Ed Clark, TD Bank CEO: Full Text Of Speech At Ivey Business Leaders Award Dinner

Ed Clark Td Bank Canada Fiscal Crisis

First Posted: 10/20/11 02:03 PM ET Updated: 10/20/11 02:03 PM ET

Good evening.

I'm delighted so many people have taken time out of their evening to be here -- especially on a night of gale forces and hard rain.

I also want to express my gratitude to Ivey for this incredible award. It"s a true honour to be acknowledged by such an important institution.

Our bank has a long history with the University of Western Ontario and the Richard Ivey School of Business. Many of our top executives have been educated there.

Today we work closely with Ivey -- in what we consider a vital program for our executive team -- teaching them strategy but, more importantly, the culture and values' system that drives so much of our success.

Tonight I'd like to talk about leadership in today's world and, in particular, the role citizens can play in creating the leadership that we will need.

I'm going to highlight the following themes.

A number of economic forces -- in both the immediate and long-term -- are changing the world as we know it.

Long-term demographic forces are causing demands for government services to grow faster than revenues.

Globalization has produced massive increases in income around the world but its benefits have been unevenly distributed.

Today's slow growth economy is accentuating economic and social disparities, as well as exacerbating the gap between government revenues and expenses.

Political leaders are challenged.

Many formed their views and values during the Age of Aquarius, but struggle to apply them in the Age of Austerity.

So big questions need to be asked. Tough decisions will need to be made.

But all that could easily lead to a politics of divisiveness.

There is a risk we bequeath to our children and grandchildren a world of "us against them." Such politics leads inevitably to everyone being worse off.

I believe we -- as leaders in the community -- have a responsibility to help construct the right dialogue; one that helps our leaders communicate the issues in a straight-forward manner, and that leads to solutions where there is some consensus.

So what kind of leadership does the world need today? To understand that you have to define the problem and the context in which leadership will have to be exercised.

Today, the world faces a complex interplay of longer-run structural economic issues and the short-term fallout of the financial crisis.

Let's start with the longer-term issues.

In simple terms, in too many countries in the western world, promises have been made that cannot be kept.

Promises around health care, pensions and support systems, which seemed affordable at the time.

Long-term structural forces make that no longer true -- even if the world were not facing the current economic prospects.

This predicament stems from a growth in government programs and commitments made in a world of growing resources and growing choices.

The post-war period witnessed rapid growth.

The baby boom plus the rise in female participation rates caused labour forces to grow faster than the population, spurring per capita income growth.

The reduction of trade barriers and the productivity spurt after the war reinforced significant increases in real income.

As it happened, government revenues were elastic – they grew faster than nominal GNP giving governments a growth dividend.

Politicians were successful if they had a "vision" -- one where new programs, or improved benefits could reduce inequities, right injustices, make a better country.

This vision resulted in the rapid evolution of government as service provider and regulator.

But as government has grown and expanded, owning in effect, more and more of societies' problems, their own credibility has become more strained.

Indeed the things that produce a better life -- good education systems, better health, modern transportation, clean air and water -- has fallen in the government domain. At the same time the private sector has enjoyed enormous productivity gains in its domain and requires fewer and fewer resources to produce those outputs.

Not surprisingly, there are questions around the limits of governments' managerial capacity and what things and how effectively government can operate.

In some cases the growth in government's immediate obligations didn't even match current levels of income.

In Europe, countries took advantage of joining the Euro to borrow money at dramatically lower spreads and in amounts that were beyond their ability to repay.

Markets were effectively asleep at the wheel and only woke up when the damage had been done.

The United States lived a decade of folly where politicians believed they could fight wars, lower taxes, keep interest rates low and have the country consume more than it produced through leveraging its financial system, citizenship and country.

Its status as a reserve currency made it effectively immune from market pressures.

Canada's position is different.

We are a small country, and were forced in the early 90’s by real market pressures to act.

We did balance the budget, and fix the Canada Pension Plan.

But we should not assume we can avoid a crisis of potential broken promises in the future.

The same demographic trends that helped grow incomes and government revenues are beginning to work in reverse in Canada too.

We have long-term structural imbalances between government revenues and expenses.

At the provincial level growing health care costs threaten to literally crowd out all other provincial expenditures.

So the core issue for the political system moves from what to do with the growth dividend to how to manage a shortfall in revenues relative to growing demands and former promises.

