Why Harper’s government is so divorced from reality

TheStar.com – Canada
Published On Sat Sep 11 2010.   By Thomas Walkom, National Affairs Columnist

Finance Minister Jim Flaherty acts as if the economic crisis is over. It is not. Friday’s announcement that unemployment is starting to inch its way up again merely confirms what most had suspected: We’re not out of this mess yet.

Yet the Conservative government insists that everything is back to normal. This week, Flaherty quietly let slip that Ottawa will cut benefits to jobless workers. On Thursday, he announced plans to raise taxes by hiking the Employment Insurance premiums that workers and their bosses must pay (this even though the EI program is running a $55 billion surplus).

His rationale, that stimulative measures are no longer needed, flies in the face of reality.

By any measure, world economic news is grim. The U.S. — Canada’s biggest customer — is stuck in a pit of persistently high unemployment. The parlous state of public finance in countries like Ireland and Portugal continues to threaten Europe’s banking system. Japan is headed back into the doldrums of deflation.

There are even indications that the mighty Chinese economy, with its near-insatiable demand for raw materials (including those from Canada), is beginning to cool.

Some explain this disjunction by arguing that Prime Minister Stephen Harper’s Conservative government is ideologically blinkered. But that isn’t the whole explanation. There are other forces at work.

First, recall that Flaherty’s insouciant approach to the slump is not unique. Britain’s centre-right coalition government is implementing that country’s biggest spending cuts since World War II. Germany too is cutting back.

In the U.S., Republicans preparing for an expected victory in the November congressional elections are calling for an end to any kind of government economic activism.

It’s all quite a change from 18 months ago, when the conventional wisdom held that only massive, concerted state intervention could save the world economy.

There are two ways to explain this shift in thinking. In the realm of ideas, a new theory (or more properly, a newly recycled old theory) has been dredged up.

This new old idea, perhaps best articulated in recent months by European Central Bank president Jean-Claude Trichet, is that business won’t invest if it fears that government-induced spending will fuel inflation.

The fact that there is virtually no inflation in most advanced countries doesn’t matter. Nor does it matter that long-term interest rates — an indicator of inflationary expectations — are at historic lows in Canada, the U.S., Japan and much of Europe.

If business has fears, the theory goes, it will act on them — even if those fears are irrational.

The practical reasons for this change of heart are more complex. In some countries, such as Greece and Ireland, governments literally can’t afford to spend more money.

But in others, such as Canada or Britain, governments don’t want to act. They may fear catastrophic joblessness. But they also fear doing anything that might interfere with the normal boom and bust of free-market capitalism.

More to the point, they fear alienating core voters. In Canada, the federal government’s brief flirtation with state activism caused some Conservatives to wonder if Harper had gone Bolshie. Flaherty’s actions this week will soothe them.

In fact, for many who support right-wing parties, moderately high unemployment is useful. It keeps wages down and encourages employees to work more for less.

It keeps unions in check. Insofar as it reduces tax revenues and leads to deficits, it provides an excuse to stomp on public sector wages and eliminate government programs.

Best of all it keeps the population in line. Most are too busy worrying about their jobs to pay attention to matters like climate change or the Alberta oilsands.

Economic collapse would be disastrous. But — for some — economic hard times can be convenient.

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