicated to exposing the mystery behind why some economies prosper and others falter. (The sequel, Retreat from Growth, is due out later this year.)
The research findings have particular relevance to Canada’s easternmost provinces, hobbled by debt and high taxes that have turned each province’s economy into a perennial laggard.
While the Canadian economy boasts an unemployment rate of 6.8 per cent, its lowest point since 1976, the Atlantic region continues to have anemic job growth. New Brunswick and Nova Scotia fare the best, with unemployment rates of 9.4 and 9.7 per cent respectively. Prince Edward Island’s jobless rate is 12.5 per cent while Newfoundland tips the scale at an alarming 17 per cent.
The economic therapy McMahon offers will be bitter medicine for a region that has become dependent on government job creation schemes.
In his examination of the economic recovery of Ireland, the Netherlands, and the U.S. states of Michigan, Maine and Georgia, the author reveals the formula for economic success and demonstrates that a move from poverty to prosperity is achievable – in a short period of time to boot.
The unorthodox solution? Ensuring corporations earn great profits.
The folks at AIMS should beware – prescribing such an approach is bound to send high-minded union activists sputtering. Canadian union bosses take a punitive approach to wealth creation that, ironically, has sparked a vicious circle.
Business profits are indignantly gobbled up by union collective agreements or taxed away by government. Companies that can’t turn a profit move elsewhere. Those that stay, eke out what profits they can by firing employees and replacing them with machinery. Either way, joblessness remains chronically high.
The two universal killers of entrepreneurial verve are high tax rates and inflexible labour costs. McMahon shows economies that have revitalized after decades of stagnation have two big things in common: government reduced the tax burden and unions moderated wage demands.
Ireland – the greatest success story – once suffered from desperate economic conditions. The country’s largest export was people, seeking employment opportunities abroad. When unions and government co-operated to reduce the cost of doing business, critics charged that the practice would create a race to the bottom in wages and government services. Not so. The benefits were immediate and dramatic.
The last standing tenet of Keynesian economics, the belief that reduced public spending would cause a downturn, was blown apart. In 1986, economic growth in Ireland was negative; during reforms a year later, it rose to 4.5 per cent. Deficits were slashed. Government spending shrank, opening new areas for industrial investment. The more the government cut, the more the economy grew – buoyed by the commitment to less intervention.
Between 1987 and 1999, unemployment declined from 17 per cent to less than six per cent. In the mid ’80s the per capita output of the Canadian economy was 2.5 times that of Ireland; by 1999, Ireland’s per capita GDP exceeded ours – a total turnaround.
In the process, real wages and government spending weren’t sacrificed. Prior to 1987, the economy was stagnant, any wage increases were quickly consumed by inflation, and real disposable income remained unchanged.
Once the economy began to boom due to productivity gains, workers successfully bargained for higher wages, but still left a healthy profit for the company. By 1989, the growing economy and broadened tax base fully restored cuts to government revenues. Education funding expanded and skilled Irish workers remain in high demand.
According to McMahon’s research, results are the same in case after case. Fiscal prudence and reasonable unions increases investor confidence. Lower taxes increase disposable income, which creates the incentive to work and, importantly, to save and spend. This stimulates economic growth and expands profits, which attracts more business investment, and so it goes. The “virtuous circle” is born.
The good news is, Atlantic provincial governments can become the architects of their own success using the same equation. The bad news is, equating profits with vice rather than virtue may be a more chronic malady – one that dooms the region to failure.
Danielle Smith can be reached at 235-7592 or by e-mail: [email protected]