Politics during a meltdown
What irks me about the Harperites’ non-response to the economic crisis is their claim that they have responded by bringing in tax cuts, announced in the Economic and Fiscal Update almost a year ago, and perfectly timed to the occasion. There is an argument to be made for tax cuts as a fiscal stimulus, although I think they will do little in the current situation where consumers are reining in spending. I’m leaning more towards souping up our existing transfer programs so that they are more effective automatic stabilizers, and starting to roll out some major infrastructure projects to retrofit our economy for low carbon world. In any event, fiscal stimulus means deficit, and the real economic discussion we should be having now is around how large the planning defict should be in 2009/10.
But the notion that Harper and Flaherty saw all of this coming and acted proactively is just plain nonsense. A year ago, tax cuts were brought in for precisely the opposite reason: surpluses as far as the eye could see due to robust economic growth projections. I challenge anyone to find a Conservative quote from a year ago that attributed their tax cuts to the looming recession. But given that tax cuts are their answer to every economic and social policy question, their claim seems to come off as credible.
It was not just the government that was deluded. The Bank of Canada and pretty much all of the major forecasters (whom a PM Dion would consult within 30 days of election) completely missed this coming recession. A lot of them are still in denial: having now accepted a downturn they see but a blip before Canada resumes growth in the second half of 2009.
The Tories just two weeks ago were proudly stating that Canada’s economic fundamentals were sound. That mantra is now dead. Harper may have known otherwise, suspected that the shit was about to hit the fan, and thought he could pull off a quick election, and majority government, before it did. Having spent the past couple of years ridiculing and bullying Stephane Dion, and spending the surplus the Liberals left them, it almost worked. But there is a new narrative now: fears of a Harper majority fueled a huge ABC campaign and online strategic voting sites; and the juxtaposition of Harper’s early claims about the Canadian economy dashed on the shoals of the worst financial crisis since the Great Depression.
Speaking of which, huge asset price collapses such as the one we are witnessing have historically been followed by depressions. Now we hope that policy makers can put together a package that merely keeps is in a recession. But those policy makers are still too obsessed with monetary policy, and we are getting to the point where monetary policy is pushing on a string. Keynesian economic policies have been pushed a side in recent decades in favour of strong central bankers with a steady hand guiding the ship of state through rough economic waters. The economy heats up too much, raise interest rates; starts to cool, cut interest rates.
At the onset of the election campaign, Harper adopted the steady hand metaphor to describe his government. In fact, his fiscal policies are actually the opposite: to avert the deficit caused by their tax cuts and a recession, they would have to cut spending, thus worsening the situation. Far from gentle adjustments of course, this approach turns the wheel toward the rocks.
But there is hope: on October 15 we may wake up to celebrate one of the biggest political miscalculations ever from one of the shrewdest political operators to make it to Ottawa.