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Freedom Profiles: Canada beats US when it really counts

Congratulations to Team Canada for taking the hockey gold from the United States in the Olympics. Getting the silver sucks. No one talks about the first game Team USA beat Canada 5-3. No one will remember the last minute score by Zach Parise put us into sudden death overtime. To the victors go the spoils. 

There is another healthy competition in which the United States and Canada are engaged: the competition for talent and capital formation. The winner is the team that allows the greatest degree of economic freedom and rule of law. Unfortunately, Team USA is trailing Team Canada where it counts.
I recently spoke with a prominent investment banker in Toronto about the changes happening in the US. “That’s not the USA that I know”, he said as he expressed shock on two overriding themes: the bailout of the auto and financial sectors and the salary caps on executives who took Tarp money (the pay czar has even claimed authority over non-Tarp companies). He also expressed optimism for good times in Toronto if the US continues as corporations flee taxes and regulations to the shores of Lake Ontario.
There are many reasons to believe that he is right.
Think Tanks Agree, Canada Takes Gold

The US has always been way ahead of Canada in terms of economic freedom and lassiez-faire economics, as measured by independent think tanks. Health care aside, the US has been giving up it’s freedom gold and Canada is set to reclaim it. Here is how those two countries compare in terms of freedom:
  • Fraser Institute:          Team Canada: 8.1              Team USA:   8.0 
  • Heritage Foundation:    Team Canada: 80.4            Team USA: 78.0
In both studies, Canada wins.  You can see how Canada has come from behind to beat the USA at its own game:

How Canada “gets it right”
  1. Tax Burden: Canada has moderate tax rates. The top federal income tax rate is 29 percent, and provincial rates range from 10 percent to 24 percent. The general corporate tax rate is 19.5 percent. Top corporate and income tax rates in the United States are 35%, with state taxes ranging from zero to 15% (See http://bit.ly/9OScuq).
  2. Provincial Rights: In Canada, the Income Taxes are divided between the Federal Taxes and Provincial in a ratio of about 60/40. In the United States it is roughly 80% Federal, 20% State Income Tax. The tax burden is reflective of the balance of power. Whereas, the United States, political power is top heavy, in Canada, the provinces have much greater leeway and control over taxation and services. That allows some provinces such as Alberta, to enjoy low taxes, low regulation, and greater economic freedom than you can find anywhere in the United States except Delaware, while Quebec is enjoying the diktats of Karl Marx (See http://bit.ly/awt64q page 11).
  3. Tariffs: Average Tariffs in Canada are 1.0%. The United States is 1.5%.  Our non-tariff trade barriers are also more significant as we are now reneging on our agreement with Mexico to make cargo truck transportation easier and slapping on retaliatory duties on Chinese goods.  Meanwhile, guess who swept in from behind while the Congress dithered on the Colombia Free Trade agreement?:  Team Canada.  In fact they signed a hat trick in 2009, Colombia, Peru and the EU. 
  4. Freedom of Movement: Canada has an immigration policy based upon the simple economics of supply and demand. Getting a skilled worker visa is relatively quick and easy. The US has a dysfunctional immigration system based upon family relationships and politics.  Understanding that with 10% unemployment immigration is not a popular subject, nevertheless, legal immigrants provide a foreign born boost to entrepreneurial activity.
  5. Business Freedom: Starting a business is quicker and easier in Canada vs the United States.  It takes an average of five days, which is very low compared to the world average of 35 days.  The US is just behind at six days.
  6. Corruption: Corruption is perceived as minimal. Canada ranks 9th out of 179 countries in Transparency International’s Corruption Perceptions Index for 2008. The US is 18th.
Currency Markets Agree

The currency markets seems to echo this sentiment.  Commodities aside, currencies get stronger with economic prospects are monetary prudence. They get weaker, i.e. inflation, with fiscal and monetary mismanagement. The Canadian dollar has been getting dstronger, while the freedom gap vs. the US has been closing. In other words, the currency markets are betting on team Canada. See the long term trend below.  


One thing is certain, economies are not zero-sum games.  Healthy competition can make both economies better.  Even so, silver medals still suck. 


Disclosure: spx, tsx