Economic analysis

Why you should be wary when O’Leary promises big GDP growth

That reality-television hucksters such as Trump and O’Leary would overstate their abilities is no surprise, but don’t be seduced into thinking economic policy is easy
PLYMOUTH, MI - MARCH 31: A fan supports Team United States during a game against Team Canada at the 2017 IIHF Womans World Championships at USA Hockey Arena on March 31, 2017 in Plymouth, Michigan. the United States won the game 2-0. (Gregory Shamus/Getty)

PLYMOUTH, MI - MARCH 31: A fan supports Team United States during a game against Team Canada at the 2017 IIHF Womans World Championships at USA Hockey Arena on March 31, 2017 in Plymouth, Michigan. the United States won the game 2-0. (Gregory Shamus/Getty)

Conservative leadership candidate Kevin O’Leary will like the latest GDP figures; at least he will if he is being honest about how fast he thinks Canada’s economy needs to grow in order for society to function property.

Statistics Canada reported late last week that gross domestic product increased 0.6 percent in January to $1.7 trillion. That’s a big gain; Bay Street and the folks at the Flaherty Building, the new home of the Finance Department in Ottawa, would have been happy with a number half that size. Canada’s economy likely grew at an annualized rate well in excess of three per cent in the first quarter.

It won’t last.

The hard reality of our times is that the world’s biggest economies have become old and slow. GDP typically is calculated by adding up consumption; investment; government spending; and the difference between exports and imports (exports add money to the economy, imports subtract). Those variables aren’t growing as fast as they have in the past. The main reason is that working populations are shrinking as Western societies age, limiting both potential output and demand. The Bank of Canada reckons Canada’s economy can advance at an annual rate of only about 1.5 per cent without triggering inflation, at which point it would raise interest rates to cool things off. There are things that could be done raise potential a little, but most experts say we should adjust our expectations to a slow-growth world.

READ MORE: Kevin O’Leary is still confusing debt with deficits

O’Leary says the experts are wrong. Make him prime minister, he vows, and he will perform what could be fairly judged a miracle, defying both mathematics and the consensus of men and women who have devoted their adult lives to the study of how economies work.

“I am making a promise to Canadians that I can grow the economy at three per cent,” he said earlier this year. Canada’s economy last grew that much in 2010 and 2011 while recovering from the Great Recession. It hasn’t grown that fast in normal times since the early 2000’s, a period that probably wasn’t all that  normal, as so much of the wealth generated during those years was from America’s debt boom and China’s once-in-lifetime rise from poverty. No matter: O’Leary insists Canada must go back to the future. “Canada works at three per cent. Health care works, education works, military spending works. It all works at three per cent…”

Close observers of North American politics will hear an echo of the president of the United States in O’Leary’s GDP targeting.

One of Donald Trump’s more prominent declarations was that he would generate annual growth of four per cent, a pace the U.S. hasn’t achieved consistently since the 1990s. It was nonsense, but nonsense spreads. Even Prime Minister Justin Trudeau has developed a penchant for magic numbers. The 2017 budget contains “clear and ambitious targets” to increase exports of goods and services by 30 per cent and to double the number of “high-growth” companies to 28,000 by 2025.

READ MORE: A budget for make benefit glorious economy of Canada

We laughed at Trump’s four-per-cent promise and we should treat the O’Leary and Trudeau pledges with equal regard. There is only one major country that puts out economic targets and then successfully hits them. That country is China, a place like no other. China can plausibly promise to calibrate GDP growth because the government controls virtually all the means of production. It also controls information, which allows it to manipulate the data whenever growth veers off target.

Countries with liberal economies can’t achieve the same thing. Indian Prime Minister Narendra Modi’s government talked of creating double-digit economic growth after taking power in the spring of 2014. Almost three years later, Modi hasn’t managed to get to even eight per cent, according to the International Monetary Fund. Strongmen and wannabe strongmen like Modi, Trump, and O’Leary talk about economies like they are companies: the chief executive sets expectations, and then everyone scurries to make them happen. Unlike Chinese President Xi Jinping, they control nowhere near enough levers to even pretend they have the power to achieve specific economic outcomes. Nor is that going to change. Trump isn’t going to nationalize Detroit, Silicon Valley, and Wall Street. And O’Leary probably doesn’t intend to edit StatsCan’s work, notwithstanding his tendency to exaggerate his record as an entrepreneur, among other things.

READ MORE: Is Kevin O’Leary really serious about his promises?

That reality-television hucksters such as Trump (The Apprentice) and O’Leary (Dragon’s Den, Shark Tank) would overstate their abilities is no surprise. It’s odd that Trudeau and Finance Minister Bill Morneau are attempting these tricks, however. They have reputations as being believers in policy that is based on facts and reasoned analysis. They and their advisers at McKinsey & Co. are supposed to know better.

Some will see little harm in setting hard targets for things such as exports and start-ups. The economy would benefit from both, so why not put down markers to keep everyone pointed in the right direction? And they might not even be real goals. Bloomberg News observed that Finance’s economic projections imply GDP will grow 40 per cent by 2025, suggesting that Trudeau’s export target is something other than ambitious. If international shipments grow slower than GDP, their share of overall economic activity will shrink.

So who cares? Fun with numbers, right? Maybe, unless the Trudeau government’s embrace of an export target shows that Donald Trump isn’t the only mercantilist on the continent. “There is no fundamental advantage to sending our stuff to Sri Lanka or to Saskatoon,” says Christopher Ragan, an economics professor at McGill University and the author of a popular macroeconomics textbook. In other words, the GDP formula doesn’t care whether wealth shows up as consumption or trade: the result is the same.

But economists such as Ragan get upset when politicians start favouring one of those variables over the others. Economies work best when government policy is neutral. Politicians should encourage efficient, sustainable production through tax measures, some investment and trade agreements. But they shouldn’t care how the wealth is ultimately created. What is Trudeau prepared to do to meet his targets? A mercantile regime favours domestic producers, impedes imports, and promotes exporters. Trudeau appears big on free-trade agreements, although he appears focused on doing deals with individual countries, rather than pursuing bigger, multi-country arrangements. Another budget measure promises to give upstart firms special access to government procurement contracts. Trudeau is open to trade, but he seems to think the market could use a little help deciding.

However, Trump and O’Leary represent something else.

It’s tempting to ignore them, since so much of what they say is obviously bluster. But Gillian Tett, a columnist and U.S. managing editor at the Financial Timeshad an important thought recently. She wrote about the “normalization of deviance,” a concept developed to explain the explosion of NASA’s Challenger spacecraft in 1986. Rather than one big mistake, the disaster likely was the result of numerous small decisions that caused normality to shift and that ultimately caused a fatal explosion. Tett wondered if Trump was doing the same thing to political discourse. What disaster will result from the normalization of stupid lies and nonsense as a benchmark for debate over how society should function?

So let’s be clear, Trump will not generate economic growth of 4 per cent in the U.S., and if a 3 per-cent-growth rate were consistently possible in Canada, someone would have got us there already. These are nostalgia ploys, meant to take us back to the 1990s, when capitalism was triumphant and we talked about the end of history. That was stupid. But the right response is to accept those days are gone, not to pretend they would still exist if only voters had chosen better leaders.

Don’t be seduced into thinking economic policy is as easy. There’s no telling the damage these people could do if they end up trying to keep their promises.