Government, the economy, and why Canadians should happily keep on being hewers of wood

Sit down for an on-the-record conversation with the average industry lobbyist in Ottawa, and the chat is likely to be bland—a mix of flattering the party in power and trying to cast a particular industry’s narrow interests as national ones.

Avrim Lazar, president and CEO of the Forest Products Association of Canada, certainly doesn’t hesitate to push his sector’s concerns. But he’s less guarded on broader issues than is the norm for his species. And as a senior bureaucrat before he jumped to the association, he also knows the government-industry dynamic from both sides.

In a telephone interview from London, following a recent summit there of global forest industry executives, Lazar offered his views on how the recession has caused a “radical” change in the role of government, why Canada hasn’t moved seriously to boost economic competitiveness, and why Canadians should embrace their destiny as hewers of wood. After the jump,  an edited transcript of the interview:

Q. What was the hot topic of conversation in London among forest products executives?

A. One of the first things that came out is that the whole global economy has made a step from market-driven to government-driven in the last three or four months in a way no one had anticipated and really no one has fully acknowledged. The intervention of everybody from China to Obama into the economy has been so massive and radical and powerful that we’re in a whole new era.

Q. Couldn’t this just be a temporary change before governments withdraw again?

A. The CEOs were saying, well, who can complain about them not letting a depression happen? But then they started to wonder, ‘Will governments have the self-discipline to step away?’

Q. What do you think?

A. Governments find change very hard, because everything they do has a clientele. Even though it might be the right intervention now, stopping the intervention is really hard.

Q. It comes down to what governments should be doing in the long run.

A. Government’s role in the economy has been brought into sharp and painful relief by the banking failure. My feeling in Ottawa—not just Ottawa, across Canada—is that the political and policy culture was not ready for a reexamination of the role of government.

We’ve had for years a sort of simplistic dichotomy between laissez-faire, the markets will solve it, and the other side of the spectrum, whatever’s going wrong, the government better step in and fix it.

Q. Why do you think we haven’t found a more nuanced vision?

A. The role of government in the economy has never really been our issue. Our issue has always been the role of government in distributing wealth. All our big policy debates have been: Should government be the only payer for health care? Who gets which tax points? Does the equalization formula work? Should we give more tax power to municipalities? Are we spending too much on health care and not enough on education?

All the huge debates have been around the use of money that’s generated. I don’t remember any top-line political debate about the government’s role in the economy, until this crisis.

Q. Maybe the last deep discussion about government’s economic role was around the MacDonald Commission, which reported back in 1985.

A. It’s a long time ago and the global economy has budged a little bit.

Q.  So what should government’s economic role be?

A. Right now the obvious answer is safety net. It’s clearly important in terms of social justice and people not starving as a result of the recession. But it’s also a stimulus program. There’s also classical Keynesian stimulus, build bridges and roads, which creates infrastructure but has the immediate impact of money starting to flow.

But then there’s the more difficult question about competitiveness. When the recession is over, the only guys who are going to have work are those who are competitive. Everybody is getting leaner, the whole global economy. So the third role of government is creating winning business conditions.

Q. And what would winning conditions be in your industry, for instance?

A. For us it’s access to rail transportation that’s competitive, a tax structure that rewards investment, changes to provincial wood distribution policies, more rapid progress on the greening of the industry, and of course not letting anybody else screw you through their own subsidies.

Q. Let run through some of those points. Don’t we have adequate railroads in Canada for moving forest products?

A. We’re a country with a huge amount of geography. What’s happened in Canada is that more than 80 per cent of our mills are on a single railway line. They do what all intelligent, responsible monopolies do—they screw their customers, giving us bad service and over charging.

Q. What should be done about that?

A. Well, it requires a federal government regulatory change to introduce competition. You can’t build additional rail lines. You could change some of the regulations to allow other carriers access.

What’s wrong with the tax system?

A. Basically we should arrange the tax structure so that anytime anyone invests in Canada we give them, I don’t know, lollypop, a pony, a puppy, whatever they want.

Q. Can you suggest a specific change?

A. The rate at which you can write off a capital investment. The government has given the manufacturing sector two-year, straight-line depreciation. Accelerated depreciation brings investments in. The trouble is the government only extends this for, like, a year or two at a time, and the planning horizon for big capital projects is much longer than that. I think we should have a permanent two-year, flat-line accelerated depreciation.

Q. What about, as you put it,  greening your industry?

A. We’ve made huge efforts to get ahead of the pack. But this is a moving target. Government could provide either tax incentives or direct incentives for the green transformation of the industry, all the way from forest practices to production and shipping.

Q. It must be hard to be heard on these sorts of issues when the government is worrying about an imploding auto industry and other pressing problems brought on by the recession.

We certainly have found that concerns about improved competitiveness conditions have been a relatively low priority. In the last federal budget, to be fair, we asked them to put more money into research and market development, and to deal with the liquidity crises, and they did. But it wasn’t massive. It was good, and we were grateful.

But you’d like more.

A. Generally speaking, reforming business conditions, which doesn’t have an immediate impact, but would have a robust and sustained impact, hasn’t been a preoccupation of any government for years. Governments have been acting a slow, stately way, while global economic conditions are changing at lightning speed.

Yet Canada is prosperous. Maybe we don’t need to change.

A. First we had the cheap dollar and the economy was doing well that way, so government didn’t feel any need to make reforms. Then we had the petrodollar, and government didn’t feel any need to make reforms. But in this world the only thing that’s going to keep our standard of living is being competitive.

Q. When we’re talking competitiveness, we usually think about cooler, high-tech industries. Doesn’t the forest products business seem a bit old hat?

A. We definitely suffer from a Toronto-Montreal-Ottawa concept of where the future of the economy is, which is simply wrong and outdated. Ask yourself what is it that’s going to create competitive advantage for Canada. Everyone would say, just go up the value chain, produce fancy chips and get at the cutting edge of technology. All of which is useful, but all of which is infinitely replicable by Chinese and Indian industrialists.

Q. So instead we remain hewers of wood and drawers of water?

A. We always thought if we had enough PhDs and engineers we could out-think all those guys, and therefore maintain our quality of life. But they are at least as smart as us, they work harder, and there’s a lot more of them.

So what is our economic advantage? We got natural resources. Water, energy, forests—and we’re brilliant at adding value to them. That’s where scarcity is going to be. That’s the one thing you can’t replicate with cheap, brilliant labour. I don’t think either Ottawa or Toronto has any idea of that yet.