PART ONE: THE CANADIAN ECONOMY

In a country as massive as Canada, widely different economic processes can be unfolding in different parts of the country. This is certainly the case today; while the west is booming, the rest of the country is facing economic stagnation. Workers in the heart of Canada’s manufacturing sector (Ontario and Québec) are facing cuts, layoffs, and factory closures. Meanwhile, a runaway oil boom in the west is posing its own problems. All of this is complicated by a massive housing boom, which is fueling both job creation and debt based spending. It would be easy to look at all of these different processes in isolation, but they are actually much more connected than even most economists realize.

The Housing Bubble

“This is purely a speculative bubble – a bubble bigger than the stock market boom of the late 1990s that collapsed in 2000 or the great boom of the 1920s that ended in the Great Depression of 1929-33. The Economist reckons it is the biggest bubble in history!” – Michael Roberts, 15th June 2005

In nearly every industrialized country in the world, a real estate boom has been raging for the last four years. Though there are signs of this boom cooling off in several countries, most notably the USA, in Canada it is still racing.

“Resale home prices continued to rise in Canada’s major markets, reaching an all-time high in February, new figures show. The average selling price in 25 major markets across the country was a record $311,101 last month, according to Multiple Listing Service data from the Canadian Real Estate Association. That’s up 10 per cent from a year earlier and is up almost $12,000 from January’s average. New average price records were established in Calgary, Edmonton, Toronto, Hamilton-Burlington, London and St. Thomas, Ottawa, Quebec City, and Saint John, CREA said.” – CBC News, 14th March 2007

The effects of the housing boom on the Canadian economy have been underestimated by many. Low interest rates have fueled construction as thousands of first time home-buyers have entered the market. Tens of thousands of jobs have been created in residential construction, driving down unemployment figures in the west. And the construction boom has driven up lumber and resource prices, too. So far, this has mitigated some of the effects of the manufacturing crisis in Quebec and has helped drive a boom in British Columbia.

But there is a more sinister side to this boom. To begin with, it is on incredibly shaky ground. Housing prices will only stay up as long as people keep buying houses. A classic crisis of overproduction is being prepared. As soon as interest rates go up, the market will cool. There is a possibility that the entire process could be turned on its head. As interest rates go up, there will be more bankruptcies, which will, in turn, force banks to raise interest rates even higher to compensate for the loss. All the while housing prices plummet. This prospect threatens the entire world, as the real estate boom is one of the pillars presently holding up the world economy.

Then there is the situation for the workers in the industry. Most of the residential construction industry in Canada is run through sub-contracting. This scheme allows developers to pass all of their financial risk on to the workers, while giving themselves a guaranteed profit rate. It is a dream come true for the big developers. They simply buy a piece of land and a design for a townhouse complex. Before they even break ground on the project, all of the houses are sold and they’ve made their money. They then find a general contractor, who bids on the contract, to build the whole thing. This contractor in turn purchases the materials and oversees the project. He then contracts small companies for each trade: a framing crew to build the houses, another company for the electrical work, another for the plumbing, and so on. But it doesn’t stop there. Each crew is full of sub-contractors. Every tradesman is brought on as self-employed businessmen who work for a piecework rate. In this way, the entire financial risk is passed on to the workers themselves. If there is a delay in the project, it is the worker who suffers. If material prices increase, it is the small crew of tradesmen that lose money.

What once would have been a large construction company, centrally organized and operated, is now divided into dozens of small companies trying to get by and an organizational nightmare. As a result, if there is any glitch in production, a crew goes bankrupt. In British Columbia, despite the red-hot market, there have been more company bankruptcies in the construction industry than in any other industry in the province every year since 2003. It is this threat that forces tradesmen to cut corners and lowers the quality of everything being built; so much for competition benefiting consumers.

The other major flaw to this structure has not been realized yet, but will be the moment the boom turns around. Since these workers are not employees, they have no employment rights. They have no paid vacation, no statutory holidays, no right to form a union, and, most importantly, no unemployment insurance. If these workers are laid off in the future (and they will be), there is no social safety net for them. This is a disaster waiting to happen.

The housing boom is also fueling debt-based consumer spending. As property values increase, so does the net worth of home-owners. This has allowed banks to push loans and credit cards onto a new consumer base. The working class, not used to such flexibility has seized the opportunity to but items that have long been beyond their reach. In the last five years, consumer credit debt (excluding mortgages) has risen from $216,100,000 to a staggering $321,166,000. This is an unprecedented rise in credit based spending. At some point, this money will either be paid back (demolishing the market for consumer goods), or there will be mass bankruptcies (demolishing the profits of the banks). There are many possible scenarios that this situation can lead to, but none of them end well.

