Social Policy in Ontario

Remarkably, the defining debate at this week’s gathering of G8 and G20 leaders in Muskoka and Toronto is bound to be a clash between those now keen to embrace government austerity and a relative few arguing that an abrupt end to stimulus spending would risk killing the nascent global economic recovery.

I say remarkably because the world economy has by no means recovered from the most severe downturn since the Dirty Thirties.

Above-average jobless rates are widespread across Europe. They remain intolerably high in Canada and the U.S., at about 8 per cent and 9.7 per cent, respectively.

The conditions that applied when London, Berlin, Beijing, Washington and Ottawa wisely spent massive amounts of deficit-funded money to soften the blow of a Great Recession triggered by a Wall Street meltdown have not noticeably improved.

Consumers remain maxed out. And the private sector still refuses to resume hiring and plant expansion. Indeed, in the U.S. alone, the corporate sector is sitting on an estimated $2.5 trillion (U.S.) in idle cash, awaiting assurance that it won’t be blindsided by a double-dip recession.

Which leaves government, as it was at the beginning of the Great Recession in 2008, alone in its ability to promote economic recovery. The real threat is that the long-term unemployed will “become permanent underclass,” says Nobel laureate economist Paul Krugman. “Penny-pinching at a time like this isn’t just cruel; it endangers the nation’s future.”

“Our highest priority in Toronto must be to safeguard and strengthen the recovery,” Barack Obama wrote G20 ministers Friday. The U.S. president warned that “should confidence in the strength of our recoveries diminish, we should be prepared again as quickly and as forcefully as needed to avoid a slowdown in economic activity.”

Translation: Pull the rug out from under the current tentative recovery, and risk being forced into a Son of Stimulus for having triggered a double-digit recession.

But Obama’s peers don’t see it that way. Host nation Canada will urge fellow G20 members to slash their deficits in half in just three years. Britain’s new Conservative-led government just tabled a budget with the most severe cutbacks since the Second World War.

In Europe, the eurozone debt crisis earlier this year has nations differing only in the speed and severity of their austerity measures. Affluent Germany and France are moving gradually but with resolve. Spain, Portugal and Ireland are quickly imposing painful cuts.

One hopes among the documents tabled for the G20 leaders’ perusal is the latest report of the non-partisan U.S. Congressional Budget Office.

By the CBO’s estimate, America’s February 2009 stimulus has created as many as 2.8 million jobs and lowered the jobless rate by as much as 1.7 per cent. The CBO doesn’t mention that the U.S. stimulus also unleashed the biggest, fastest U.S. economic turnaround in modern times.

The irony, of course, is that slashing public payrolls and pensions, as major European economies are doing, reduces tax revenue for deficit reduction. And it forces governments to spend heavily even on newly minimal welfare assistance or risk social upheaval.

As host country, Canada will be sought out in particular by British PM David Cameron for tips on replicating Ottawa’s brutal deficit-slaying mission in the 1990s. Cameron has already misrepresented it to Britons as a cure-all lacking long-term consequences.

Economist Armine Yalnizyan reminds us that balancing the Canadian books was achieved “on the backs of the poor, especially on the backs of women, and they have yet to see the benefits of those sacrifices or the economic growth that has occurred since.”

The proof of that assertion by the senior economist at the Canadian Centre for Policy Alternatives is to be found in Ottawa’s own reports of a growing gap between rich and poor in this affluent nation.

Comfortably situated economists peddling the austerity tonic – Krugman, Robert Reich and Joseph Stiglitz conspicuously excepted – as always fret about the corrosive effect of inflation, signs of which are practically non-existent in the mature economies. The sleep of mainstream economists is not troubled by the impact of anemic household income on the jobless and marginally employed.

It was these forecasters that John Maynard Keynes had in mind with his observation that “practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.”

Myopic deficit-eradication nostrums, while not defunct, have been thoroughly debunked. One could easily suffer yet another humbling of the dismal scientists who failed to warn of the looming global credit crisis and resulting catastrophic Great Recession. But the stakes are too high for that.

At best, what the G20 leaders are courting is a second “jobless recovery” like that of the early 2000s.

And you don’t want to know the worst.

< http://www.thestar.com/business/article/827625–olive-world-leaders-embracing-austerity-are-playing-with-fire >