Monday, June 09, 2008

Fire Jim Flaherty - Now!

Fire Jim Flaherty – and Send a Message that Canada Will Carry Out a 180-Degree About-Face by Promoting Canadian Citizen Investment in Emerging Global “Sunrise” Business Sectors – Now!

9 June 2008

It still needs to be said. This guy has got to go. And let it be an example to others.

In my view,
Jim Flaherty is possibly the most misguided Federal Finance Minister in Canadian history. In particular, his policies have made him the arch enemy of economic democracy in Canada.

By way of explanation, Mr. Flaherty is a lawyer, and neither an economist
nor a businessman, and so he is susceptible to bad economic advice. He simply doesn't know the difference. But is this a good set of qualities to have in a Canadian Finance Minister as we face into the headwinds of a looming – and possibly brutal – global recession?

What did he do – and why is it this serious?

Through eliminating the partially tax-exempt status of Canadian income trusts on Halloween Day, October 31, 2006, Mr. Flaherty decimated an entire industry, while also robbing two million Canadian investors – to whom he had promised he would not do this – of approximately $35 billion in life savings.

The flaws in Flaherty’s logic – and ethics – have been
well-described elsewhere, perhaps best of all by Diane Francis in the National Post on December 9, 2007.

When Mr. Flaherty destroyed the Canadian income trust program, he did more than close a so-called tax loophole. He demolished a system that was working to encourage ordinary Canadian investors to keep – and grow – their life savings in Canada.

Savings and investment are the lifeblood of every national economy. Nowhere in the world but in Canada was the process so home-grown. The income trust program promoted a virtuous cycle in which Canadians kept their savings in their own country, investing it for the most part in relatively small enterprises with high capital requirements.

An added benefit to this now-dismantled Canadian policy was that the income trust system helped to level the Canadian investment playing field, narrowing the discrepancy between the incomes of the very rich – who have far-reaching access to investment opportunities – and of ordinary Canadians – who, only in Canada, enjoyed investment benefits enjoyed elsewhere only by the very rich, but on a smaller, more democratic scale – through the made-in-Canada income trust system.

Capital is almost always difficult to come by for small-scale enterprises – the kind of enterprises which – prior to Mr. Flaherty's thoughtless decision – created a distinctive flavour to the Canadian economy on the world stage, which elsewhere is well-known to be dominated by large, faceless and anonymous pools of capital operated for the benefit of the already-rich.

Mr. Flaherty has basically sold out Canada’s 259 income trusts to much larger international investors – whose snapping-up of these encumbered assets at fire-sale prices will again be tax exempt, but without the added benefit of promoting Canadian saving together with Canadian ownership of Canadian assets.

How will foreign investors get the tax exemption that Mr. Flaherty has just closed off to small investors? By borrowing the funds to make their acquisitions. Mr. Flaherty is a reverse Robin Hood. He has borrowed from two million small Canadian investors, and given to a small circle of deep-pocketed, and much more leveraged, international investors.

Thanks to Mr. Flaherty, Canadian assets are rapidly slipping out of Canadian hands – never to return.

40 of 259 Canadian income trusts had already been sold out by the close of 2007, for the most part to international investors with a very different set of interests than the ordinary Canadians whom they replace.

The new owners of these almost universally small-scale, home-grown Canadian companies will lack the loyalty to Canada that the prior holders of these assets demonstrated – the mainstream (and trusting) Canadian investors whom Mr. Flaherty has literally defrauded and robbed.

Mr. Flaherty's policies remove tax benefits for Canadians and transfer them to non-Canadians. His new policy constitutes a profound detriment to this country. Mr. Flaherty's bold initiative – in one fell swoop – essentially
transfers tax incentives from small Canadian investors to large, wealthy and mostly foreign investors.

