Leadership AWOL as economy shudders

TheStar.com – Canada – Leadership AWOL as economy shudders: Deepening crisis won’t wait 7 weeks for Ottawa to get its act together
December 07, 2008. David Olive, Business Columnist

Somehow the urgency of the present hour has eluded the Prime Minister, who needlessly provoked a constitutional crisis in the midst of global economic peril unmatched since the Great Depression, and a governor general who last week abetted the PM’s recklessness by overturning precedent in granting him the parliamentary adjournment he sought in order to save his skin.

The upshot is that Canada effectively has no federal government as the nation slides into a recession that some forecasters expect will claim 600,000 jobs, in addition to the hundreds of thousands of Canadians thrown out of work in the manufacturing, auto, forestry and other sectors in the last two years.

Relief will have to wait at least the better part of two months, until late January, when Stephen Harper’s government finally tables a stimulus budget, which must then be debated and might well be defeated.

That’s seven lost weeks, at a minimum, when Stephen Harper’s political career will assume primacy over the economy.

A lot can happen, we’ve learned this year, in seven weeks. Entire national banking systems have been exposed as insolvent and in need of a state-financed bailout lest the global system collapse. Oil, wheat and other commodities have rapidly plunged in value, taking oil patch and farm incomes down with them. Everyday Canadians have endured huge losses on their retirement nest eggs invested in the stock market. The North American auto industry teeters on the brink of extinction. Iceland has declared bankruptcy. Hungary and Pakistan are hooked up to fiscal IVs provided by the International Monetary Fund (IMF).

That’s seven weeks of neglected measures to curb further job loss. To soften the blow for those who have been put on the street. And to create new jobs by investing in a sustainably prosperous 21st century economy. One based on knowledge rather than brawn industries. That develops and exploits alternative energy sources.

The contrast with our fellow industrialized nations could not be more stark. Collectively, the U.S., Europe and Asia have committed $2.6 trillion (U.S.) to jump-start economic growth, in addition to more than $2.7 trillion so far to bail out a crippled global banking system. The pump priming and financial-system bailouts are huge, in part to inspire consumer and business confidence – equal to 7 per cent of GDP in Germany, 16 per cent in China, 21 per cent in Britain.

The figure is 6 per cent for the U.S., where president-elect Barack Obama says: “We are facing an economic crisis of historic proportions … The truth is we do not have a minute to waste” in restoring economic health. Obama pledges federal spending aimed at saving and creating more than seven million jobs.

Ottawa boasts it has put stimuli in place equal to 2 per cent of GDP. It is referring to $2.5 billion (Canadian) in tax cuts implemented last year before the world economy went haywire, and that were accompanied by $4.3 billion in spending cuts, for a net stimulus that is in fact negative.

Rather than jolt new life into an economy slipping into what Ottawa acknowledges will be a recessionary period over the six months, ending next March 31 – itself an overly optimistic forecast in the opinion of most economists – Ottawa’s economic statement, or fiscal update, of Nov. 27 actually called for $2 billion in reduced spending. Advertised as a document to reassure Canadians, the statement recalled Abraham Lincoln’s dismissal of a debating rival’s argument: “As thin as the homeopathic soup that was made by boiling the shadow of a pigeon that had starved to death.”

Robert Fairholm, director of economic forecasting at the Centre for Spatial Economics, one of the four companies the federal finance ministry relies on for its economic forecasts, calls Ottawa’s rosy projections a “fantasy.” He says in the absence of substantial new federal stimulus, the Canadian economy will shrink 0.1 per cent next year, in contrast to Ottawa’s stated expectation of 0.3 per cent growth. By contrast, boosting the economy by even $15 billion worth of federal investment would likely yield 1.6 per cent growth next year.

The IMF, an agency traditionally averse to deficit spending, last month exhorted affluent nations to invest in their economies by an amount equal to 2 per cent of GDP – about $30 billion in Canada’s case.

Canada joined the consensus of Group of 20 summiteers in Washington in November that signed on to that target. Yet a day after delivering his Nov. 27 stand-pat economic statement, the strongest tonic federal Finance Minister Jim Flaherty chose to offer was, to paraphrase William Lyon Mackenzie King on conscription, stimulus if necessary, but not necessarily stimulus.

Flaherty’s response Nov. 28 was: “I hope the economy will be strong and we won’t need to have any additional stimulus in the Canadian economy, but if it’s necessary to do so, we will do so.”

What parts of a global economy in turmoil is the minister unable to see when he draws back the blackout curtains at the Ministry of Finance? Not his Oshawa riding, apparently, where year-over-year Employment Insurance claims have shot up by 96 per cent.

