Canada’s ‘more humane society’ saved economy: Krugman
TheStar.com – Business – But a complete recovery is far from a sure thing, Princeton’s Paul Krugman says.
Published On Mon Aug 16 2010. Tracey Tyler Legal Affairs Reporter
NIAGARA FALLS, ONT. — More stringent banking regulations and a “basically more humane society” have helped Canada weather the economic storm better than most countries but a complete recovery is “by no means a sure thing,” says Princeton University economist Paul Krugman.
Krugman, a 2008 Nobel laureate, told lawyers at the Canadian Bar Association’s annual meeting here Sunday that while it is “amazing” Canada was not sucked into the vortex of economic collapse like the United States and much of the European Union, certain aspects of its economy are, if not exactly scary, a “little disturbing.”
One is that Canadians, he said, spend and borrow “a lot like the Americans.”
The other is that we are saving less.
The latest figures show the personal savings rate of Canadians in the first quarter of 2010 was 3 per cent of income. In the U.S., the savings rate rose to 6.4 per cent.
It is the first time since the 1970s that Canadians are saving less than their neighbours to the south.
“Even though it has recovered much better than the U.S., Canada is by no means fully recovered,” Krugman said in a keynote address at the opening of legal conference.
Globally, the signs are slightly ominous that much of the world is drifting towards deflation, with unemployment rates “basically flat on both sides of the Atlantic.”
While government and banking officials have forecast a return to full employment within five years, those predictions are based on traditional assumptions about the cycles of economic downturns and recoveries, said Krugman.
“It is not at all clear when and how this ends.”
That said, while Canada has gone through what would in ordinary circumstances be considered “a severe recession,” its financial system has emerged remarkably unscathed given its close proximity to the U.S. and its open economy, said Krugman
While Canada didn’t experience the “great housing bubble” seen in the coastal U.S. and parts of Europe, including Ireland, what really helped is its floating currency and, in particular, its “old-fashioned banking regime,” in which banks remain highly regulated and get most of their money from deposits, he said.
Krugman, who was awarded the Nobel Prize in 2008 for his work in economic geography and new trade theory, said research he’s currently involved with is showing the single biggest factor determining which countries did and didn’t undergo a banking crisis in the last couple of years is whether the country’s banks rely primarily on deposits for their funding.
Because of the regulations imposed on banks and mortgages, “it is not so easy to use your house as an ATM in Canada” Krugman said.
“In effect, Canada is an example of the virtues of a relatively traditional approach to regulation,” he said. “A country that, for a variety of reasons, did not get caught up in the euphoria of financial innovation, of all the wonderful things that could be done if we did not force bankers to adhere to those rules” that developed in response to the great market crash of 1929.
A “combination of good luck but mostly good policy” have allowed Canadians to be spared the horrors that Americans have faced, he added.
And that good policy includes a safety net of employment insurance and social programs.
Canada being “a basically more humane society,” Krugman said, “has meant the suffering is far less.”
< http://www.thestar.com/business/article/848276–canada-s-more-humane-society-saved-economy-krugman >