If the truth were told, the litany of flaws in Canada’s current economic policies is not entirely attributable to Mr. Flaherty. His former assistant, and now Governor of the Bank of Canada, Mark Carney, is “credited” with instigating this seizure of the assets of private investors. Mr. Carney's role in this fiasco should not be forgotten.

Mr. Flaherty's provincial counterparts are perhaps also little wiser for the most part. Mr. Flaherty is just the worst of a bad lot, and firing him might send a message that it is time for a change at all levels. (And if his complicit boss – Stephen Harper – went with him, more’s the better!)

If I were in Mr. Flaherty's place as Finance Minister, what would I do?

First and foremost, I would reinstate the income trusts. Canada was unique among the
G8 nations in promoting combined citizen savings and capital investment in home-grown businesses through the income trust structure. It was a unique program, and worked better than any method employed elsewhere to achieve the combined objectives of encouraging citizens to save, while also providing tax-protected funds to enable Canadian industries to operate and expand, thereby contributing to the health of the economy and providing jobs to Canadians.

Once having restored Canada’s income trusts – those that are not already gone forever – what would I do next?

I’d address the single most pervasive flaw in the economic policies of the Canadian federal and provincial governments.

Virtually in unison, all levels of Canadian government throw money at sunset industries, while depriving emerging industries of needed capital. I’d turn that policy the other way around – and use the income trust structure where possible to accomplish the shift in focus.

Right now, Canadian governments are lobbing billions of largely unrecoverable taxpayer dollars at the declining and troubled automotive and forestry sectors. Their nominal aim is to save Canadian jobs. But what they are really doing is investing, with taxpayer funds, in uncompetitive businesses at a time when Canada has already established itself as a world leader in business sectors that are growing. In fact, all that is hampering the growth of these emerging sectors is – you guessed it – a shortage of investment capital.

Why do our federal and provincial government like to invest our funds in business sectors that are failing?

Because high quality, high-paying jobs are being lost.

So rescuing the employees of closing automotive assembly plants and closing pulp and paper and timber mills brings welcome but short-lived relief to skilled Canadian workers.

Both sectors are in trouble – the automotive sector because North America manufacturers have never been able to produce the vehicles that North Americans want to drive – particularly in an era of dramatically escalating energy costs, and the forestry sector because primary demand – and with it production – is shifting to Asia.

My suggestion – enough is enough. Let’s step in and remove the ringleader from office, so as to send a message to the others!

It is certainly true that when a well-located previous Canadian auto plant becomes a suburban mall, the new – mostly retail sales – jobs created will pay much lower wages.

The new jobs rarely exist where workers now live.

In fact, the new jobs are waiting to be created, because capital is in short supply in emerging industries!

The closure of auto manufacturing facilities and pulp, paper and forest products mills is certainly a hardship.

But that is not the point.

Capitalism is about
creative destruction, and there is no way to foster the development of new industries without also permitting the decline of fading industries.

What our government leaders miss in their efforts to win the hearts of voters is that emerging industries will also create high quality, well-paying, and much longer-lasting jobs – though in different sectors and often in different geographical areas that require different skills.

So, rather than throw money at sunset industries, I would redirect funding incentives to emerging companies in “sunrise” industries, assisting them to get established on the ground floor. I would make Canada a leader in the promotion of new models of locally-based business and industrial development.

I would use something akin to the now decimated income trust structure to accomplish this objective, using for the most part private rather than government funds to accomplish the creation of new, high quality jobs.

At this time, the Canadian “sunrise” industry that holds the potential to offer the most in return for such capital support is the still struggling mining and mineral exploration sector. (There are other sectors as well, which I will mention later.)

What is so special about the mining and mineral exploration business in Canada?

Global demand is rising – rapidly, thanks primarily to billions of previously third world persons joining the global economy, mostly in Asia, but also in less obvious areas, including Latin America, Africa, the countries of the former Soviet Union and, of course, the Middle East. The participation of these billions of new global citizens has created unprecedented demand for raw materials.

