Manufacturing pointlessness

I can understand that the Toronto Star's editorial board has fallen victim to the Manufacturing Obsession, and that it feels obliged to make the case that the interests of seven people who work outside the manufacturing sector are as nothing before those of a single Manufacturing Worker. But I can't understand why it thinks that The Cause will be helped by calling on the Bank of Canada to lower interest rates in order to bring the exchange rate back down.

The problems of the Canadian manufacturing sector are best summarised by the following graph from a National Post Op-Ed by the CD Howe's Institute's Wayne Robson:

During the past 5 years, the price of automobiles relative to oil has decreased by about a factor of about three. If you were in the business of producing cars and oil, then the appropriate response to this kind of a relative price shift is to re-allocate productive resources away from cars and into oil. And that's what has happened, to the general benefit of Canadians. (See also this). But if sustained real wage growth and record employment rates are part of a package that involves a smaller fraction of the work force employed by the manufacturing sector, then The Star wants no part of it. If relative price movements are the cause, then by golly, The Star will  do all it can to get influence public policy so that those relative prices go back to where they were.

Except that it's choosing the wrong relative price as a focus for policy. Suppose that the Bank of Canada did decide to abandon inflation targeting in order to lower the CAD-USD exchange rate. Manufacturing exports would become more profitable. So would energy exports. A lower exchange rate would have no effect on the trends that are leading to a transfer of productive resources out of the manufacturing sector.

Comments

[Erin Weir]

Higher oil prices certainly justify some transfer of resources into oil production. However, artificially low provincial royalties have arguably driven this transfer past its optimal point. Furthermore, it is not a given that the resources transferred into oil production needed to come out of manufacturing. (The price of oil has increased in relation to the price of almost everything else, not just manufactured goods.)

Also, an op-ed by Donner and Peters posted in The Star’s online edition does not necessarily reflect the editorial board’s views.