Philip Cross: Trudeau runs Ottawa like a Silicon Valley startup

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Prime Minister Trudeau recently questioned the viability of exporting liquified natural gas from Canada’s East Coast to Europe, saying there has “never been a strong business case” for such projects — even as natural gas prices soared in a Europe weaning itself from Russian supplies. Trudeau’s background is in teaching, not business, so I doubt he knows much about evaluating business cases. But we citizens can discern the business model he evidently favours based on how his government has operated for the last seven years.

Since its election the Trudeau government’s strategy has been to ramp up spending and finance it with a steady string of budget deficits issued at low interest rates as it waits — probably vainly — for its various “investments” in human capital and green energy to generate future revenues. Government program spending rose rapidly even before the pandemic, from 12.5 per cent of GDP when Trudeau took power to 14.6 per cent in 2020 and then, according to this month’s fiscal update, to 15.7 per cent in 2022-23. Over half this increase was debt-financed, as revenues rose only from 14.7 per cent of GDP in 2015-16 to 16.0 percent in 2022-23. This debt-based strategy assumed that: interest rates would stay low, willing investors could be found once the Bank of Canada stopped buying the government’s debt and future revenues would materialize. This is a risky plan for an economy built on highly cyclical industries such as housing, autos, technology and natural resources.

Justin Trudeau has consistently shown no interest in cutting costs, either in his government or in his choice of hotels

Mr. Trudeau’s financial strategy most closely resembles the Silicon Valley model, as outlined by Alexandre Lazarow, venture capitalist and adjunct professor of entrepreneurship at the Middlebury Institute in Monterey, in his book Out-Innovate: How Global Entrepreneurs from Delhi to Detroit Are Rewriting the Rules of Silicon Valley. The Silicon Valley model of startups requires venture capital investment up front and regular injections of cash as firms struggle to cross the so-called “valley of death,” in which their costs outstrip their revenues. A few tech firms achieve the status of unicorn, with their valuation growing to $1 billion or more, but 70 per cent fail before generating sufficient profits and many more fail afterwards according to Lazarow.

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In terms of culture, Silicon Valley could have been a template for the Trudeau government. It is obsessed with youth, idealizing the myth of a twentysomething college dropout building a company in a garage, when the reality is the average tech startup founder is 42 years old. Trudeau himself lionizes youth, so much so that he kept the government’s youth portfolio for his own. Silicon Valley firms are also highly centralized, reflecting their domination by outsized personalities such as Steve Jobs, Mark Zuckerberg and Elon Musk, just as Trudeau dominates his government. The downside of Silicon Valley includes its high cost of living, especially housing, and questionable ethics, including a litany of sexual harassment and misogyny — problems that have surfaced from time to time during Trudeau’s administration.

Lazarow argues that while the Silicon Valley model has worked for California’s tech industry, it is not suitable for most industries or countries. This is because what he calls “frontier” firms operating outside Silicon Valley have limited venture capital funding, fewer skilled workers and decentralized corporate structures. Instead of striving to be unicorns, a better model for frontier firms is “camels,” or firms that are built to capitalize on opportunity but are also sustainable and resilient, capable of surviving cyclical droughts in either financing or sales. A key difference between frontier firms and Silicon Valley is their attitude to cost restraint; in the words of one Chicago businessman, “managing costs is not something you hear about (in Silicon Valley). If you are not managing costs, you are not building a business. You are building a financial instrument, which is not healthy.” For his part, Justin Trudeau has consistently shown no interest in cutting costs, either in his government or in his choice of hotels.

The federal government’s business model since 2015 resembles the Silicon Valley approach of burning through cash while hoping for a moonshot return on its spending. Like high-tech startups, the federal government is exceptionally vulnerable to higher interest rates, which have sharply curtailed projected revenue growth while nearly doubling interest payments on debt in just two years. A better approach would have been emulating the camel’s emphasis on sustainability and resilience by cutting costs, being efficient and conserving resources for life’s inevitable ups and downs. Unfortunately for Canadian taxpayers, Mr. Trudeau appears to have the wrong instinct about which business model to emulate and no credibility in evaluating which business cases could be successful.

Philip Cross is a senior fellow at the Macdonald-Laurier Institute.