Power will flow to a post-pandemic Ottawa

Posted on May 24, 2020 in Governance Debates

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TheStar.com – Opinion

First, it must be said the Canadian federation performed far better in crisis management than many other federal states — especially our neighbours to the south. This in spite of the prior sullen adolescent behaviour of some of the major players in the perennial soap opera called Canadian federal-provincial relations.

Second, some unlikely leaders rose to national stardom and others’ stars faded. François Legault had a good early crisis, until the scandal of Quebec nursing homes smacked him. B.C.’s John Horgan, the most important Canadian premier few east of the Rockies have heard of, set the standard for early and courageous crisis management.

But in the next three to five years, as we clean up from the massive bloodshed — human and financial — of the pandemic, the new centre of power in Canada will be the federal government. Conservative pundits, blinded by their hatred of the breathy theatrical style of our prime minister, promote mayors and premiers as Canada’s new leaders. They do not understand where power concentrates as a crisis moves to recovery.

The old military cliché that God is on the side of those with the biggest guns, has a fiscal corollary. She is also on the side of those with the biggest financial guns. When everyone is a beggar and a borrower, who has the untrumpable advantage? The one who can create vast sums of new financial ammunition for their guns. Improbably, in the 21st century, this is not cities, nor multilateral institutions, nor even global banking giants. It is still nation states.

They alone have the right to create new credit, to print new money, without limitation. The right of seigniorage — the exclusive prerogative to print money — becomes the most powerful weapon when everyone is a borrower. Yes, big banks can create millions in new lending, but governments can create billions with a key stroke. Another time-honoured cliché — if you owe the bank a million dollars and cannot pay, you have a big problem; but if you owe the bank a billion dollars, they have the problem — will further enhance Ottawa’s power to declare winners and losers.

This may dramatically change the power dynamics in the Canadian federation. Canadian governments from big cities to small provinces will spend more than they can tax for some years to come. They cannot raise taxes meaningfully, nor can they cut expenditures by any useful amount. They must borrow. Cities are forbidden to go into operating debt. Bond buyers always have the provinces by the short hairs — issue too much debt, and your credit rating plummets and your servicing costs explode.

Nations, however, as the Japanese first discovered three decades ago, especially if your investors are your own citizens, can borrow billions with little impact on either inflation or your currency. Mainstream economists, especially fiscal conservatives and monetarists, have been humiliated by the degree to which their “crowding out” claims have been thoroughly debunked in recent years.

In Canada this means that the one government that has a massive printing press in its basement — to use Andrew Cuomo’s delightfully memorable image — is Ottawa. But if you are a near-bankrupt borrower, as several Canadian provinces and cities will soon be, you cannot demand money from the printing press owner without it coming with strings attached.

For the first time since the Depression and the following war, Ottawa will be propelled into a much more powerful policy decision-making role, as a result of this shift in power dynamics, in ways that will seriously test the old boundaries of Canadian federalism.

“Premier Kenney, you need five billion recovery dollars? You got it, but not to revive zombie oil and gas companies. Spend it on reducing emissions and a transition to a low carbon economy or we will give it to someone who will.”

“John Tory, you need two billion to get your transit projects up and running? OK, not a single dollar will be spent on dirty diesel buses.”

Canada is a federation that works better in practice than in theory, as the saying goes. But that is only true when all sides believe that they have been mostly fairly treated. Ottawa will need to be very careful not to be seen to be bigfooting every other government because they have the only big chequebook.

Provinces and cities, in the borrowers’ queue for years to come, will need to ensure that their case is better than those in line behind them. That will mean listening to and negotiating with Ottawa on its policy goals.


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