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The Progressive Economics Forum

The D Word

My Alternative Federal Budget technical paper from last week seems to have single-handedly re-inserted the word “deficit” into Ottawa’s policy lexicon after a decade’s absence. A couple good columns have come out repeating the main premise of my paper (see Thomas Walkom in the Toronto Star and Frances Russell in the Winnipeg Free Press). And every story that raises the prospect of a US recession, and what that means for Canada, eventually comes back to implications for the federal budget.

There are detractors, of course, who prefer to rely solely on monetary policy, and who view fiscal policy as ineffective and ill-timed. I disagree. While we do need to lower interest rates, this is increasingly an ineffective policy because there is little ripple effect from changes in overnight rates at the Bank of Canada to the rest of the interest rate structure. We are seeing, if anything, higher rates from banks for commercial and household lending due to the credit crunch, and the “flight to quality” in the financial markets is driving down interest rates on medium-term government bonds.

So we need to put fiscal policy options on the table. The critique that fiscal policy comes too late has some merit to the extent that recessions are short-lived and fiscal measures involve a lot of long-term planning (like building a new bridge). But other fiscal measures can be brought to bear. The key is to get money quickly into the hands of people who will spend it. Some of this will happen automatically – the small surplus on the Employment Insurance account will revert to a deficit should the economy go into recession. That is a good thing, and the government should consider measures that would enhance the eligibility for EI so that more unemployed workers would benefit (currently only about one-third of the unemployed get EI). Another measure could be to enhance the GST credit, which would quickly put more money in the hands of low-income Canadians. And targeted measures could be developed for specific regions and industries that are hard hit.

The worst thing the feds could do would be to cut spending in order to meet the artificial objective of a balanced budget. Revenues will slow, perhaps fall, should the economy turn down, and the feds should let any resulting deficit happen, not pile on with spending cuts. Canada is the only G7 country to have run surpluses in recent years, and is well-positioned to run deficits if need be. In the US, the Bush-Bernanke $100 billion “stimulus package” has been criticized as not stimulative enough, even though the context is a previous year’s deficit above 2% of GDP. In Canada, an equivalent deficit would be above $30 billion.

As for infrastructure, we should be getting prepared with some big ticket items that we need anyway. The labour market is currently strong but the fallout for construction could be large over the next year or two. The fact that the US recession is being driven by a dramatic fall in asset prices (in the past, we call such an event a “depression”) suggests this will not be your garden-variety post-war recession with a quick drop then a return to business as usual. This could take a couple years to play out, and any resulting slack in the employment market could be absorbed by needed capital investments in social housing, public transit and early learning (child care) centres.

Enjoy and share:

Comments

Comment from rabbit
Time: January 23, 2008, 4:12 pm

Although I agree that running deficits for a year or two might stimulate the economy, in the long run massive government debt has produced too much pain. What’s more, once the budget goes into deficit, it may be damn hard to get it out again.

In other words, I would rather put up with more pain than we might have to right now in the interests of long-term gain.

Comment from Paul T.
Time: January 24, 2008, 7:55 am

rabbit again you jump from your hole.

the hopes of running a short term stimulus package is keep the economy on track. hopefully with a few tweaks here and there in the form of fiscal and monetary policies we can keep the Canadian economy from approaching the American meltdown.

The key is smart tweaks, not misguided shotgun approaches like across the board tax cuts. Our economy has several inter-related layers that some focused policy attention may help keep us afloat.

For example, can you imagine with such a shortage of investment dollars giben the state of the big three in north america, Ford comes out with an offer to build a $300 million engine plant to help shore up the massive auto sector job losses we have been experiencing and the Feds reject any involvement in securing such investments. It is a well beaten path these days that in order secure such investments, government incentives and help is tyicapply required to court these huge outlays of private sector investment. I am not a big fan of corporate subsidies but if that is the way the courting process has evolved to, don’t look a gift horse in the mouth. The long run pay off is well worth the up front courtship costs.

The math is pretty simple. it is just he ideological blinkers that have been fitted onto Harper that is the problem. Our economy is in the throws of transformation. Having somebody at the helm can deliver the complexity and challenge of some well crafted and timely policy would be a really good thing right about now for the future.

Where are the damn Liberals and the critiques of HArper on the economy. The election issue is starting to finally turn to the economy, not Afghanistan.

Come on Mr. Dion and Co. get on your horses and attack.

paul

Comment from rabbit
Time: January 24, 2008, 8:41 am

There is more to deficits than math. World-wide, governments have shown an addiction to debt that rivals the most irresponsible credit-card customers. Canada is now (thanks mostly to Chretien’s regime, and it hurts me to say that) in the highly desirable and fairly rare position of running government surpluses. Even the provinces are in much better shape than they used to be.

We should think twice or thrice before returning to the intoxicant of debt financing, no matter what the economics tell us.

Comment from Paul T.
Time: January 24, 2008, 10:28 am

I am not calling for a return to systemic deficits. Canada has been the last of the developed nations to run a surplus in the last extended expansionary period. Mostly as a result of the draconian social spending cuts combined with the expansion in tax revenues stemming from a robust and lengthy economic expansion.

If any country deserves a bit of targeted stimulus from government spending, it would be Canada.

And who knows, potentially the government revenues are still fairly healthy, we may be able to provide a bit of targeted stimulus without going into the red. This would have been quite easy to accomplish a few weeks ago. That is if Steve and his crafty bunch wouldn’t have given the house away with their last tax cut, that is somehow now being trapezed out as the spending we need to keep the economy on pace.

Imagine giving out billions in tax cuts but refusing to anty up a few million in courtship fees to bring some much needed investment and jobs in the auto sector.

If that is not just plain simple math that has lost its logical base within the lowly brainwaves of those on the hill, then I don’ what is.

pt

Comment from rabbit
Time: January 24, 2008, 12:20 pm

You’re not calling for systemic deficits, but I fear that is exactly what it could trigger. My argument is not one of economics, but of mind set.

It’s like arguing that there is no harm in “just one drink” for an alcoholic. True, provided it doesn’t trigger more drinks. And I simply do not trust politicians enough for them to keep off the sauce – they’ve shown too many times that they have a unquenchable taste for it. We’re on the wagon right now – let’s stay on it even if it’s not the “optimum” strategy.

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