Playing the Lottery after the Meltdown

Fold or raise? Full house or three of a kind? Eager to jump start an economy that has seen almost unprecedented meltdown, governments around the world are racing to place gargantuan bets with taxpayer and treasury money. Only time will separate the profound from the boondoggle among these bets. Meanwhile, poised on the dawn of a new year, I’ll present my analysis and opinion, recognizing that the complexity of the current situation dictates that no one has the real answer.

Last year’s credit crunch and the ensuing illiquidity has generated a financial crisis whose effect that might have, only a few months ago, seemed totally inconceivable:

  • massive government ownership of banks (HBOS, Northern Rock) and insurance companies (AIG)
  • bankruptcies of some pillars of the financial system (Lehman Brothers)
  • a North American auto industry (GM, Ford, Chrysler) that stared down death, and even with bailouts, may not survive in any recognizable form
  • an estimated $30 trillion of value wiped out of global stock markets in a matter of months, according to Alan Greenspan
  • not to mention a US recession that has already lasted a surprising one year, with almost no country globally, including hitherto unstoppable China, seeming able to escape  severe slowdown.

Closer to home, in 2009, the Canadian province of Ontario, will for the first time have a slower GDP growth than the country as a whole and, in essence, become a have not province. As a country, Canada has a historical reputation of being:

“hewers of wood and drawers of water”

One could easily add to that old dictum:

“hackers of rock, drillers of oil and bashers of metal”

While Canada thrived on a commodity based economy, Ontario’s strategic proximity to Detroit, made the automotive industry king and made Ontarians as rich as almost any region in the world as a result. Over the last 20 years, as the economy started to transition toward knowledge intensive industries and away from basic manufacturing, Ontario did make some strategic investments in Advanced Manufacturing, involving information technologies such as robotics, automation and MRP increased basic efficiencies.

However, with the unstoppable rush of manufacturing activity to the Pearl River delta in Asia, that strategy is no longer enough.

A few months ago, I wrote a series on Public Policy for the Digital Age, which I wrote in the vain hope of stimulating some real discussion during a particularly unexciting Canadian election campaign. At that time, Canadian politicians seemed to ignore what the general public already knew “It’s the economy stupid”. Now, almost no one believes that something should but done, but the question is what?

Many believe that the making real things are the only real“jobs, and that all other jobs are just glorified hamburger flipping. Nothing could be further from the truth. Consider the pervasiveness of information technology, in all aspects of our economy, as an example:

  • the average car is really a complicated computer network, or even cloud, or hundreds (and soon to be thousands) of networked computers with unprecedented software. And the trend to IT in automobiles continues to accelerate into areas such as traffic optimization and safety.
  • for even the most sophisticated manufacturers of smartphones, such as RIM, Nokia or Apple, software complexity now signficantly outguns RF Engineering and manufacturing of the devices. The smartphone is essentially a complicated software and services ecosystem which happens to have some hardware to run on.
  • green technologies, such as green energy, increasingly harness complicated IT-based systems, to innovations in nanotechnology and industrial design.
  • healthcare and life sciences for an aging economy, is just starting to be transformed by software, web and mobile based delivery mechanisms, driven both by concerns about escalating costs but also increasingly demanding consumers.

There is no question that, even if all the actual metal-bashing manufacturing were to migrate offshore, the real value adds during the coming decades will be in such knowledge intensive industries.

It is in this context, and with best practice economic theory suggesting that, in times of recession, strategic economic stimulus is critical to drive recovery,  governments have no real choice but to act. And, the global price tag of such economic stimulus will entail trillions of dollars of spending.

Therefore, while government investments in:

  • infrastructure, like highways and bridges
  • an auto industry that has stubbornly refused to invest in future technologies

are inevitable, governments must save some “powder” to invest in our economic future. The old adage of investing in buggy whips at the dawn of the age of the automobile couldn’t be more true (not to mention ironic) today. The fact that governments don’t generally do a great job in picking winners and losers only magnifies the problem.

My message to our public policy makers here in Ontario, and probably most other OECD countries as well, is simple:

  • find a way to channel some of the economic stimulus into sectors that will be the future of the country,
  • resist the urge to make discrete investment decisions, instead finding ways to leverageor top up existing investment decisions made in the private sector, and lastly
  • measure the results so future generations can benefit from our economic experiments.

As taxpayers, it’s our money politicians are spending, topped up by money created by turning the printing presses at the Bank of Canada. Therefore, it is only reasonable that we need to be heard in determining how it should be spent.scotia-richer1