Surprising consensus on the economy

Posted on January 7, 2009 in Debates, Governance Debates – Opinion – Surprising consensus on the economy
January 07, 2009. Thomas Walkom

There is growing expert consensus on how Ottawa should deal with the economy, a consensus that crosses ideological lines.

Put simply, it is that the federal government must put a lot more money in the hands of Canadians – either by cutting taxes or boosting spending.

That, in turn, means not just accepting a government deficit but embracing it.

If federal Finance Minister Jim Flaherty were to do absolutely nothing in his Jan. 27 budget, he would face an estimated deficit of about $10 billion in the 2009-10 fiscal year beginning April 1.

The new consensus holds that Flaherty should deliberately increase the deficit in 2009-10 alone by anywhere from $13 billion to $32 billion.

That such a consensus should even exist is testament to the extraordinary nature of the global crisis. Just a year ago, economists were fighting it out along predictable lines – the left calling for more spending on poverty; the right arguing for fiscal restraint.

Today, the experts disagree only on the nature and size of the so-called fiscal stimulus they think Ottawa must use to keep Canadian workers employed. Most take it as a given that so-called monetary policy – attempts by the Bank of Canada to force down interest rates – is no longer sufficient.

Glen Hodgson, chief economist of the centre-right Conference Board of Canada, writes that in today’s environment, monetary policy is about as useful as pushing on a string. Banks don’t want to lend if they fear they won’t be repaid. Firms don’t want to borrow to expand production if they think no one will be buying their goods.

Which means that Flaherty’s attempts to talk down commercial lending rates (as he did this week in a private meeting with bankers) are doomed to failure.

But if monetary policy is futile, what’s the alternative? Here, most experts agree: governments should stimulate the economy by spending money or cutting taxes.

Even the flinty-eyed economists of the International Monetary Fund argue that industrial countries should stimulate by an amount equal to 2 per cent of everything they produce in a year.

The world seems to be buying into variants of this formula. U.S. President-elect Barack Obama’s proposed two-year $700 billion (U.S.) spending and tax cut package works out to about 2.5 per cent of that country’s gross domestic product. China’s planned $586 billion stimulus package equals about 6 per cent of its GDP. Germany’s conservative and Britain’s Labour governments are each proposing packages equivalent to about 1 per cent of their respective national outputs.

Here at home, Armine Yalnizyan and David Macdonald of the leftish Canadian Centre for Policy Alternatives are calling on Flaherty to adopt the 2 per cent formula and introduce a stimulus package of about $32 billion for the fiscal year beginning April 1 – on top of whatever deficit Ottawa already faces.

Hodgson at the Conference Board recommends a smaller $13 billion stimulus package over the same period, which he calculates would result in a deficit of about $23 billion in 2009-10.

At the Toronto Dominion Bank, chief economist Don Drummond – a former finance department official – suggests that Ottawa avoid the embarrassment of running a massive one-year deficit by assigning roughly $9 billion in new spending and tax cuts to the current 2008-09 fiscal year. He would then add on another $14 billion stimulus package in the 2009-10 year that begins April 1.

Given that the slowing economy has already created a shortfall in tax revenues, Drummond calculates that this would leave Flaherty with a total deficit of roughly $34 billion over the entire 2008-10 period.

The experts disagree over how this stimulus should be structured. The TD’s Drummond wants most allocated to permanent income tax cuts for middle-income earners. Yalnizyan and Macdonald prefer infrastructure projects and social programs.

But all (including the Conference Board’s Hodgson) say Ottawa should direct more money to the unemployed and poor. That’s because those with little money must spend whatever they get just to live. And spending, economists agree, is what is needed.

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