An interview with Catherine Swift
At the beginning of the month, The Globe ran a series of pieces talking about corporate spending in relation to the money that corporations have on hand. The Globe called it a spending crisis. Why do you think corporations aren’t spending?
They have no confidence in the economy right now. They certainly have no confidence in [U.S. President Barack] Obama’s administration – they saw what stupidity happened around that debt ceiling discussion.
Another reason is that U.S. corporate income-tax rates are among the highest in the world right now, and companies are keeping their powder dry. Canada’s been benefiting. Businesses are interested here because we have a more competitive corporate tax rate.
So the primary reasons for the spending crisis are uncertainty and tax rates?
Look at what’s happening in world financial markets – not just the U.S., of course – Europe is going to hell in a handcart. Confidence levels are so important to everybody – consumers and businesses – and until they feel that things are on an even keel, the situation will continue to get worse.
A politician can say to companies, “You’re supposed to create jobs,” but companies’ main goal isn’t to create jobs, though that does happen; companies’ Number 1 objective is to stay in business, which means making money. For any politician to say, “Business has to step up to the plate,” no – that’s not their job. That’s the typical socialist line, though, and Obama seems to be much more of a socialist than I thought he was before he took office.
What policy would create economic security? A lower tax rate?
Governments have spent so much – that’s the other side of the coin. In the private sector, the problem is that they’re not spending. In the public sector, it’s that they’re spending like drunken sailors. And that cannot continue. The fact that U.S. debt is in the multiple trillions is outrageous, and Europe is the same – both countries have spent for decades and are now in incredible debt.
Unfortunately, the U.S. has an election coming up next year, and the best time to implement tough measures is at the beginning of a politician’s term, when he or she has a few years to get those measures underway. Now, with the election just over a year away, I don’t believe Obama’s going to be able to make the tough decisions, even if he wants to, and I don’t know that he wants to. I think it’s a pretty bad scene right now. And the fact that companies are not spending and are not creating employment more than they are is a testament to that.
If the election wasn’t happening, there might be hope for the establishment of a credible debt-reduction plan, and some major cuts. We can’t get back to a sane scenario without cutting, and the Obama health-care plan is a big sinkhole of money, so that’s not going to help any.
Is there any expectation that future corporate spending will be domestic?
It’s hard to say. Companies are rational most of the time, and if they can do something less expensively elsewhere by outsourcing, they’re probably going to (depending on the business). But I think it’s a mixed bag – it’s not that simple.
Do you think we have a governance problem between government and corporations?
No, I don’t. The shenanigans that have gone on in financial markets have been the responsibility of a bunch of crooks, and government facilitated that, unfortunately. That’s a whole other question. But beyond the crooks on Wall Street, I don’t think there is a governance problem. When you have governments, like, seemingly, Obama’s, that do not understand the priorities of business and think they’re social program entities, that’s just foolishness. That doesn’t work.
What are the core differences between the ways Canada and the U.S. govern corporations?
In Canada, we haven’t spent ourselves into a stupor in quite the same way. We certainly have debt issues, but they’re not quite as bad. In the mid-'90s, when Canada’s debt rating was downgraded, we did get our house somewhat in order. (There were different circumstances – the Liberals had a majority government, whereas the U.S. has gridlock right now.) We paid off our deficit, and we were paying down debt until the most recent recession, when we cranked it up again. Our fiscal situation back in the early nineties was similar to Greece’s, but we did something that Greece didn’t: We got our fiscal house in order. Granted, we need to do that again. And hopefully that will happen now that we have a majority government again. In Canada, if you have a majority government, you’re basically a dictator for four years – provincially and federally.
We’re going to have to cut the size of our government in Canada, and this is pressuring all of the other developed countries. The baby boomer generation is retiring, and we have this massive government that was paid for by a tax base from their workforce. We’re not going to be able to afford the government we had in the past. Our health-care system is cruising towards financial trouble, and that’s going to be very painful for a lot of people, but it has to happen. Unless we get our ducks in a row, we will not be doing the next generation any favours. And think of all the government workers, who, by and large, make way more money than they’d make in the private sector, and who have great big pensions that there’s no money to pay for – don’t think that’s not going to hit the fan.
How do you see that playing out in the near future?
I know the Harper government is well aware of these issues. It has already started to work on the federal public sector. It got rid of the absurd practice of paying a severance to those who retire or quit – only if you’re fired should you get a severance. That was small potatoes compared to the big picture, but the government has obviously shown some will to address this problem.
I think we’re going to see a downsizing of government, and we’re going to have to see it provincially, not just federally. There are going to be periods of difficulty, when people who are used to relying on government are not going to be able to anymore. There’s going to be privatization of services, as Rob Ford has been looking at in Toronto. This kind of thing is going to have to happen, because we simply can’t afford the debt anymore. The next generation is nowhere near as big as the baby boomers’ and people are right to worry that the bill’s going to be handed to them. It’s a disgrace, what’s happened.