This challenge -- found around the western world and in Canada -- is compounded by the effects of current economic developments, and more broadly globalization.

The US and part of Europe has suffered through what is called a "balance sheet" recession rather than the more typical "income" recession. And, if history is a guide, the recovery will be slow and painful and accompanied by periodic crises.

The prolonged period of slow growth expected will have a profound effect on Canada's recovery and economy.

Obviously the slowdown produces a short-term gap between government revenues and expenses.

But the nature of the recovery will mean the revenue shortfall will last longer -- the pressure on expense growth will be greater.

More importantly, it also risks increasing the structural fiscal deficit as the prolonged period of low growth reduces the growth potential of the economy.

We have hardly begun to appreciate the implications of such a state of affairs.

In addition, a more Japanese-like scenario of an extended period of slow growth is also characterized by persistently low interest rates.

The effect of prolonged low interest rates on many long dated financial future promises is dramatic – defined benefit pension plans become severely challenged and workers with defined contribution plans face retirement incomes well below those that they had expected.

At the same time the distributional effects of globalization are becoming more apparent.

Globalization may make the world better off, and makes those in the western world with highly valued skills better off.

But others are falling behind.

This includes people with skills in less demand, or in direct competition with workers in lower wage countries. Income gaps have widened. The middle class has shrunk. And the working class struggles. While the highest income earners have become better off.

Without fully understanding all the forces at play -- people get it.

They recognize the prize has just got smaller -- and their instinct is to protect their share.

The Tea Party in the United States is an obvious example. Don't focus on their particular solutions. Focus on what drives this movement. Their popularity stems from tapping into the emotion of average Americans -- people who've worked hard and played by the rules all their life but still don’t feel like they've reaped any of the expected benefits.

That also happens to be a message being delivered by those in the "Occupy" movement. They recognize there is no easy solution and -- to their credit -- have avoided being captured by particular solutions. But their message is the same -- they don't like how the world is turning out.

Unfortunately solutions to both the long-term structural issues, and the immediate issues surrounding the financial crisis and the economic problems, are very often tied up in difficult issues of fairness and moral hazard.

Indeed, unlocking the current crises may well require the population to accept government actions laced with moral hazard -- rewarding less disciplined members of society.

For instance, Germans may recognize that they benefited enormously from the Euro, and their government implicitly stood by and permitted the peripheral countries' excesses because their countries were an outlet for German export growth. But they still understandably resist socializing the losses of the inevitable defaults of these countries.

Additionally, the beneficiaries of the globalization believe that their new found higher share of the income pie is deserved and shouldn’t be taken away.

Redistributive policies are fraught with challenges to get the right mix of incentives.

If political leadership in the 70s until the last decade was primarily formed around "what can I do for you with your money," over the last two decades, but with increasing force, an alternate framework has become more popular.

It is built around wedge politics, and a division of society between those who have and deserve, and those who don't have or deserve.

Or on the other side of the political spectrum between those who have and don't deserve and those who don't have and do deserve.

Thankfully this discourse has remained relatively muted in Canada. But the strength of the world trends I've talked about – an aging population, globalization compounded by a financial crisis resulting in a balance sheet recession producing slower growth – are putting pressure on societal allocation of resources. And so we should not be complacent nor too reliant on Canadians' natural desire to find consensus.

What is remarkable today is that even short-term economic outcomes seem highly dependent on political, not economic actions.

For instance, the fiscal challenges faced by the U.S. are not complicated.

There have been numerous commissions with numerous answers.

The debate is entirely political – will promised future entitlements be reduced, or taxation levels be raised?

And whose entitlements and whose taxes?

In Europe, the solutions are less obvious, although again the basic elements are apparent.

The peripheral cannot repay all their debts.

So who bears the pain: the lenders or the broader European population?

And what mechanism is put in place to stop future reckless behaviour?

It is no simple task to unwind this remarkable mess without causing a second financial crisis – but it is impossible to answer the question on how to do it without answering the distributional questions first.

The distributional debates and the discourse about the size and scale of governments are not only a legitimate focus for public and political debate – they are the crucial underpinnings of a democracy.

But the debates, in of themselves, create enormous uncertainty, and risk making the economic outcomes worse.

Extended and divisive debates cause investors, consumers and producers to wait for greater certainty.

