Stimulus can hurt: Canada’s Economic Action Plan ill-suited for all regions

Posted on August 21, 2013 in Inclusion Policy Context – FPComment/opinion
13/08/20.   Ron Kneebone and Margarita Gres, Special to Financial Post

Federal government Economic Action Plans are ill-suited to Canada’s decentralized labour market

When the 2008 global recession hit Canada and national unemployment rates began to rise, the federal government soon found itself under pressure to do something to help. That something ended up being the Economic Action Plan, a multi-billion-dollar spending initiative spread across the country. But, in at least one part of the country, no help was really needed at all. In New Brunswick, the recession had a relatively small impact on the state of the job market. Federal spending there would have been at best, unnecessary or, at worst, harmful, crowding out private investment while having an inflationary effect on the regional economy. In Alberta, Ontario and B.C., on the other hand, job markets were much more seriously affected for a much longer period of time. A greater concentration of stimulus in those provinces would have been welcome.

None of this should be surprising. There is no “Canadian” labour market. Rather, Canada is made up of many smaller labour markets which rise and fall in response to different factors. Changes in energy prices affect energy-producing provinces like Alberta, Saskatchewan and Newfoundland and Labrador by much more and much differently than they do other provinces. Similarly, a downturn in the U.S. tends to impact Ontario’s manufacturing industries more than other provinces while arguments with the U.S. over softwood lumber have large impacts on the employment in B.C. but cause barely a ripple in Saskatchewan. All of this means we should not be surprised to find provincial economies go into, and exit from, recession at different times and to experience different depths of recession.

In a recent report, we show that provincial labour markets typically enter and exit from recessions at different times. In the early 1990s, for example, Ontario’s economy entered recession well-ahead of the rest of the country. Alberta entered into recession five months after Ontario and exited from recession nine months before during which time Alberta enjoyed robust employment growth even while jobs continued to be lost in Ontario.

We also show that at the same time some provinces are experiencing relatively mild recessions others are enduring far larger job losses. Looking across all recessions since 1976, the general tendency has been for Ontario to suffer deeper recessions than other provinces and for provinces like Saskatchewan and Manitoba to experience recessions that are considerably milder.

The most effective automatic stabilizers may be those that enhance the social safety net

Why should these findings be of interest to governments? When recession hits, governments are faced with a fantastically difficult task. They must quickly and accurately identify in which area of the country the recession is hitting, where the pain is most severe, and in which region of the country the recession might prove to be the most prolonged. Our results suggest the answer to these questions depends on considerations that do not yield easy predictions. In one recession Ontario may suffer a lot and Alberta not so much, but the next time the relative suffering may be reversed. The recession may be long-lasting in Newfoundland and Labrador one time (as it was in 1989-93) but short-lived the next (as it was in 2008-09).

To form judgements like these, and to formulate well-designed stimulus programs appropriate for the regions of the country most in need of that stimulus, requires months of data collection and analysis and lengthy debates to deal with the political challenges of regionally-differentiated tax cuts and spending increases. Perhaps for that reason it is rarely done. Instead, it is typical for governments to hastily create plans that apply stimulus across the country; a practice that results in spending needlessly — or even harmfully — in some provinces, while possibly coming up short in provinces facing the deepest economic crises.

Examinations of the role played by governments in alleviating the recent recessions in Canada, the United States and elsewhere have emphasized the importance of relying less on efforts like the Economic Action Plan and more on “automatic stabilizers” — pre-established mechanisms such as employment insurance, social assistance, and prescribed tax adjustments — to alleviate the impact of recessions. Indeed, recent work suggests that the most effective automatic stabilizers may be those that enhance the social safety net and so simultaneously smooth economic fluctuations while addressing concerns about poverty and inequality.

Before the next recession comes, the federal government — and provincial governments as well — would be wiser to prepare by investing resources in legislating well-designed automatic stabilizers so these processes are in place to naturally kick in precisely where and when they are needed. With the right formula of automatic stabilizers responding quickly and precisely to economic contractions, the main job left for politicians would be persuading the public that resorting to action plans and national strategies is something we are better off avoiding.

Ron Kneebone and Margarita Gres are authors of Trends, Peaks, And Troughs: National And Regional Employment Cycles In Canada, a report for The School of Public Policy, University of Calgary

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