Can Canada Escape a Lost Decade?

January 30, 2012

Year four of the global economic crisis is unfolding with no sign of a real recovery. Seemingly unable to resolve its financial crisis and agree on a recovery strategy, the EU is entering another recession, which will sideswipe the Canadian economy to the tune of $10 billion according to the Bank of Canada. 

Economic powerhouses, China and Brazil, are slowing. In the US, a bitter political power struggle is paralyzing efforts to bring about recovery, resulting in $30 billion a year in lost Canadian exports according to Bank Governor Mark Carney. Here at home, the Harper government is preparing for a major round of austerity in its upcoming budget.

Both the IMF and World Bank are predicting a economic slowdown and warn of the danger of another meltdown—or as the IMF head put it , “a 1930s moment”

Economists and policy makers are divided on the international financial and economic reforms needed to stabilize the global economy.

While these problems are largely beyond Canada’s control, there is much our federal government can do to weather the storm, speed recovery and invest in the building blocks for Canada’s long term prosperity.

Canada’s economic performance over the last four years has been mediocre at best. Although the recession was declared officially over two and a half years ago, a large majority of Canadians believe we are still in recession (Pollara); and more than half believe the government is moving in the wrong direction (Ekos).

Official unemployment has risen from 7.1% to 7.5 % in the last three months of 2011 with the loss of 63,000 full-time jobs. The broader measure of un/underemployment averaged 10.6% in 2011, a shocking 19.7% for youth aged 15-24.

Contrary to claims by political leaders that the damage to the labour market has largely been repaired, a recent CCPA report concludes that, adjusting for growth in the working-age population, employment creation to date has offset less than one-fifth of the damage done by the recession.

Three decades of wage stagnation, declining unionization, ballooning inequality and a massive transfer of national income from labour to capital, have among other things, resulted in a profound weakness in economy-wide consumer demand. It has also led an anxious middle-class to run up unprecedented personal debt in an effort to hang on to living standards.

High unemployment and falling average incomes in 2011 have made things worse as have forced wage rollbacks by both governments and corporations.

Canada's economic engines–exports, household consumption, business investment, government spending–are generally anemic, or in the case of the latter about to go into reverse.

Federal policy makers and a number of economists believe that the number one priority is to reduce fiscal deficit by reducing spending. They see this as a pre-requisite for investor and consumer confidence, which will in turn drive investment, jobs and growth, largely without government intervention. Betting that the economy will bounce back after the “confidence gods” are appeased with tax and spending cuts, seems like wishful thinking.

In the current depressed domestic and global environment, such an “expansionary austerity” strategy, short of an unlikely export surge, will only prolong the current stagnation, or worse. The UK and Ireland clearly illustrate the wrongheadedness of this approach, to say nothing of the human suffering it inflicts. The time for fiscal austerity, as Keynes taught us, is during a boom not a slump.

Such an approach could condemn Canada to a lost decade of high unemployment, depressed incomes, chronic insecurity, and shattered dreams for a generation of youth.

The federal government has the tools and the policy flexibility to decisively inject demand into the economy. It should embark on a major public investment initiative. Priority investment areas would include: infrastructure, R&D, health, education, child-care, public transit, building retrofits, renewable energy, etc.

A carefully targeted public investment initiative would yield high returns, boosting productivity, stimulating private investment, and creating high value-added jobs in activities that improve living standards and reduce inequality.

It could be implemented both through conventional fiscal means, or in part through public sector financing vehicles, for example, a public infrastructure bank.

It would jolt the economy out of its current lethargy—reviving demand, income growth and job creation— and would give companies a reason to invest knowing there is someone at the other end to purchase their products.

At the same time, it would tackle the structural weaknesses in the economy, which need to be fixed in order to assure our long-term prosperity.

Eighty years ago Canada and other countries were pulled out the Great Depression by a massive fiscal spending initiative; it was called wartime mobilization. Surely we can apply this simple truth to the very serious (non military) challenges we face today.

This article was originally published in the Hill Times.