Overseas observers of American politics are certainly disconcerted by the degree of domestic political animosity in the U.S., and by the self-inflicted delegitimization of its democratic institutions in the last two decades. Those who observe similar events from Italy feel a particular shiver run down their spine. Memories of what happened in the early 1990s, when Italy’s state and institutions suffered a severe loss of credibility and the political fight turned fierce and acrimonious, still haunt. Since then, the Italian economy has never recovered, in part because investors need a stable political framework to take risks, particularly around intangible investments.
At that time, Italy’s regional divide became so contentious as to cast doubt over the very unity of the state. The public debt grew at record levels for peace time. Financial instability was so severe that Italy’s exchange rate agreements with European partners were suspended. However, it was the discredit suffered by Italy’s political class that caused the economy to stop growing. The parties’ reciprocal accusations of corruption and hidden interests tore apart the citizens’ sense of community and created a climate of profound mistrust. In the mid-1990s, Italy’s GDP per capita was higher than the United Kingdom, and aligned with Germany’s and France’s. Since then, the income of Italians has dropped by 30% compared to European counterparts.
For economists, the “Italian disease” is still kind of a mystery. In fact, it is especially elusive because the causes of Italy’s economic decline were rooted in political events. In some ways, those events are perhaps similar to what we see in the U.S. today: Deep fractures in government degrade its efficacy, the legitimacy of the highest public offices has been denigrated, and there are attempts to manipulate judicial powers. All this has taken place amid a frenetic electoral cycle in a hyper-partisan media landscape.
On top of this, the International Monetary Fund (IMF) recently estimated that U.S. government debt may amount to 160% of the GDP by 2030, reaching exactly the same level as Italy today. Rising public debts, regardless of why they exist, are a strong amplifier of political uncertainty, and transmit instability to the rest of the economy. In Italy’s experience, this has happened mostly through the effects of political shocks on the prices of government bonds, which are the backbone (the “safe asset”) of the financial system. This produces what is called a “doom-loop” between sovereign and banks debts. In the U.S., the Federal Reserve can mitigate those effects, but this may happen at the cost of eroding the central bank’s credibility in pursuing its monetary objectives. In the long term, risk premiums on the government bonds might become permanently higher and affect economic growth.
The particular uncertainty originating from the state’s institutional framework especially affects “intangible” investments, such as those in research, intellectual property, software, and changes and improvements in labor and capital organization. These investments are riskier than tangible ones because they require high capital engagements and high start-up costs in the face of uncertain outcomes and returns that are postponed over time. Moreover, labor and capital reorganization requires associated political reforms. Finally, if a country’s stability is questioned, banks and financial investors are more wary of engaging and funding intangible investments, from which they will not be able to recover any material collateral in case of failure. Empirical experience and statistical data confirm that for intangible investments to flourish, a first requirement is stability in political and institutional frameworks.
Unfortunately, it is precisely those investments in new ideas, new ventures, new research, or still unknown advanced technologies that will be vital for every country’s development and well-being in the decades to come.
When Italy experienced its phase of exceptional political turbulence and the loss of credibility in its institutions, the economy suffered a dramatic setback. Public and private investments collapsed, and the intangible ones fell by more than 20% between 1992 and 1993. The consequences are still felt today because Italian productivity has never recovered. Entrepreneurs were afraid of immobilizing their capital in an unstable political context. Instead, they chose to cut costs, beginning with the number of employees, and piled pressure on the government to introduce any form of flexibility that allowed firms to expatriate at the first signs of instability. Thirty years later, none of the major Italian private corporations of the time — Fiat (now FCA), Luxottica, Fininvest, or Pirelli, among others — has its legal seat in Italy.
Of course, the early 1990s were a spectacularly wrong time for skirting intangible investments. It was the time in which information technologies emerged as the most transformative power in the production of traditional goods and services, opening the way to innovative solutions, higher productivity, and better-paying jobs.
In many ways, the present moment is an exceptional one too, albeit with differences from the 1990s. Whatever one thinks of the claim that we entered an age of secular stagnation or of excess of savings over investments, there is no doubt that the U.S. needs significant infrastructure investment to bring the quality of the capital stock in line with other advanced or “advancing” economies. The most striking hole is where public and private investments should leverage each other: Just think of the American delays in 5G networks and other important infrastructures, where the material component is indistinguishable from the immaterial one, from air and ground transportation to medical services. The state’s role in incentivizing lower-emission means of power generation or greener transportation, either private or public, is far behind the curve. There is ample space for a catch-up, but making the government work proficiently with the private requires political stability.
Maintaining people’s trust is of paramount importance. The political climate in the U.S. in recent years has been disappointing for anyone who understands the relevance (economic and otherwise) of public consensus around democratic rules and values. Governments must demonstrate to citizens that they (the people) ultimately benefit from the democratic system. In order to do that, improving social policies, such as by upgrading the federal and state safety nets, is key, as well as increasing poor families’ access to quality education. The Italian experience shows that the loss of political credibility and the weakening of the economy are self-sustaining. Once a vicious circle is generated, it is extremely difficult and enormously painful to reverse it.
OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.
Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.
Business, building and support services saw the largest gain in employment.
Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.
Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.
Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.
Friday’s report also shed some light on the financial health of households.
According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.
That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.
People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.
That compares with just under a quarter of those living in an owned home by a household member.
Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.
That compares with about three in 10 more established immigrants and one in four of people born in Canada.
This report by The Canadian Press was first published Nov. 8, 2024.
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.
