11/30/2011
By Charles Payne

Last week I read where Sal "the Ironworker" Montagna died on the bank of a river near Montreal. As a big time Soprano's fan and as someone fascinated with the mob, this rubout was particularly intriguing. Sal was a big deal in the United States when he rose to become head of the Bonnano family in 2006 at only 35 years old. Apparently, because he grew up in Sicily where the vow of silence "omerta" was still observed, Sal got the nod. Known as a tough guy with old fashioned values, the operator of Matrix Steel (hence the nickname) was clipped by authorities and eventually deported out of the nation in 2009.

Sal headed to Canada where he began a campaign to take over the Rizzuto Clan whose head was ironically enough stuck in an American prison. It wasn't as easy as one would think, or at least as an American would think, to take over the Canadian operation. There was a series of murders and kidnappings. In the end, it seems someone shot Sal, who then jumped into a river to escape, only to die on the other side. The story got me thinking about toughness in general, and if Americans are as tough as their Canadian neighbors. Outside of hockey, I just never thought of Canucks as tough people.

Of course they come from tough stock and can knock'em back with the best of them, but I keep seeing those Canadian Mounties or hearing the lyrics from Drake's new CD and there is no way they are tougher than Americans, right?
Yet, not only did one of our toughest gangsters go to the Great White North and get snuffed, Canadians are enjoying an enviable economic surge, because they had the guts to tough out spending reforms.

Our political leaders can't cobble together a drop-in-the-bucket cut in our debt load, and one has to wonder how smooth the next continuing resolution will be? Canada was in a lot of trouble not too long ago. Then "The Maple Leaf Miracle" happened after a serious political commitment. Right now our economic problems can be solved. We don't need a miracle, but the clock is ticking.

Vast Waste Land

When I lived in North Dakota, the only thing worse than that bad penny you got stuck with from time to time was any coin minted in Canada. It wasn't a great period for Canada, which kind of seems to have put little emphasis on business. The fact is the country still has a lot of work to go with respect to building global powerhouse businesses. Right now outside of resources businesses, there's only Research in Motion and Cirque Soleil with international presence but the former is looking ragged. But that was once true for the entire Canadian economy which saw the worst GDP per capita performance from 1989 to 1996 and capital productivity was worst than all industrialized nations, even Japan who has lost two decades.

Shining Maple Leaf

In April 1993, Canada lost its coveted AAA debt rating which underscored its lost ways and inability to deal with its debt crisis. A new budget would have to be prudent, get government right, create a smaller public service, reduce business subsidies, protect elderly benefits and eliminate certain tax on business income. If that sounds familiar that's the exact challenge facing our elected leaders today.

In 1995, a landmark Canadian budget was passed that included:

> Three year savings of up to $29.0 billion of which $25.3 billion came from expenditure cuts
> Cutting expenditures and increasing taxes at ratio of $7.00 cuts to $1.00 of revenue
> No increase in personal income tax rates
> Dramatic cuts in departmental budgets (some halved in three years)
> Cutting civil service sector by 45,000 fewer positions or 25%
> Reforming pension program
> Business subsidies cut 60%

There was a call for higher business taxes, but as it turns out, corporate rates decreased to 18% on January 1, 2010, from 21% and will drop to 15% in 2012. Right now corporate tax rates in Canada are the lowest in the G7. In addition, taxes on business investment, debt and deficit are the lowest in the G7. Meanwhile, the nation has the most skilled work force, with highest portion of post-secondary graduates in OECD and provides the most generous research and development tax incentives in industrialized world. There is universal health care with government funding 70% of total healthcare versus 50% in United States (Medicare and Medicaid).

Government spending as percentage of GDP peaked in Canada at 53% in 1992 to 40% in 2008, during that period in the U.S. the number was around 36%, but its climbing fast, to 39% in 2008 and 42.7% in 2009.

In 2002, S&P restored Canada's AAA rating. Four other countries have gotten their AAA status back, Australia, Denmark, Finland and Sweden through a variety of approaches; all but Denmark were pro-business, less government spending. So back to the question: are Canadians tougher than Americans? Well according to prohockey-fans.com all of the top ten goons in NHL history were born in Canada: 10 Dave Brown, 9 Stu Grimson, 8 Tie Domi, 7 Gordie Howe, 6 Clark Gillies, 5 Terry O'Reilly, 4 Joey Kocur, 3 Dave Schultz, 2 Dave Semeko tied with Bob Probent and 1 Dave "Tiger" Williams.

There's no doubt our mathematic situation is infinitely more complex and numbers significantly higher, but at the end of the day, it comes down to political will. Right now, it's no contest. We don't have the guts.

Charles Payne
Wall Street Strategies