No Risk Please, We’re Canadian
Mark Carney said something terribly rude last week.
Canadian companies have $562 billion in cash reserves, noted the governor of the Bank of Canada, up from $370 billion when the recession ended in mid-2009. That’s a giant pile of “dead money” and it should be put to work, Carney said. “If companies can’t figure out what to do with it, then they should give it to shareholders and they’ll figure it out.”
Corporate Canada and its many friends and admirers were having none of it. “Few companies want to weaken their cash reserves that might come in quite handy if a double-dip recession occurs in Canada, or south of the border,” wrote the Calgary Herald’s editorial board. “Such reticence is called prudence.”
Ah, yes. Reticence and Prudence. Among the most popular names for baby girls in Canada.
Of course it is always sensible for a company to hold onto a certain amount of cash, just as companies should have sprinkler systems in their offices to minimize the risk of fire. But cash held as a pre-caution is cash not invested on machinery and equipment, training, research and development, or any of the other things companies must spend on in order to innovate, improve productivity, and grow. Caution has a cost.
So real prudence consists of striking the right balance between keeping some cash on hand to deal with misfortune and investing cash to develop the business: A sprinkler system is a sensible precaution against fire; having a fire truck and a squad of firemen permanently stationed at your office building is not.
Are Canadian companies striking the right balance? One way to answer that is to look at how much cash American businesses are carrying.
It’s about two trillion dollars. Factor in the difference in the scale of American economy and it’s clear that American businesses are holding onto far less “dead money” than their Canadian equivalents.
Now, it’s tempting to think that only shows the Yanks have got it wrong. Again. Remember the American real estate bubble? The financial products it floated? The meltdown of 2008? Americans are foolhardy. They love risk. And they’re paying for it.
Not us Canadians. We are risk-averse. We name our daughters Reticence and Prudence. It’s why we didn’t have a real estate bubble, dodgy financial instruments, and bank failure. It’s why we are doing so much better than the Americans now. The Yanks should do things our way, not vice versa.
There’s something to this line of thinking. Canadian business culture is indeed risk-averse and that risk aversion did help insulate this country’s banks, and the country, from the meltdown of 2008.
But let’s not be smug about this. Superior Canadian virtue is not the principal reason we are doing well. The decade-long commodity boom is. Or to put that another way: We got lucky.
And let’s not lose sight of a more fundamental point about risk.
“Risk” doesn’t only mean “danger.” It’s also opportunity. When Ug told Mug he was leaving the cave to see what was in the valley beyond the hills, there was a chance he would be eaten by sabre-tooth tigers – but there was also a chance that he would discover a richer land where he and his descendants would prosper while Mug and his risk-averse descendants continued to live in the squalor of the cave.
In business, the dual-edged nature of risk means risk-aversion will sometimes pay off, as it did in 2008. But financial meltdowns are rare calamities. What happens every day, all over the world, is the relentless advance of innovation, improved productivity, and growth. That’s the process by which wealth is created. And a culture of risk aversion doesn’t help it. In fact, it hinders it.
In June, when the Organization for Economic Cooperation and Development (OECD) released its latest report on Canada, it hit on a theme that is depressingly familiar to economists: Canada’s productivity growth is awful. And getting worse. “Canada’s over-all productivity has actually fall-en since 2002,” the report noted, “while it has grown by about 30 per cent over the past 20 years in the United States.” On a chart, the lines tracing Canadian and American productivity are essentially equal in the late 1980s but slowly diverge in the 1990s and then, in the last decade, an enormous gap opens.
If we don’t close that gap, our prosperity will slip away when the commodity boom goes. And the commodity boom will go. They all do.
So how do we improve productivity? “Twenty years ago we created a laundry list of the things we needed to change in the policy front and productivity would blossom,” says Don Drummond, one of the country’s leading economists.
“And you know, we changed most of them but productivity didn’t blossom.”
Canadian corporations got lower taxes and all sorts of incentives to invest. But they didn’t, and they aren’t, at least not at anything like the rate that’s needed. According to the C.D. Howe Institute, investment per worker has risen from $10,100 in 2009 to $11,600 in 2011. But in 2011, American companies invested $13,200 per worker.
“We are heavily underinvested in machinery and equipment, particularly high technology stuff, relative to the U.S.,” notes Don Drummond. “We have roughly half the stock of machinery and equipment per hour worked in Canada that the U.S. does.” The figures for research and development are even worse: Canadian business spends about one per cent of GDP on it, compared to two per cent in the U.S. and 2.5 per cent in Japan, the Scandinavian countries, and others in the OECD.
Drummond and many others are convinced Canada’s culture of risk aversion is a big factor in all this.
Don’t invest. Don’t seek out new opportunities in emerging economies. Don’t be bold and aggressive and go see what lies in the valley beyond the hills. If we try something new we might be eaten by sabre-tooth tigers. And besides, things are pretty comfortable here in the cave.
Of course that attitude will eventually make things much less comfortable in the cave, but that’s not apparent now. Today, things are ducky. Did you hear that the average Canadian household is now wealthier than the average American? Delightful!
Whatever we’re doing must be working, right? So let’s keep that cash stuffed in the mattress, put little Reticence and Prudence in bed, and read them a fairy tale. We can all nod off together.