This problem precipitated a lot of the problems in Europe. People retire very early in Europe, they have a very big government, and, in Greece, for example, they like to live the good life on everybody else’s dime. The Germans are paying for Greece right now, and they’re not very happy about it. But in the EU, Greece is relatively small. When you start to see Italy, Portugal, and maybe even France, having problems, you’re really hitting the mother-load.
Huge corporations are accused of sitting on large amounts of money. What about small and medium-sized businesses?
When you have low levels of confidence, you’re not going to be foolish – , whether as an individual or a company, big or small. In all likelihood, small businesses aren’t going to be holding money offshore. A large company can pay for really expensive financial services to jiggle their money around. Small firms typically cannot – they’re just sitting tight, trying to stay alive.
Do you see this dynamic in the companies you represent at the Canadian Federation of Independent Business?
We do. We survey our members monthly to gauge their level of confidence – we call it a business barometer – and the results are not terrible. Canada is not the U.S. – Canada is better off. But everything’s global these days: We’re very integrated, so of course we’re affected by what’s happening in the U.S. and across the Atlantic.
An interview with John Curtis
Do governments have reason to be losing confidence in corporations, given the fact that U.S. public corporations are estimated to be sitting on over US$1 trillion?
My instinct is to say no, that governments can express disappointment in the private sector, and can say, “We’ve done our share, now you belly up to the bar.” That’s the general line that is taken publicly, and that is fair enough, because governments in the western world have, on the whole, been extraordinarily generous to the corporate sector in recent years – arguably too generous. But the world doesn’t work that way. Corporations are not investing, because there’s no demand out there. Governments are not providing the kind of public support that is necessary – in terms of public spending and job creation – and so businesses are quite logically saying, “We can’t see how we’re going to sell our goods [or services, depending on their sector], so we’re not going to invest.”
From the end of the Second World War to the 1970s, governments spent wildly, and that led to all the growth in roads and hospitals and schools/universities. But by the early ’70s we had both inflation and unemployment, so government shifted to supply-driven economics, and that’s what we’ve been seeing for 30 years now – a focus on productivity, competitiveness, tax cuts, and anti-regulation. My argument is that that’s now played out fully. Interest rates are close to zero, but if no one is willing to spend, it doesn’t matter how cheap money is – they’re not going to use it. It’s called a liquidity trap. We have to go back to more fiscal policy and less monetary policy. Governments have to start spending again and run up deficits for the short term. They can then pay them off as tax revenues go up – as more people are able to pay taxes. It’s a dead issue at the moment, because the high end of our society is not being taxed enough, and not enough of the broad middle class is working, so we’re seeing a revenue shortfall rather than overspending.
This is similar to what happened in 1937, when the U.S. went into a second recession because it was cutting back debt when, in fact, it should have continued the New Deal spending. Now, there are too many people not working – that’s the real problem. And Warren Buffet’s quite right – the rich aren’t paying enough in taxes.
Have we become too dependent on private companies to solve public problems?
I’m not that ideological. The best public policy should involve all stakeholders – corporations, unions, and governments. At the moment, we’re still playing to the corporate interest. We’ve not yet seen the decline of corporatism, though we might if things get bad enough. We’re still in the situation of the ’20s or the ’50s, not the crisis of the ’30s or ’70s.
How do you think international governance structures can be changed to address a crisis of confidence?
One can try to improve regulations – not necessarily heavy-handed regulations, but ones that can work around the most egregious practices – in the financial sector, and even in terms of trade and environment. At the moment, there’s a real lack of leadership in international governance; there’s a lack of consensus. We need a sense of what the problems are before seeking solutions.
The trade system arguably kept the economic crisis from spiraling out of control in recent years, but its governance is not that good. We can’t sort out the Doha round. We can’t improve the institutional capacity of the World Trade Organization. Regional trade agreements are good partial solutions, but they’re not comprehensive. So, basically, we’ve done nothing in the past 15 years to improve things. There’s a crisis of governance virtually everywhere.
This is partially due to shifting power – the U.S. and Western Europe have lost traction, and the Chinese and Indians have gained strength (though they’re not taking leadership roles yet). Things are changing rapidly: Goods are made all around the world, many services are performed offshore, and exchange rates are bouncing all over the place. The governance system, generally, is deteriorating. It’s amazing that, collectively, we’re doing as well as we are.
You mentioned that the solution is to include all stakeholders in regulatory mechanisms. How can international governments be changed so that private corporations are integrated into those structures?
There will be growth in the economy over time, so corporations will take more interest, rather than continuing to avoid risk at all cost. There should be much more collaborative public-policy making involving social, environmental, and human-rights groups, among others. There will be serious social problems as time goes on if there remains only an implicit coalition between government and business.