August 4, 2007

A strong dollar, and short memory

Henry Srebrnik, The Calgary Herald

Canada has to be the country with the shortest collective memory in the world. As we know, the loonie is now worth about 95 cents US – fuelled, to a large extent, by the economic boom in Alberta. Some economists think it may even reach parity with the American dollar soon. Five years ago, it hovered at around 65 cents US.

Statistics Canada now says the surging currency is giving consumers purchasing power far greater than simple economic growth figures suggest.

Between 2002 and 2005, Canada’s economic output expanded by 8.3 per cent in real terms. But the purchasing power of the country's earnings increased by 13.4 per cent. Why? Because while the volume of exports rose, the price paid for those exports rose even more.

John Baldwin, director of microeconomic analysis at Statscan, explained that the large increase in the value of the Canadian dollar “is benefitting everyone across Canada.” And it has also led, he added, to an employment boom that has pushed Canada's jobless rate down to lows not seen since the 1960s.

Now, here’s my point: for years, under the Jean Chretien/Paul Martin regime, we were constantly being told that our low dollar was good for Canada. It allowed us to export cheaply, despite the fact that, as a corollary, our imported goods were expensive and Canadians had little purchasing power when abroad.

I remember being in Montana in July 2001 and seeing almost no Canadian license plates as soon as we crossed into the state from Alberta. We were the “east Germans” of North America, economically locked in behind our borders.

Now we can actually travel to the U.S. or Europe without going bankrupt. And retirees can again afford to buy sunbelt condos in places like Arizona and Florida.

Cross-border shopping is again, as it was in the early 1990s, all the rage. People are even buying cars in the U.S. and shipping them home. After all, such items typically cost a good 30 percent more in Canada – but if our loonie is worth close to a greenback, clearly they are cheaper in border towns anywhere between Bellingham and Buffalo.

Of course, since prices, like water, seek their own level, this will have the effect of eventually lowering the cost of goods in Canada – and so giving all of us more purchasing power.

But it turns out that the Chretien trade-off – a cheap currency that benefitted our exporters at the expense of higher priced goods at home – wasn’t even necessary. According to economist Stephen Poloz of Export Development Canada, the belief that a strong dollar hurts exporters is a myth. He asserted last year that Canadian exports actually declined during that period.

So why don’t we “call” the Liberals on this? Clearly they all flunked Economics 101 when at university. Does being our “natural governing party” mean never having to say you’re sorry – or wrong?

Here’s a suggestion: the next time our two former prime ministers visit the U.S., they should ask the bank to give them 65 cents US for every one of their loonies.