No End To Unemployment Crisis

The recession won’t be over till people get back to work
November 1, 2009

The next time someone says the “recession is over,” ask them exactly what they mean. Because it’s increasingly clear that it means different things to different people. And it’s equally clear it doesn’t usually mean that the unemployment crisis is over.

Many economists, politicians, journalists, and corporate executives are now fervently repeating the mantras “recovery” and “recession is over.” But what they mean is almost always that some indicator of economic growth is either not falling as quickly as it was last month or that growth of some sort has actually increased, even if very slightly.

Statistics Canada, for instance, reported recently that:  “Canadian industries lowered their rate of capacity utilization by 2.8 percentage points to 67.4% in the second quarter, a much smaller decline than the decrease of 5.2 percentage points in the first quarter. However, industrial capacity use still reached its lowest level since the start of the data series in 1987.”

What they almost never mean is that unemployment has stopped increasing or that employment is substantially increasing – because neither appears to be true. Indeed, several observers have indicated that the job-loss crisis is likely to get worse before it gets better.

The Organization for Economic Cooperation and Development (OECD) reported in September that any economic recovery Canada sees is likely to be “tepid” and that new evidence underscores that the bulk of the demand in the world economy is being generated by government stimulus spending while corporate employers remain reluctant to hire.

The OECD said the unemployment rate could approach 10% in 2010, a pessimistic forecast compared with many being generated today on Bay Street, but indicative of employers' continued unease with a recovery fuelled by trillions of dollars in government spending and record-low interest rates.

The OECD also predicted that the Canadian economy would continue to contract in the third quarter and post only meagre growth in the fourth quarter. The Paris-based organization forecast that the combined economy of the Group of Seven nations would shrink 3.7% this year. The report indicates that Canada’s economy will shrink by 2% in the third quarter and expand only 0.4% in the fourth. In addition, unemployment will rise in most countries in 2010 and remain high in the near future. “If the recovery fails to gain momentum, the OECD unemployment rate could even approach a new post-war high of 10%, with 57 million people out of work,” it warns.     

The World Bank suggested recently that, even if global growth turns positive in 2010, unemployment levels will rise further in virtually every economy well into 2011. The International Labour Organization (ILO) warns that the global recession will likely increase unemployment by 18-30 million, possibly by over 50 million if the situation continues to deteriorate, which would take the number of unemployed to 230 million or 7.1% percent of the world’s labour force. The number of “working poor” earning less than $2 a day would rise to 1.4 billion (45% of the world’s labour force) from 1.2 billion in 2007.

Meanwhile, StatsCan's latest report on the manufacturing sector shows orders actually fell in July, a sign that an increase in demand the previous month was largely the result of stimulus spending that jump-started the North American automobile industry -- for instance, the popular but now-defunct “cash for clunkers” program. In addition, July retail sales also fell in spite of economists’ expectations of continued growth in sales.

Respected Canadian economist Arthur Donner warned recently that, while their might be some signs of an economic recovery later this year, any recovery will not be very robust and unemployment will remain extremely high into 2011.  Complicating matters, adds Donner, is the whole question of the sustainability of the recoveries in the advanced countries, especially if the current massive stimulus programs are reduced or withdrawn.

A recent article by long-time Globe and Mail Washington correspondent Barry McKenna similarly notes that “it's too early to relegate the crisis to the history books. And it's way too early for anniversary celebrations. It's easy to confuse the end of a recession with a full recovery.”  McKenna suggests that, were the same accounting procedures applied today as were used during the Great Depression, U.S. unemployment today would be worse than in the 1930s.

StatsCan’s recent evidence indicates that Canada continues to face ongoing price deflation. August consumer prices were down 0.8% year-on-year, and many key items continue to deflate. Although lower prices might seem a bonus to working families, in fact it’s a sign of the overall weakness of the economy because it means that companies and consumers will be tempted to put off purchases today in hopes of even lower prices later on. The unintended result is a deepening of the downward spiral of current production cuts and layoffs, further depressing demand.

Unemployment, of course, also further deepens the crisis of consumer spending, which drives at least 60% of Canadian economic activity. If people lose their jobs and don’t anticipate adequate employment insurance benefits, they stop spending or borrow to continue spending. 