Interestingly, and perhaps unknown to most Canadians, Canada happens to be the world leader in the creation and operation of mineral exploration and mining companies. We also happen to be the world leaders in raising new capital for such ventures.

Canada is home to more mineral exploration and mining companies than all of the world’s remaining countries taken together, though most of these companies are small, operating on shoestring budgets. The majority of these companies trade as small-capitalization stocks on the Toronto Exchange, or as “penny stocks” on the Canadian Exchange, based in Vancouver. No country is more active in this explosively growing "sunrise" business sector than Canada!

Canadian mineral exploration and mining companies alone could create more highly-skilled and high-paying jobs – and more mineral products to meet world demand much faster than their international competition – except for one thing.

What these home-grown Canadian enterprises lack is what the Canadian government has been giving away in massive allocations, with little hope of return, to the automotive and forestry sectors, and what the Canadian government has just seized from two million small Canadian investors – and that is sufficient capital to proceed with the next steps of their diverse projects.

I have written recently about two of these Canadian companies,
Nevsun Resources and Jinshan Gold Mines.

As Finance Minister of Canada, if I used government subsidies at all, I would divert such subsidies to underfunded mining and mineral exploration companies to aid them both in the exploration of newly-identified mineralized zones and in the development of new mining operations. The global commodity boom will require the contribution of Canadian miners for decades to come. These are jobs with a future, they require trained workers with high skills, and they pay very well.

Additionally, I would divert government training money to preparing individuals to work in sunrise industries, not only including mining, but also such fields as biotechnology, alternative energy, agriculture, software development, microelectronics and public infrastructure.

I would advocate looking forward, to where new jobs will be needed, and not backward, to where jobs are inevitably being lost – no matter how much money we throw at the problem.

What else would I do as your new Finance Minister?

Canadian miners face an adverse climate for raising capital for new projects. I would assure the availability of new capital through programs that encourage ordinary Canadians to invest in such ventures. (This sounds a great deal like the income trust program, doesn’t it?)

I would also promote inter-governmental partnerships.

I have written recently about how risky it is for Canadian companies to do business abroad. I would promote government-to-government partnerships to create a safer international climate for Canadian investment.

Under my financial leadership, and I am offering the most difficult example I can think of first, Canada might possibly have explored the formation of a collaborative partnership with the Chavez government in Venezuela to promote private investment – before Mr. Chavez wandered further down the well-worn road to the government seizure of the assets of private, and in his case, Canadian companies, thus stifling further international investment in the economy of his country for the duration of his leadership, if not longer.

Perhaps partnering with Mr. Chavez seems an unlikely venture. But I wish to suggest to you that forging such difficult and unlikely partnerships is one of the things Canadians do best (along with, for example, also originating the world's leading hospitality companies
consider Fairmont and Four Seasons Hotels and Resorts – both now privately-held companies as evidence).

Canadians are particularly good at getting along with difficult people. If you like, you could attribute this uniquely Canadian characteristic to sharing the world's longest undefended border with the somewhat unruly citizens of the United States to our south!

I suggest that before dismissing this proposal outright, you consider how a very unlikely Canadian government partnership with the Castro regime under the leadership of former Prime Minister Pierre Trudeau many decades ago opened the door for a very successful Canadian company – Sherritt International – to operate thriving businesses in Cuba today. It's controversial, but Sherritt has for many years now been paving the way to the restoration of free enterprise in Cuba – and it's certainly not going to happen any way other than through this type of gradual evolution!

I have no certainty that partnering with as regressive and short-sighted a leader as Hugo Chavez would have been successful, though Mr. Chavez models his self-styled “revolution” on Mr. Castro’s quixotic example.

But based on Canada’s experience in Cuba, the risk undertaken would likely have proven less than the ultimate damage that resulted to Canadian investment assets with the government seizure of the properties of two Canadian corporations with years of experience of operating in Venezuela –
Crystallex International Corporation and Gold Reserve, Inc.

