How Will the Next U.S President Impact the Canadian Economy?
By Ben Saltiel
Five presidential hopefuls continue to fiercely battle through their respective primaries in an attempt to garner their party’s nomination. A Republican field that at one time contained 17 candidates, making it the largest presidential field in the history of the GOP, are down to their final three candidates : Donald Trump, John Kasich, and Ted Cruz. On the Democratic side, Hillary Clinton is competing against the surging Bernie Sanders campaign in her historic bid to become the first Female American President. While 11 months remain before any candidate can start their tenure as Commander and Chief, it is not too early to consider how each party can impact their Canadian neighbours to the North. Much of the focus of this presidential campaign has revolved around illegal immigration and foreign affairs; however, this article will primarily focus on the potential economic impact the next U.S president will have on the Canadian economy.
January saw the TSX reach its lowest level since July 2013. The Canadian Central Bank dropped its growth forecast from 2% to 1.4% and the price of oil went below $30/barrel. Forecasts estimate that by the end of 2016, the price of oil will hover around $40 a barrel. With the Canadian economy being heavily reliant on oil exports, the drop in the price of oil and the failure to pass the Keystone XL definitely contributed to these economic woes. The fact that the pipeline project never materialized was a major blow to the Conservative who saw the 8 Billion dollar US deal as a major job creator despite the potential environmental ramifications. Against Stephen Harper's best efforts, sitting President Barack Obama exercised his executive order to veto and reject the Keystone pipeline project and if a Democrat is elected in 2016 you can likely expect that they will replicate their predecessor’s actions.
Bernie Sanders considers climate change as the biggest threat facing America and Hillary Clinton announced back in September that she opposes Keystone XL, therefore its existence is contingent on a Democratic defeat. Senator Sanders emphasized that “Climate change is real, it is caused by human activity and it is already causing devastating problems. Our job now is to aggressively transform our energy system away from fossil fuels into energy efficiency and sustainable energy.” On the Republican side there is significant support for the Pipeline; all remaining candidates have said they would reverse Obama's veto or sign it into law if it had the votes. Therefore, Canadians supporting the Keystone XL project can expect to receive backing from the GOP regardless of whoever appears on the final Republican ticket.
In addition to the Keystone XL pipeline, as the United States continues to be Canada’s largest trading partner, the state of the American economy plays a vital role to Canadians. The drops in oil and commodity prices have left Canada exposed and uninsulated in the event of a weak American economy. An increase to the Canadian balance of trade, through increased exports to the U.S would help offset the projected lower growth. The US Labour Department January jobs report announced that wages have grown 2.5% over the past year and unemployment sits at 4.9%, an eight-year low. Some use these indicators as evidence of a strong recovery however it should be noted that the labour participation rate for January is 62.7%, 2% down from 2012. Furthermore, the wage growth is likely skewed by the 21 states that chose to raising their minimum wage requirements from 2014-2015. Whoever wins this election will inherit a national debt of 20 Trillion dollars, a stock market that has seen the S&P500 index drop by 11% twice since August 2015, a volatile Chinese economy and declining exports as a result of the stronger dollar. Presently the Debt to GDP ratio sits at 76%; at current government spending levels, interest payments on this debt is projected to eclipse military spending by 2021. The debt will have to be addressed during the next presidential term through tax hikes or significant spending decreases.
As it pertains to the economic outlook for the U.S, there is quite a divide between Macroeconomic strategies espoused by the remaining candidates of both parties. The Democrats blame the failure of the economy on the private sector while the Republicans blame government ineptitude. The self-proclaimed “Democratic Socialist” Bernie Sanders believes that the best way to grow the American economy is by reducing inequality through drastic government intervention. His policies include raising the minimum wage to $15/Hour, raising taxes on the billionaire class, instituting a speculation tax on Wall Street investment funds and breaking up the major Wall Street Banks. Hillary Clinton, a moderate progressive has adopted Sanders minimum wage policy, raising taxes on millionaires and high frequency traders speculation but plans on cracking down on corporate inversion through taxing American companies on deferred revenues made outside of the country. Cuts to government spending are unlikely from either Democratic candidate as they both favor substantial investment in infrastructure and social programs. Critics of their policies fear that raising corporate tax rates and imposing speculation penalties will cause more corporate inversion to London and Ireland where companies can take advantage of lower tax rates to preserve their profits.
In addition to companies leaving for lower tax rates, the rate of entrepreneurship has yet to catch up to pre-recession levels. While the number of small businesses has started to rebound after a particularly devastating five year stretch from 2008-2013, there are still 300 thousand fewer small businesses than before Barack Obama assumed office. With the number of small businesses yet to reach the 2008 levels, raising the minimum wage requirements, business tax rates and eliminating deductions could yield an adverse effect on promoting private enterprise. These sentiments are promoted by Republican candidates who fear that the country would be poorly served by the Democratic candidate’s respective platforms.
I know what the formula is: cut taxes, you restrain the government, you don't let the regulators put you out of business and you grow jobs, John Kasich.
Ohio Governor John Kasich, one of more moderate remaining GOP candidates, has a contrary economic view compared to his Democratic counterparts. Kasich believes that high corporate and personal taxes coupled with reckless government spending and incommodious regulations are why the economy does not work for everybody. This is in line with the classical teachings of Milton Friedman and what Kasich’s Republican adversaries unanimously endorse. John Kasich can take credit for cutting taxes in Ohio while expanding Medicare and still managing to achieve a budget surplus.It should be noted that granting tax breaks while being involved in military conflicts are responsible for the large deficits that accrued over the course of Bush 43’s administration. With every presidential candidate committed to some sort of involvement in Syria, it will be unlikely that any candidate will manage to deliver a balanced budget during their first term. The two largest shocks to the stock market over the past year were caused by widespread volatility in the Chinese market and the Federal Reserve raising interest rates, leading some to believe that the U.S economy may be susceptible to another recession in the near future.
Dating back to 1960, the American economy has experienced eight recessions. Six of these recessions were triggered by inflation or changes in interest rates in order to combat inflation and 4 were impacted by oil price shocks. Fortunately with the price of oil projected to stay low for the foreseeable future and the abundance of available oil created by fracking and Canadian tar sands, there should not be a sudden spike in the price of oil, unless demand substantially increases or supply decreases. Inflation appears to be under control, as it is projected to average approximately 2.4% from 2016-2020 but only grew by 0.1% for 2015. Regardless of whether analysts have bearish or bullish outlooks on the economy, it is evident that a consequence of high debt and the inability to substantially lower interest rates will leave the Treasury and Federal Reserve with fewer options in the event of another recession should it arise.
It is for this reason that the next President of the United States will have to navigate through the uncertainty in global markets and ensure that whichever policies they choose to pursue will consider how stagflation, oil shocks and credit bubbles have caused previous recessions and plan accordingly. The Canadian economy would receive an immediate boost with a Republican in the White House because of their support for the Keystone XL which the Democratic candidates oppose. Ultimately the Canadian economy will be best served by having the Presidential candidate that can oversee a strong American economy that will see sustained growth in jobs, wages and small businesses. If American companies are producing more and their citizens have more disposal income, the low Canadian dollar will offer Canadian businesses vast opportunity to export south of the border.
Illustration: Florence Yee, John Molson Business Review.