The Harper government’s recently-announced plan to extend benefits for up to 20 weeks to “long-tenured” workers will help, certainly; some reports indicate that up to 190,000 laid-off Canadians will benefit. But it’s nowhere enough to fully repair Canada’s badly-frayed unemployment safety net. Cuts by successive Liberal and Conservative governments have ensured that today only 39% of those who pay into the EI fund actually qualify for benefits; many of them are seasonal and part-time workers who work regularly year-in and year-out, but not steadily. Meanwhile, reductions in unemployed workers’ spending help drive the economy even further into recession; that’s one of the best reasons to reform the EI system.

Several observers are now suggesting that recent growth in stock-market values is another “green shoot,” an indication of an impending economic recovery. But unless it is accompanied by significant growth in investment in the real economy – production of goods and services – financial-sector growth might mean exactly the opposite. That’s because corporations’ and wealthy individuals’ purchases of stocks, bonds, and other securities might easily indicate that capital is being shifted away from real investment and into more profitable financial speculation. That’s exactly what was happening in the lead-up to last year’s massive stock-market meltdown.

From August 2008 to its lowest point in March of this year, the Toronto Stock Exchange lost 35% of its total market capitalization. By August 2009, capitalization was still 18% below its level of August 2008. But it had increased 53% since March. Capital is being pumped back into stock exchanges again as corporations search relentlessly for the highest possible profits or easy money.

Unfortunately, however, the enthusiasm for new and more profitable stocks, bonds, derivatives, and other exotic securities – the New York Times says that some corporations are now attempting to securitize people’s life insurance policies the way they did subprime mortgages a few years ago – has yet to spill over into investment in production.

The glaring reality is that there is a growing disjuncture in Canada and other advanced capitalist countries between the needs and outlook of the real economy and the needs of corporations, banks, and financial speculators. Back in 1996, for instance, Prof. John Edmunds of the Arthur D. Little School of Management in Cambridge, Massachusetts suggested in a much-quoted article in Foreign Policy that securities were becoming “the new world wealth machine.” Instead of concentrating on production of goods and services, Edmunds claimed, with financial dealing “many societies and indeed the entire world have learned how to create wealth directly.” As a result: “We have entered a new economic age.”

To many of us, that sounded absurd even before the 2008 financial meltdown pulled the plug on the “wealth machine”:  its absurdity has now been even more clearly demonstrated, of course. When equities bottomed out on November 21 last year, the MSCI World index had fallen 55% since October 2007, a global loss of $21 trillion, or the loss overnight of $21,000 of so-called “wealth” for every individual in the developed world, according to a Times Online report in February. With it, of course, went many people’s educational or retirement savings, their jobs, and their future hopes.

Nevertheless, many mainstream economists and politicians continue to assume that there is no real difference between financial dealing and real production. Thus they can easily be fooled into believing that any economic transaction is as useful and beneficial as any other, because it indicates economic activity is increasing. 

This highlights one of the recent problems facing the Canadian economy. Stock trading increased dramatically during the 2002-to-2007 boom, absorbing much of the substantial profit Canadian corporations generated early in the recovery.  But machinery and equipment investment in domestic goods-producing industries slumped, as the accompanying graph from Industry Canada indicates:


Investment in domestic production of goods


From 1999 to 2008, machinery and equipment investment in Canadian manufacturing industries actually declined by 2.4% per year; during 2008 the decline accelerated to 6.5%, a trend which continues. Investment fell in almost all categories of business machinery and equipment in the second quarter this year, according to Statistics Canada. Trucks and telecommunications equipment were the only exceptions, as companies increased their expenditures on both following significant decreases in the previous two quarters. And again, StatsCan’s analysts say investment is still declining, just not as sharply as earlier in the year: “The 4.3% decline in expenditures on machinery and equipment was not as sharp as the 11% drop in the previous quarter.”

In other words, those with capital to invest continue to redirect it into financial dealing, not into goods-and-services production. So far there has been no sign that corporations are willing to rebuild Canada’s manufacturing sector or restore its declining productivity, even though a recession is a good time to retool: falling prices and low interest rates bring relatively low costs of investment, while a high Canadian dollar makes it easier to purchase imported capital goods. 

But corporate Canada’s collective disinterest in capital investment can be seen in the recent fall in imports of machinery and equipment. StatsCan reports that total Canadian imports fell 2.2% in the second quarter. “This was the fourth quarterly decrease in a row, but was not as steep as in the previous two quarters,” notes StatsCan, adding that: “Machinery and equipment, as well as industrial goods and materials, were major contributors to the decline.”

