Climate Keynesianism
With recession on everyone’s lips south of the border, how much longer can Canada hold out before we begin to feel the nasty effects in the Great White North? I am guessing that the Tories want to go to the polls now because they know the economy is slipping and they do not want to have to wear the downturn that is to come. Cause it might be a doozy. A major tumble in asset prices has historically been given the term depression not recession. And the prospect of this taking several years to unwind is a realistic one.
Not that I am calling for a depression (and unlike some who like the idea of a good cleansing, I certainly do not wish that kind of pain on so many people). We understand much more about how capitalist economies function and have lots of experience with policy options to mitigate the worst impacts – if we do not get blinded by ideology that is.
But neither is this likely to be your garden variety post-war recession. People are experiencing a major shift in mood right now, with so many headlines and punditry about the prospect of a recession, plus the occasional bad trading day on the stock exchanges (remember that 6% one-day drop in January). The biggest danger is by way of self-fulfilling prophesy, that we may just talk our way into a recession – consumers get antsy and pull back on spending while seeking to sock some money away (paradox of thrift, anyone), and as businesses see that softness in demand they hold back on making new investments. This compounds the negative wealth effects of falling asset prices.
Keynes called it the animal spirits of capitalism. Well, the animals have been on quite the bender, and we are starting to get a sense of how bad the hangover may be. To be clear, we are not there yet. And maybe we will be spared the worst of the US recession. Maybe not – Ontario seems to be feeling the pinch, though the West is still booming. But it would be prudent to start planning for stormy weather rather than be in denial until a recession actually shows up in the statistics.
In recent commentary, most fiscal policy recommendations have started with the notion of getting money quickly into the hands of those who will spend all of it. In Canada this would primarily work through EI, but one could also imagine souping up the GST credit, the Canada Child Tax Benefit and Old Age Pensions, not to mention welfare (which should be uploaded into a national income security program, like the others, but that is another story). In fact we could make a case for bigger ramp up of these income transfer programs because we really ought to bring in a carbon tax and this would be a good way of mitigating adverse distributional impacts.
In addition to this, why not contemplate some bigger infrastructure projects? The knock against them is that they take a while to get up and running. But if this is not your run-of-the-mill recession and could take a few years to wrench its way through the system, then why not set the wheels in motion for some major projects that would absorb employment losses and keep us closer to near full employment we now enjoy while addressing some shared priorities. (Even at full employment, if ever there was a case for public investment crowding out private investment this would be it)
What I’m thinking is a major public works campaign for climate-change-related infrastructure. Huge public transit investments. Energy efficiency retrofits. Alternative power. These are all things we need to be doing anyway, so why let resources sit idle. If employment drops these projects could be brought on line quickly if the pre-planning was already in place.
These projects would best be done at a municipal level since they know what infrastructure they need. In fact, they have been complaining about this shortfall for years. Let municipalities pitch projects that would be cost-shared with the senior governments. Give them 33 cent dollars to spend, and as long as they meet certain criteria set out that demonstrate GHG emission reductions, let the funds roll this fiscal year.