Basically, Mr. Chavez let Crystallex and Gold Reserve undertake all the development risk on their government-approved mineral claims in Venezuela. These companies succeeded, demonstrating the viability of developing mines at two adjoining locations – Las Cristinas and Las Brisas. Now his government will be exploiting the resources in which these companies invested tens of millions of dollars, many of them Canadian dollars – but without the benefit of continuing access to international capital to move these projects forward, with the result that Mr. Chavez has stifled the continued development of these prize properties and further impoverished the people of his country.

Let’s now consider less risky ventures, of which countless examples exist around the world in the early stages of the emerging global commodity boom.

In Eritrea, the indigenous government has taken a 30% stake in the business of Nevsun Resources to develop the ultra-rich Bisha project into a thriving mine. Why should the Canadian government not join countries such as Eritrea in such partnerships, assuring the provision of needed capital to undervalued companies such as Nevsun Resources, while also enhancing the security and mutual benefits accruing from already-existing small scale Canadian investment in international business ventures?

With some strategic thinking, the Canadian government could probably develop a program to channel private rather than public Canadian investment funds into such ventures as the Bisha project, which, with one of the highest presently available return-on-capital ratios in the world at this time, is still starving for the funds needed to get this promising project off the ground (and this while front-page headlines reveal that the Canadian and Ontario governments are still dilly-dallying with promises of further aid on top of hundreds of millions of Canadian dollars of unrecovered capital incentives already invested in the moribund automotive sector)!

So far I have said little about mineral development projects in Canada. Such projects are less risky still, and offer direct and immediate promise of good, high-paying skilled jobs for Canadians.

It should go without saying that hundreds if not thousands of such projects in our own country are already in development, but presently on hold, due to shortages of investment funds to bring promising mineral deposits to the development stage. Of personal interest, there are countless mining ventures now well beyond the exploration stage operating in nearby Red Lake, Ontario on the prodigious Northwest Ontario greenstone belt – where Goldcorp presently mines the world’s richest known gold deposit.

Many such projects, including the presently contentious projects planned by Aurora Energy, Northgate Minerals and in particular Platinex, are located on traditional aboriginal lands. We are in the very early stages of learning how to form development partnerships with aboriginal communities to provide training, jobs – and investment opportunities – for aboriginal Canadians in Canadian mineral exploration and mining development projects.

Let me assure you, this is yet another “unploughed field” with far greater potential for return than the further investment of public funds in sunset industries. Canadian Zinc’s Prairie Creek Project, and Goldcorp’s Musselwhite Mine offer only two of a multitude of sterling examples of how Canadian mining companies can partner with aboriginal Canadians to create benefits for all concerned – including the economic empowerment of aboriginal Canadians through means other than the direct transfer of government funds.

I happen to conduct the majority of my professional work with aboriginal Canadians, and let me tell you, the awareness of the development and investment potential of mineral exploration and mining on traditional lands (including the use of innovative “green” environmental practices) remains in the earliest developmental stages, in part because Canadian governments have failed to exercise leadership even in promoting thinking about shared investment and job creation opportunities for aboriginal Canadians in this particular area.

We could spend a lot less on manufacturing automobiles in Oshawa – whether they are “alternative” vehicles or not – and a little bit more in the Northwest Territories, Northwest Ontario, and Eritrea, as well as diverse other locations both within and outside Canada – possibly even in Venezuela, and create a far greater number of high-quality, well-paying, and desperately needed jobs for skilled Canadians – whose training and job opportunities could potentially be promoted through forward-looking government initiatives in sunrise industries – of which mineral companies are only an example!

And don't forget, we could still spend retraining money in Oshawa and Windsor to assure that Canadian auto workers have many more decades of employment to which to look forward – but in alternative fields of employment which offer greater promise than the declining North American automotive sector.

