The Sumner Epiphany: Making the Better Widget With Our High Dollar

A long, long time ago your loyal scribe was a nervous insecure but wholesome 18 year old sitting in his first economics class at the University of Guelph.  Professor Sumner was visiting from England and he had the task of teaching yours truly about the dismal science of economics.  It surely wasn’t a marriage made in heaven.

Simply put Professor Sumner and most of that class got off to a rough start.  He couldn’t get the average class mark above 20% and with me sitting at 22% I didn’t think my future, as an economist was very secure.  Luckily for me Professor Sumner had an epiphany.  He realized what he was doing wasn’t working and he worked with the class to get us a passing grade.  I’m sure his British academic background plus being fresh off the boat really hindered him.

I bring this up because I read a wonderful column by Toronto Star economics writer David Crane last Monday.  Crane wrote a piece about how the high dollar can actually be good for Canada as it forces us to become more productive.  It was a great read but for some reason it made me think of Professor Sumner.  I’ll tell you why later.

David Crane argues like I have in the past that the higher dollar will force us to become more innovative to compete on the global market.  He gives a couple of examples of how the high dollar is affecting our “competitive position” as Canadians.  The following is a direct quote from his article.

“For instance, let’s say you run an auto parts company that sells to the U.S., and your product is priced at $7.50 (U.S.) per unit. When our dollar was 65 cents (U.S.), as it was just a few years ago, that meant the auto parts company actually got $11.55 (Canadian) for each unit sold. But with the dollar at 95 cents (U.S.), the Canadian auto parts company only gets $7.88 (Canadian) for each unit”.

“Even resource companies, which price in U.S. dollars, feel the pain. When oil was selling at $60 (U.S.) a barrel, with a 65-cent dollar the Canadian oil company would get $92.40 (Canadian) a barrel. But if oil hits $80 (U.S.) a barrel and our dollar is at 95 cents, then the Canadian oil exporter would get just $84 in Canadian dollars. Mining and forest products companies are hit in the same way since they also price in U.S. dollars”. (Hot Loonie Not All Doom and Gloom, David Crane July 16, Toronto Star)

You can see from Crane’s examples how our higher loonie is affecting our economy.  It’s got to be driving Ontario treasurer Greg Sorbara crazy as he tries to steer the Ontario economy into an election.  Leaping over those big foreign exchange losses is a challenge.

An argument can be made that things got a little sloppy when the Canadian dollar was at 62 cents briefly in 2002. In other words Canadian exporters were living in the 62-cent world.  You could afford to be a bit inefficient and make it up in the foreign exchange.  All of that’s gone now.  With the dollar briefly topping 96 cents Monday, our innovation skills are going to have to go into overdrive.

So what’ll we do?  Well, that’s where my old Professor Sumner comes in.  Back in the day when he was having such a hard time getting through to us young Canadians I wrote him a note on my exam.  I told him that Canadians don’t know what widgets were.  In fact I’d never heard of them.  They must be some British concoction.

I’m sure when Professor Sumner read that he recoiled.  A “widget” is a mythical economic product which academic economists use in teaching all the time.  “How does this affect the price of widgets?”  How will this or that affect the supply of widgets?  Can we make a better widget, etc., etc, etc.  Nobody really knows what a widget is like, its simply used to describe common economic theory.  It’s the basis of introductory economics.

Anyway, sitting in that class with a 22% average I didn’t know that.  However, I quickly learned after the Sumner epiphany I’d better find out “what’s up with widgets”.  And after reading David Crane’s article about how this high dollar might not be so bad, I thought we’d better get our widgets in a row.

That means in this high dollar world, Canadians have to make better widgets, at lower costs and make sure we can deliver them on time.  From a service perspective we’ve got service those widgets and make everybody want more of them despite a 95/96-cent dollar.

Is that a tall order?  I think so.  David Crane thinks so too.  However, we don’t have a choice people.  Increased productivity is key.  We’ve got to move those widgets like we’ve never before.