On the whole, then, Canadians would do well to remain skeptical of claims that the economy is turning around.  While there are a few signs of improving economic conditions, there are still just as many indications that our economy is far from healthy, and possibly still deteriorating. Almost all observers agree that employment growth will be especially slow and painful. And for working families, surely that’s what matters most.

As Donner points out, one of the key issues will be the success or failure—as well as the fate—of economic stimulus programs. Corporations, as we have seen, continue to show unwillingness to rush into much in the way of productive investments, so it’s essential that government stimulus plans are effective in creating jobs and generating economic activity.

So far, the evidence is that Canada’s stimulus program has not been very effective at all. Prime Minister Stephen Harper, remember, had to be dragged kicking and screaming into introducing a stimulus budget at all. His February program was largely a system of smoke and mirrors: his so-called “stimulus” package largely depended on matching funds from already cash-strapped local provincial governments.

The B.C. government, for example, faced a May election and long remained in denial about the likely effects of the recession on the province’s economy and fiscal situation.  Once the election was over, the government panicked as the budget deficit ballooned. In negotiations with the federal government, many other provinces brought matching dollars to put people to work. But B.C.’s Gordon Campbell held out for a special deal until August, when he finally received a firm “no” from the federal government. At stake is about $1 billion worth of infrastructure funding that B.C.'s municipal governments had been waiting for since January. As a result, spending has been particularly sluggish and B.C. has in fact been quite severely impacted by the recession.

But B.C. is not the only laggard. Only 12% of the infrastructure fund had been spent nationwide by late September, according to the Globe and Mail. And of the money that was secured in B.C. earlier this year, there was a clear pattern: 90% landed in ridings currently held by federal Conservative MPs. It seems that patronage and politics are trumping fair distribution and careful targeting.

In addition, the Toronto Star reported in June that at that time, in fact, the funds were flowing even more slowly than forecast in the 2007 budget, before the financial crisis hit. According to that timetable, programs under the Building Canada Plan should have pumped more than $5 billion into projects by this fiscal year. Yet the amount spent so far is $1.3 billion less than was forecast long before the “stimulus” budget was passed.

In addition, governments continue to push policies that are exactly the opposite of what is needed in the face of the economic crisis. The B.C. and Ontario governments, for instance, recently announced plans to harmonize their sales tax regimes with that of the federal government. In B.C., this was one more example of the Campbell Liberals’ panic in the face of their deteriorating fiscal position: while they breathed not a word of the plan during the election, they announced it just a few weeks later.

An across-the-board increase in sales tax is almost always regressive in that it takes a larger relative bite from the incomes of poor and working-class consumers than from wealthy taxpayers.

“Consumers will pay more—there's no getting around it,” Stephen Spector, president of the Certified General Accountants Association of B.C. told the Province. “The truth is it is a shift in taxation.” This is especially damaging in a recession because it takes purchasing power out of the hands of those most likely to spend most of their incomes immediately in their communities rather than save it or spend it on imported luxury goods. What influential economist John Maynard Keynes called “effective demand” is precisely what’s needed to help reverse the trend toward falling prices, falling output, and more layoffs.

It’s essential that Canadian workers, their unions, social activists, and sympathetic legislators demand more and better. Canadians must insist that effectively-targeted stimulus spending continues and, where most needed, even increases. After all, it’s increasingly clear that corporations are highly unlikely to help fight the recession through increased investment in the real economy.

Spending should be aimed at useful projects that will increase Canada’s international competitiveness and reduce our reliance on non-renewable energy sources. Spending should not just include infrastructure programs, but also social spending: enhanced and improved EI, child care, health care, education, and housing. Reluctant politicians must be convinced that deflation and falling consumer demand are major contributors to the problem; that larger deficits today will pay off in terms of reduced social problems, social costs, and lower unemployment tomorrow. 

Long ago Keynes pointed out that, even if stimulus spending consisted of nothing more creative than burying bottles of banknotes in old mines, it would still help revive a slumping economy. Fortunately, as he also observed, we can come up with much better, more productive and more useful projects. All that is lacking is political and corporate will.

Kim Pollock is a Canadian research representative for the United Steelworkers, based in Burnaby, B.C. He is the author of a handbook for union activists called
What Every Worker Needs to Know about Capitalism. His articles have appeared in The Tyee, Our Times, and other publications. He also writes weekly articles for Steelworkers’ locals, members, activists, and staff.