Reflecting widespread U.S. sentiment that the lame-duck Bush administration has been preoccupied with bailing out Wall Street and ignoring Main Street, David Miller said of Flaherty’s fiscal update: “I’m very concerned the statement does not show the urgency needed to address the economic challenges Canada is facing.”

The Toronto mayor added: “It’s important that as the government addresses the credit crisis (it) ensures that our manufacturing industries, our construction industries and other places that are being affected have relief, and not just the banking sector.”

Pump priming doesn’t agree with everyone, of course. Short-term stimulus packages, says Don Drummond, chief economist at TD Bank, “don’t really generate very much short-term stimulus and they very quickly become long-term structural problems.”

Drummond, a former official in the federal finance ministry, adds that “Canada is not the problem – we’re the only developed economy in which employment and consumption are still rising. Our economy’s been hit by international events, not by domestic events.”

Like many economists, Drummond also casts a baleful eye on infrastructure spending, since putting a spade in the ground usually comes only after a long stretch of planning, by which time the economy has recovered – but the spending, and its potential inflationary impact, remains.

That was a widely held view at the outset of the Great Depression, when Washington remained obsessed with balanced budgets, which even Franklin D. Roosevelt felt the need to promise in his successful campaign for office in 1932.

It does seem a bit odd to dwell on the possibility of mismanaged government spending in the immediate aftermath of one of the global private sector’s most colossal blunders of all time – a U.S. housing boom spawned by often predatory marketing of subprime, or junk mortgages that Wall Street bundled and distributed until the toxic waste, as it’s now known on the Street, had contaminated the balance sheets of almost every major bank on the planet.

While government doesn’t have a monopoly on misallocating capital, it is the spender of last resort when consumers and businesses are too fearful or impoverished to spend. And only government can spend truly big – to build a transcontinental railway, wage a war, finance the early cyberspace network that became the Internet.

Drummond’s argument aside, Canada is hardly isolated from external shocks, though it’s true the impact here has always tended to lag the onset of disturbances in the U.S. and elsewhere. The recent announcement of the closures of two Magna parts plants north of the GTA, with a loss of 850 jobs, came six months after the first credible rumours that Magna customer General Motors Corp. might actually be close to bankruptcy.

Liberal economist Robert Reich, labour secretary in the Clinton administration and an economic adviser to the Obama transition team, makes a persuasive argument in his blog that “government spending that puts people back to work and invests in the future productivity of the nation is exactly what the economy needs right now. When there’s lots of idle capacity, deficit spending is entirely appropriate, as John Maynard Keynes taught us. Moving the economy to fuller capacity will of itself shrink future deficits” – the long-term structural problems to which Drummond refers.

The challenge is to spend carefully. And after the improvisations of FDR’s New Deal and Lyndon Johnson’s War on Poverty, and our own experiments with regional economic development and subsidies to hydroponic cucumber growers in Newfoundland, we have by now accumulated sufficient knowledge, one would hope, to invest public funds at least as wisely as the vaunted capital allocators in the private sector for whom we have the collateralized debt obligation (CDO) to thank.

Where to invest?

1. Social capital

In other words, people. Immediate relief is required for people whom our market economy has failed. Employment Insurance eligibility and duration of benefits need to be expanded. Enhanced child care and worker retraining tuition grants are imperative. Workers who have lost health and pension benefits need at least temporary pharmacare and dentistry coverage to carry them over to their next job.

Paying for such essentials out of pocket crimps spending on consumer goods, which in turn triggers layoffs at everything from car and lawn mower dealerships to construction firms. The downward spiral has to be reversed, keeping in mind that even in the prosperous times of a year ago, approximately 900,000 Canadian children were living below the poverty line.

For social advocates, the needs are obvious and pressing. “Boosting three geared-to-income programs – the Canada Child Tax Benefit, the refundable GST credit and the Working Income Tax Benefit – would put additional money into the hands of lower-income households who are most likely to spend it immediately,” the Caledon Institute of Social Policy notes in a recent paper, The Forgotten Fundamentals.

Employment Insurance, which now serves only four in 10 unemployed Canadians, must be restored and strengthened.

It’s time to stand on its head the mythology around burdening future generations with our big-spending ways of the moment. The future generations are with us now, living in squalid quarters for lack of decent public housing, with street gangs for role models, college out of reach. The money we invest today to lift these young people out of wretched living conditions is our best assurance of lower dropout rates, teen pregnancies, violence and crime when it’s their turn to run the country.