For us, the challenge is to have a real debate without it turning into a divisive debate, which in itself produces negative outcomes.

Conversely not talking about the issues has a great cost.

In Canada there is a cone of silence around our longer-term issues.

Many politicians believe talk about structural reform is like touching the third rail of a subway -- you're bound to get zapped.

Unless citizens encourage these difficult conversations, politicians understandably put them off.

And as we know the problems don't go away -- they just get bigger with time.

We are asking a lot of a group of politicians who grew up either in the era of "I can do more for you" or in the era of "I can protect you good people from the bad people" to master the very real shift in leadership required to lead a society to a successful answer to those questions.

But the well being of our country, and indeed today the western world relies on their doing so.

How can we as citizens help our politicians lead us in a constructive dialogue?

Business leaders spend their careers in change management, leading organizations to shift paradigms, find new answers, and rebuild themselves.

What principles would we tell a politician to follow? Several come to mind.

First -- understand the issue and motivations at play. You cannot fix what you don’t understand. Recognize there are not really good guys or bad guys, but people who responded to the incentives that were given. Accept we are where we are.

Secondly -- build consensus. We need leaders who can make the complicated simple - without demonizing. Societies respond at incredible speed when there is consensus about a problem, its nature and the solution.

Three -- make fairness a crucial test for solutions. Recognize that there is no single view of what is fair. Indeed there are divergent views. Help to build a discussion that creates the middle ground.

Fourth -- paint a vision of the future so people see hope for a better world - for themselves and their children. Generation after generation has sacrificed themselves to have a better world.

Fifth -- create a sense of urgency. Faced with difficult choices people's instinct is to wait - hoping better choices will emerge. But waiting can make these issues more intractable.

Sixth -- encourage and legitimize the diversity of ideas in public debate. There is often more than one way to a desired destination. We all want universal health care. But the Swedes, Australians and French all show us there are different routes to get there.

Finally, if fairness is a critical criterion -- so must be economic growth. Growth solves many distributional issues.

What are the framework policies that governments need to sponsor to foster economic growth?

Many of these -- such as investment in education -- are not in contradiction to a focus on fairness. Others may involve tradeoffs. Life isn't always fair -- but where do we find the balance?

So where do we go from here?

The population, and particularly non-political leaders, must help politicians make the shift to a world of constrained government resources.

Here’s how we can help.

Let's stand against divisiveness and political extremes.

Let's support and reward leaders who strive to take the higher ground.

Let's, as citizens, talk about the elephants in the room -- making room for our politicians to act.

Our politicians didn't want to slay the budget - but they learned quickly that they would be supported for doing so.

We encouraged -- and made acceptable -- difficult national conversations.

We must repeat history, and lift the cone of silence.

Let's be open-minded about new ideas and not assume that the way we achieve our goals today will work tomorrow.

We must think outside of the box.

We must be willing to put sacred cows out to pasture.

In a resource-constrained world, clinging to the status quo will hurt -- not help -- those most vulnerable in our society.

We must help our politicians be the leaders we need.

Leaders: Who understand the issues. Who choose the pragmatic over the dogmatic. Leaders who build a consensus around the problem and solution - and paint a vision of a better Canada.

Who celebrate fairness, make tough choices – who are empathetic and convincing.

Who recognize the practical implementation of old principles may be very different from what we have done in the past.

Leaders who recognize that, in the end, economic growth matters and dividing smaller and smaller pies won’t work and that international competition is increasing, not decreasing.

Canada has come though the financial crisis relatively well – and we are rightly proud of this and past efforts that have placed us in good standing.

But looking forward we face many of the same challenges as the western world.

How we address them will be a defining moment in our nation's history and our future course.

We possess incredible advantages. Canada is a civil nation, a compassionate nation, a nation that seeks consensus, and that is confident enough to compromise. These are some of our great traits and traditions. These are some of the things I love most about our country.

We have it in us, as Canadians, to get the issues on the table, to support conversations that are inclusive and respectful and ultimately that benefit all Canadians.

We need not be divisive. And we need not delay.

Now is the time to stand up and speak. Let’s work towards preserving the elements that will make our country great, fair and equitable in a world of constrained government resources, tough global competition and forces driving increasing income disparity.

With our help, we can do it. And we must do it.

Thank you.

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Filed by Daniel Tencer  |