Social Policy in Ontario

This anemic recovery

Posted on February 9, 2014 in Policy Context

—

NationalPost.com – Full Comment
February 8, 2014.   Conrad Black

The failure of most of the Western economy to bounce back from the severe recession of 2008-2010 with traditional levels of job creation, despite completely unprecedented debt-issuances and money supply increases in the United States, shows again that we are in uncharted economic waters.

From the mid-18^th Century to the First World War, there was little inflation in Great Britain. And from the end of the U.S. Civil War to World War I there was little inflation in Canada or the United States. Since the Great Depression, all the world’s currencies have been steadily removed from any discipline or value yardstick, and are not now valued in any relative or absolute way except compared to each other: they are all being devalued together. That is three quarters of the reason why the price of gold has risen from 1933 to recent times by 6,500%, the rest being increases in the gold supply. And that is more than half the reason why the Dow-Jones Industrial Average has risen from 334 in 1929 to around 16,000 today.

All the large advanced countries except the United States and Canada had been devastated by the war, but had been sophisticated economies and had educated and skilled work-forces. Their own determination — and in the cases of Japan and Western Europe, American (and some Canadian) assistance — put them back on their feet and they advanced rapidly as prosperous, flourishing democracies. The 15 years of the Great Depression and World War II, after a period of reconstruction, gave way to an era of immense job creation based on consumer goods and leisure-travel, gadgetry, and more commodious housing.

In the 1970’s, Arab-Israeli conflicts and supply-demand shifts in the oil industry, and gradually accumulating inflation, led to a sharp spike in oil prices, which have risen over 40 years from $3 to around $100 a barrel, as the American percentage of oil from imports rose from 20 to 60, and has now begun to decline sharply. The oil price hike spurred accelerated inflation that was reduced only by the application of the draconian measure of 20% interest rates in the United States, which led to a serious recession. (Raising interest rates is a terribly self-destructive remedy to inflation, as each percentage point increase in the interest rate induces a half-point rise in the rate of inflation, until everything cracks.)

Ronald Reagan revived the American economy with increased defence spending, always the most effective form of economic stimulus as it involves high technology investment and reduces unemployment and spurs adult education, (and is something Canada should have more of); and income tax cuts and tax reform. The world followed the American recovery, as usual, and it was a golden decade following the American-led, abrupt and bloodless American victory in the Cold War. But in the 1990’s the United States was carrying the luxury-goods industries of France and Italy and the engineered-products industries of Germany and Japan with its imports, much of them on consumer borrowing. The Clinton administration ordered and legislated hundreds of billions of dollars into non-commercial residential mortgages. The federal budget was balanced but the U.S. current account deficit ballooned to an unsustainable $800 billion per year.

More and more people clip a percentage of money as it moves around but a lot of the economic growth is illusory

As under-developed countries discovered the virtues of economic growth, they set up a great deal of manufacturing based on cheap labour. China and India, representing almost 40% of the world’s population, created a durable market for resource economies like those of Canada and Australia. The terrorist attacks of September 11 2001 led to reactive tax reductions in the United States to prevent  a recession, and finally, the wheels came off in all four directions, the entire banking system, except for Canada’s and a few other countries’, came to the edge of collapse over non-commercial mortgages. The most severe recession since the Great Depression ensued.

The United States has almost tripled its money supply in five years; the accumulated federal deficit has risen from $10-trillion after 233 years of American national independence, in 2009, to nearly $18-trillion now, and all that has been purchased is 2% economic growth rates and a reduction of unemployment to where it was five years ago. Manufacturing is being slowly repatriated to the U.S., which had outsourced 56-million jobs, but the jobs aren’t coming back: The manufacturing is being conducted at 10% of the former manpower levels. The economies of the West have been overinvested in the service economy, which adds little value. Teeming infestations of lawyers and consultants and stock brokers and merchant bankers and civil servants and other white collar employed people merely raise the velocity of money, the frequency of transactions. More and more people clip a percentage of money as it moves around but a lot of the economic growth is illusory.

In an example I have used before, if a country decreed that every person in the country must write a poem and buy and sell a poem 10 times a day for $100 each, regardless of the length or literary quality of the poems, at the end of the year, that country would have by far the highest standard of living (GDP divided by population), but no one in it would be any wealthier. We are getting to that point, and the inflation statistics do not really reflect the cost of food and energy, and they disguise grinding income-spending squeezes for a very large number of people.

This is why the West is enjoying an anemic recovery, except for Germany and its immediate economic collaborators. Germany threw off the addiction to Dane geld for the working and agrarian classes that for obvious historical reasons afflicted Western Europe, (under ostensible socialist Gerhard Schroeder of all people), and trimmed social benefit. The country also benefits from the quality of its manufacturing and the disguised export bonanza of a Euro weakened by the southern countries.

In Canada, there has been prudent fiscal management since Brian Mulroney’s time, and the Canadian dollar, which this government is trying to talk down, rose to parity with the greenback (though it has since fallen to the 90-cent level). Finance minister Jim Flaherty has promised a surplus in two years and is on track to deliver it, but the government is boxed in by its reduction of the old GST.

Brian Mulroney and his finance minister, Michael Wilson, realized that the way forward was taxes on sales and services and reduction of income taxes. Stephen Harper, Jim Flaherty, and the Americans have failed to get the message. The Harper government was allegedly committed to reducing the GST in order to give future, more socialistic, governments a cap on what they could tax and spend. But we are now in a cul de sac. Canada’s economic growth figures are inadequate and the federal government should replicate the course of the Mulroney government but prepare the public relations ground better, and make the tax increases on elective, non-essential transactions only, and lower the tax on personal and corporate incomes, stimulating all useful economic activity and continuing deficit reduction.

Primary industry (resource extraction) will require more jobs, secondary industry (manufacturing) will grow only marginally in employment terms, and if we must expand the service sector, and we will have to, let us just pay the proverbial hamburger-flippers and pizza delivery people better; at least they add value, unlike many office workers. (They all dress the same now anyway.) As a society, we have egotistically rejected value-adding work. The way to address wealth disparity, and it is indeed an issue, is to tax the velocity of money and distribute unstigmatizing income supplements to lower-income, employed people.

In this, as in almost all fields of public policy, what we need is emancipation from hidebound thinking and rigid ideology, and a little creativity. We’re not seeing much of it now. The Canadian political parties are like three famished dogs tugging at the same threadbare door-carpet.

< http://fullcomment.nationalpost.com/2014/02/08/conrad-black-this-anemic-recovery/ >

Tags: budget, economy, featured, globalization, ideology, participation, standard of living, tax

This entry was posted on Sunday, February 9th, 2014 at 12:26 pm and is filed under Policy Context. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.