By Theo van de Kletersteeg

If you believe the soothing words of politicians and most bank economists, we have nothing to worry about, other than potentially another year or two of small government deficits. But don’t fall asleep yet.

Compared to the “land of milk and honey” that Canada truly was some 45 years ago when the economy was booming, when everyone who wanted a job could find one, when government deficits did not exist, when government debt (for all practical purposes) did not exist, we have fallen a long way. While a minority of the population has done very well, people with below-median incomes have seen their prosperity decline, and are watching their governments just managing to hold things together.

Governments as well as most individual taxpayers are living on the edge, loaded to the gills with debt. Faced with an economy that could no longer produce the revenues necessary to sustain robust spending, governments have been borrowing for decades to maintain services, and to upgrade infrastructure and public assets. Consumers likewise learned that they could replace lost purchasing power with borrowed funds, and later discovered that, based on low interest rates, one could buy homes and cars that previously had been reserved for the truly well-off. Most stuck their heads in the sand and pretended everything was all right. Younger people who had not experienced the prosperity of the sixties did not see anything wrong with borrowing oneself into oblivion.

Living on the edge and having seen most people’s standard of living decline, should we be concerned about our economic prosperity?

The current global fall in oil prices was preceded was a similar fall in the global price of iron ore. Australian and Brazilian producers, the “gorillas” in the global market for iron ore, decided some time ago to flood the market with ore produced from their low-cost mines, realizing full well that, as a result, global prices for this commodity would drop. The anticipated drop in prices would make it more difficult or impossible for high-cost producers to compete, while low-cost producers would still be profitable. Moreover, given that the market for iron ore is dominated by only three producers, they have the ability to reduce output and increase prices at will, making for a very volatile marketplace, which investors do not like. The result in Canada was that new mines planned to open in northern Quebec and Labrador did not open, because the necessary multi-billion dollar financing could not be raised. Furthermore, Cliffs Natural Resources closed its $4 billion Bloom Lake mine early in January because it is losing more money with every tonne of ore it mines.

What happened with iron ore is now playing itself out in oil markets: the largest low-cost oil producers are continuing to produce at full capacity, knowingly contributing to a global oversupply situation. As is common in commodity markets subject to free competition, increasing production leads to reduced prices, compelling higher-cost producers the choice to increase production levels to compensate for lower unit revenues, or to reduce or cease production. Sooner or later, sanity will return to the market, but not without having wreaked considerable havoc in countries hosting higher-cost producers. Indications are that markets for metallurgical coal, copper and liquefied natural gas may become subject to similar kind of international pressures.

If these developments are sustained, this will be catastrophic news for Canada which relies on foreign investors to fund the billions of dollars necessary to put resource properties into production. Without these investments, Canada will not benefit from the tens of thousands of jobs that could be involved in construction and resource exploitation projects, and the direct and indirect tax revenues that would be generated by these economic activities.

Looking back into Canada’s industrial past, when the Avro Arrow fighter interceptor project was cancelled by the Canadian government of the day in 1959, and all of its related assets ordered destroyed, Canada lost a major chance of becoming a “world-class” aircraft manufacturer. Thousands of Canadian engineers left for the U.S. and helped that country become the number one global supplier of military and civil aircraft that it is today. Even today, some experts say that a 1950’s designed Avro Arrow with updated avionics and other appropriate upgrades would outperform any other fighter interceptor available on the market. With Bombardier suffering from well-publicized test setbacks, lower than expected sales of its advanced C-Series aircraft, and other corporate problems, it remains to be seen whether Canada will ultimately be more than a blip on the radar screen of foreign aircraft purchasers.

In technology, it did not take long for Canada’s flagship enterprise, Nortel Networks, to disappear from the scene, and just when so many of its engineers had found new careers with Blackberry Limited, that company too descended rapidly into near-irrelevance. Its new CEO is doing a marvellous job re-directing the company’s strategy, but a turnaround is by no means a slam dunk.

While Ontario, Canada’s manufacturing heartland, was able to overcome Avro’s loss through strong gains in automotive manufacturing (“Auto Pact”), it has suffered badly during the past decade or so as the North American Free Trade Agreement caused many international corporations to rationalize their North American plants. Ontario was dealt considerable blows by the disappearance and downsizing of numerous manufacturing facilities, including those in the steel industry. Ontario’s economy has been “downsized” from Canada’s strongest to one with considerable challenges. Ontario’s heavily-indebted government continues to add to its debt load through deficit spending, which condition is expected to last for a number of years and could worsen if Ontario’s auto industry should find that lower costs to build vehicles in Mexico would be a compelling reason to move there.

With regard to exports, whereas 45 years ago Canada produced consistent and large trade surpluses month after month, such surpluses have largely given way to deficits, with only occasional surpluses.

Coming back to oil, and assuming that prices will continue to fall for some time, this may sound like good news for consumers, but bad news for the economies of all provinces as purchases of oil-related equipment and supplies will be delayed or cancelled, and as previously highly-paid surplus workers return to their home provinces. Furthermore, financial institutions will feel the brunt of mortgage, auto loans and credit card defaults. Mutual fund holders and energy investors will feel poorer as the value of their assets decline, and will not be as eager to spend as before.

It took a long time for Canada’s economy to decline and, equally, it will take a long time to restore its former growth, especially when it appears the economy will be facing more headwinds in 2015. What should be done? I suspect that building a more prosperous Canada will entail numerous baby steps that, while minor individually, will be part of a very complex puzzle. If it were my choice, I would start at the beginning, with education reform. Increasingly, our educational system has failed to keep up with the needs of our economy, and is therefore one of the reasons why our economy is performing at below-capacity levels. Our economy needs appropriately-skilled people and our high school students need to be given the tools to allow them to contribute positively to society, and to lead satisfying lives.

No, we are not all right. We have lost our way and, unless we take action to address fundamental underlying problems, new generations of Canadians will find it increasingly difficult to make ends meet, and to find challenge and fulfillment in their lives.