U.S. Protest Vote in Midterm Elections is Good for Canada

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Appeared in Stockwatch.com
A Republican majority in the House of Representatives under the watchful eye of Tea Party activists might just be good for Canada.

U.S voters gave the newly-minted Congress a mandate to reduce government spending in Washington and stave off ill-directed tax increases that would further weaken the American economy. As a result, we should expect fiscal restraint and a rise in economic confidence, which should in turn stimulate Canada’s economy, which still sells 75 per cent of its exports to the United States.

America’s vast national debt and the high level of government spending are rightfully among the top concerns for a large segment of American voters. With a $1.5 trillion projected annual deficit for 2010, Americans are spending eight per cent of their income to pay off government debt. Under current projections, that load will not ease in the next 10 years. By 2020, the total debt is expected to double and reach $20.3 trillion, leaving an annual deficit of $1.25 trillion.

No wonder Tea Party-backed candidates captured more than one third of the Republican votes. Numerous polls have indicated that sizeable majorities of voters believe that U.S. federal spending is unsustainable and that the debt is clouding America’s economic future. Add to this the continuing high unemployment level (9.6 per cent), and the reason for voter unease about the Obama administration’s policies is clear.

We have just witnessed a decisive protest vote against the status quo. Many of the newcomers in Congress ran on platforms to reduce American public debt and not raise taxes. Spending cuts in domestic programs, as well as reductions in domestic discretionary and even military spending, are needed to bring back fiscal discipline. The Obama administration will now have to compromise and work with the new Republican majority.

If investor confidence can be restored and government interference in the economy rolled back, economic prospects for Canada will pick up. Fiscal discipline and renewed American economic growth will foster two specific benefits to Canada: higher exports, plus downward pressure on the Canadian dollar relative to the American dollar. Canada's economic recovery has been sputtering this year due to the weakness of the American economy. Canadian-American trade is still below the 2008 level. Lack of confidence in the future of the American economy is part of the reason why the Canadian dollar is trading around 98 U.S. cents. Such a high dollar has been a significant obstacle to increasing our exports to the United States.

A Republican majority in the House also means that the United States will not take any action to penalize Canadian crude oil products. Democrats such as Henry Waxman, Democratic Chairman of the House Energy and Commerce Committee, were keen to do exactly that.

The time for serious compromise between fiscally responsible Republicans and Democrats is now. Canadians have a lot at stake.