The Alberta Advantage

The oil industry in Alberta is booming like never before. The steady increase of oil prices over the last several years has made it profitable to process Alberta’s oil sands. This process requires a lot of energy and water, so the cost is much higher than simply pumping oil out of the ground. This means that the oil sands projects have larger secondary economic benefits, as they need to produce more operating infrastructure. It also means the environmental damage is much greater, but this is of little importance to the oil industry. The booming Alberta economy is an oasis amongst the desert of the world economy. Natural gas and oil now account for over 70% of Alberta’s exports.

Alberta’s massive oil deposits are being pillaged by the big oil companies who are celebrating a windfall of billions of dollars. They’re throwing money around like drunks in a casino. Calgary is full of Hummers and cowboy hats as the rich spend their loot. In a move that shows the mindset of the ruling class, Bentley has opened a dealership in Calgary. Why spend money on social programs for the people when you could by yourself a $400,000 convertible?

The oil companies’ desperate drive to increase production has left Alberta with a labour shortage. The unemployment rate currently sits at a historically low level of 3.5%. This has meant a rise in wages for the working class. Last year the average weekly earnings rose nearly 5% to $817.47, a full $70 above the national average. But the benefits for the working class come with a host of other problems. A massive migration of people looking for work has swelled the population of the province and squeezed its infrastructure. There is a shortage of housing and the roads cannot accommodate the increased traffic. Many workers who go off to the oil rigs often come back addicted to drugs. This is the other reality of the Alberta advantage.

Manufacturing slump

Last year, the Fightback editorial board explained the relation between the booming oil industry and the slumping manufacturing sector.

“Both the industrial and political basis of the dominance of Ontario is being undermined and the general trend is for this erosion of influence to continue.
“A combination of a high dollar, high oil prices, and cheap-labour competition from places such as China, has led to a crisis in Canadian manufacturing. Steven Poloz, Chief Economist and VP of Export Development Canada, warned of the possibility of “Dutch disease” in October 2005:
“Dutch disease can be contracted by any economy that produces a key resource and has a manufacturing sector, too. Suppose the world price of the resource shoots up, causing the sector to boom. This will generally cause the economy’s currency to appreciate, putting stress on the manufacturing sector. Something like this happened to the Netherlands in the 1970s, when energy prices jumped and the Dutch guilder rose – hence the name of the illness.
“Obviously, the current situation has the potential to inflict Dutch disease on Canada. Oil prices have ratcheted higher in the past year, boosting the Canadian dollar into the mid-80s against the U.S. dollar. While high oil prices benefit some exporters – producers of petroleum, oil and gas equipment, energy exploration companies and engineering firms – others receive fewer Canadian dollars for each U.S. dollar export sale. Only if exporters are importing some inputs do they have any chance of offsetting the stronger currency, because those import costs are reduced.”
“Since this editorial was written Dutch disease has hit full force. 200,000 manufacturing jobs have been lost since November 2002.”

Of course “Dutch Disease” is only part of the problem. While it is true that the resource sector and the manufacturing sectors are often in conflict with each other, they are not the only competing sectors of the Canadian economy. The shipping and warehousing industry is booming in BC. The boom is based entirely on the sharp increase of imports from China and, of course, the export of raw materials to China. While Vancouver’s ports are expanding, the trains are running around the clock. But these imports are undercutting the manufactured goods from eastern Canada.

A brief look at Canada’s manufacturing sector reveals an immediate crisis. The centre of the Canadian manufacturing industry (and until recently, the Canadian economy) is Ontario and Québec. Together, the two provinces account for 75% of exported manufactured products. Over 2 million workers are employed in the manufacturing sector. These jobs have traditionally provided much of Canada’s consumer base and have acted as a barometer for the general health of the Canadian economy. It is for this reason that the weakness in the manufacturing sector is alarming many economists.

In the last year, Ontario has lost 5.1% of its manufacturing jobs; in Québec, the situation is even worse with 7.9% of its manufacturing jobs disappearing between February 2006 and February 2007. But despite the loss of manufacturing jobs, the unemployment rates in Ontario and Québec remain much the same. Ontario’s unemployment rate has hovered between 6% and 6.5%, while Québec’s unemployment rate has actually come down slightly to 7.8%. How is this possible?

While manufacturing jobs are disappearing, new jobs are being created in the hotel and service industry. In Ontario alone, over 30,000 service industry jobs have been created in the last year. All of this weighs down the economy, as the service industry traditionally pays their employees much less than the manufacturing industry. While economists quietly worry about the erosion of their consumer base, there is a much greater problem that they should be concerned about: the effect this is having on the consciousness of the working class.

In the next installment the authors analyze the progression of the class struggle in the Canadian labour movement.

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