I'm not at all saying that unemployed auto workers don't need our government’s help and support, or that “alternative” environmentally-friendly vehicles are not a good idea. But let me say this. When private industry is good and ready on its own to choose to develop such alternative products in Canada, it will not need massive government subsidies to do so!

It is compelling economic fundamentals which lead to the creation of high-quality, long-lasting jobs. And when such fundamentals exist, massive government subsidies are simply not required, because private investment capital will be drawn to such ventures through their inherent merits.

When the time is right for new initiatives in the automotive sector, government handouts won't be necessary to bring them to pass. Automotive companies will develop new kinds of vehicles because the potential for return on investment justifies such production decisions. There is no need to “force” the issue with hundreds of millions of transfered taxpayers' dollars.

But let’s retrain our automotive workers for employment in fields where smart and skilled workers are in high demand now – even in shortage (as
presently happens to be the case in the mineral sector, where tens of thousands of very desirable jobs are presently going unfilled), rather than dish out corporate welfare to sunset industries on the verge of insolvency.

In summary, let’s restore the groundbreaking Canadian income trust system, and let’s redirect government incentives from propping up sunset industries to forming partnerships for finance, training and domestic and international partnerships with sunrise industries in such areas as mining, agriculture, alternative energy, biotechnology, information technology and infrastructure development – and yes, even in “alternative” transportation, but as just one of hundreds of areas for considerably more modest potential public and private investment partnerships.

Let’s promote government initiatives which create the kind of regulatory structures that make it possible for most of the new investment funds to come from private – ideally mainstream citizen – sources.

Let’s again use government policies to reward Canadians for investing in productive enterprises in their own country, rather than to punish them for “taking advantage” of supposed “tax shelters,” which in reality assure that ordinary Canadians, rather than faceless pools of global capital driven by the already very rich, remain the owners of Canadian business assets!

The tax incentive structure of the now-dismantled Canadian income trust system that encouraged two million Canadians to invest in domestically-based Canadian businesses was a very good idea, just as the dismantling of the income trust program at a time when Canada has unprecedented needs for new capital investment to maintain its position of world leadership in mineral exploration and mining was a very bad idea – in fact, probably the worst-timed decision ever in Canadian government financial history!

And take my word for it – our local, regional, provincial and federal governments will not be lacking for future tax revenues under such a program. The stars just happen to be aligned at this time so that Canada could potentially emerge as the biggest winner
of all the countries in the world – in the emerging international commodity explosion.

A forward-looking Finance Minister is needed, and Mr. Flaherty is by no means that man.

Mr. Flaherty's regressive socialistic ideas are in fact more akin to those of Hugo Chavez of Venezuela than to those of the original designers of the Canadian income trust system.

Mr. Chavez’ seizure of tens of millions of dollars of Canadian assets this year was in fact a modest gesture when contrasted to Mr. Flaherty's bald-faced decision to rob two million of his countrymen of $35 billion in small-scale investment assets – not to mention the opportunity cost of many tens if not hundreds of billions of dollars going forward that might have been redeployed into home-grown Canadian businesses, were it not for Mr. Flaherty's confiscatory conduct!

The time for change has come.

Let’s send a clear message, and fire Jim Flaherty – and with him the backward-looking Conservative Party of Canada – now!

Oh, and while we’re at it, perhaps
Mark Carney at the Bank of Canada could be let go as well….

Let’s look forward and not backward in Canadian economic policy. And let’s keep all Canadians – including our fastest-growing population sector, aboriginal Canadians – investing in Canadian businesses through a restored income trust program – both at home and abroad, for many more decades to come!

The petition to restore the Canadian income trust system is still active. Click here to add your name to this still timely and well-considered petition.

Oh, and if anyone knows of a petition to fire Mr. Flaherty, not to mention Mr. Harper and Mr. Carney, please let me know. I'll be there with my signature! (This link is the closest I have found so far. Hats off to Cameron Holmstrom of Toronto!)

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