2. Infrastructure

Much of our “built environment,” as architects and urban planners call anything made of concrete, glass and steel, is a good deal older than you are. Canadian municipalities alone are struggling with an estimated $143 billion “infrastructure deficit” of 50- to 100-year-old schools, hospitals, elevated highways (the Gardiner Expressway was completed before the Beatles broke up in 1970. Despite being only 42 years old, it has been under constant repair for the past decade) and water and sewage systems (the latter culpable in Toronto’s waterfront beaches being closed to swimming).

With $1 billion worth of goods crossing the border to the U.S. each day, it similarly is incomprehensible that the Ambassador Bridge at Detroit and the Peace Bridge at Buffalo have not been replaced or twinned, putting an end to the daily caravan of idling transport trucks backed up to Queenston. The fragility of the North American power grid was demonstrated in the great blackout of the eastern half of the continent not long ago, at about the same time levees patched up countless times rather than replaced with state-of-the-art ones pioneered in Holland cost America one of its great cities.

Infrastructure projects have a multiplier effect, Reich argues. “They create lots of jobs, and they make the economy work better in the future. Governments should also spend on health care and child care. The expenditures are also double whammies: they, too, create lots of jobs, and they fulfill vital public needs.”

And the timing couldn’t be better. Robert MacIsaac, chair of Metrolinx Regional Transportation Plan, oversees a proposed $50 billion, 25-year plan of new GTA light-rail lines, expanded GO service and Viva bus rapid transit in York Region. That’s a quadruple whammy: job creation, getting commuters out of their polluting vehicles, attracting more commerce to less accessible parts of the GTA, and thus expanding the tax base in North America’s fourth-largest and fastest-growing city.

“It’s a brilliant time to move forward with infrastructure because you’ll never get a better price on contracts than you’re going to in an economic downturn,” MacIsaac pointed out in the Star last month. “We need to position the province to be competitive when we come out the other side of this rough patch.”

Look around and you’ll see plenty that needs fixing.

3. Green stimulus

There’s a compelling argument to be made that developing alternatives to fossil fuels – essential to the quest to curb global warming – is a superior form of economic stimulus than reducing taxes or issuing government-rebate cheques. Development of wind farms, solar panels, more energy-efficient small vehicles and rapid transit creates high-paying jobs in R&D, enhances Canada’s competitiveness as an exporter of alternative-energy technology, cuts energy costs (another competitive advantage), and reduces our expenditure on imported oil and natural gas.

Green infrastructure tends to keep jobs at home. The liberal Center for American Progress Action Fund estimates that traditional fossil fuels, on average, see about 22 per cent of the American household’s energy expenditures leaving the country. A home or office equipped with solar panels, by contrast, ships just 9 per cent of its energy expenditures abroad.

That’s because much of the R&D in alternative energy is North America-based. And the construction workers and many raw materials – notably concrete – must be sourced locally.

In this relatively nascent field – at least compared with a fossil fuel addiction traced to the beginnings of the Industrial Revolution – there is still vast opportunity to achieve Silicon Valley-like leadership in R&D, as successive generations of wind turbines, for instance, become more efficient. There are hundreds of small firms, many still in start-up phase, working on innovative improvements.

Here again is an opportunity for government to play a role where, at least for now, the private sector is hoarding rather than spending cash.

Along with Canada’s dubious distinction as an energy glutton, with our above-average per capita energy consumption, our vast physical size exposes us to most types of energy applications and the expertise that goes with them.

By the reckoning of some, not just Obama and former U.S. vice-president Al Gore, the most dynamic industry of this new century will be energy, whether in the form of developing new energy sources; devising new applications for solar, wind and other alternatives; retrofitting homes, offices and vehicles to use innovative forms of energy; or the construction job of building wind farms and installing solar panels.

SOMEHOW, when it comes to providing more adequately for our people – whether it’s the creation or rehabilitation of public housing, or income supports that lift folks from subsistence level, or playing midwife to a new job-creating centre of excellence for Canada in green-energy technologies – we tend, in flush times, to ignore these pursuits, which are so much less glamorous than, say, investment banking. And in tough times we declare that as a community we haven’t the money for such things. It’s this mentality that gave us a reactionary Nov. 27 fiscal statement rather than a visionary one that embraced the future.

So for now we remain bystanders, waiting for the private sector to recover and take up the mantle of progress in a manner suited to its own narrowly defined goals.

Just as government and the private sector long ago learned the benefits of endless collaboration, we don’t have to accept a cramped role for government in times of economic failure.

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