Mark Carney’s widely publicized speech on the state of the global and domestic economy is worth a careful read.
He is bang on in much of his analysis of what ails the advanced economies today – the ongoing deleveraging from a long period of unsustainable public and private debt accumulation relative to GDP in which growth was driven mainly by household consumption in excess of real income growth and by the growth of public debt (much of it the result of socialization of private debt) rather than by productive private sector investment.
And he is distinctly gloomy that we can avoid a long period of stagnation. He rules out an exit via looser monetary policy, and seems to leave little room for expansionary fiscal policy outside the US. That leads him to view the major hopes for global growth as (1) global re-balancing, with emerging economies like China buying more from the rest of the world and (2) private investment led growth in the advanced economies.
Turning to Canada, Carney was explicit that growth cannot come from households going ever deeper into debt, and that business must stp up to the plate.
As reported in the Globe, “The Bank of Canada Governor used a luncheon speech in Toronto on Monday to warn that Canada’s recovery has been backed by “debt-fuelled” consumer spending that must be replaced by businesses using their healthy profits to boost investment and move aggressively into emerging markets.”
The relevant text of his speech:
…Canadian companies, with their balance sheets in historically rude health, have the means to act—and the incentives. Canadian firms should recognize four realities: they are not as productive as they could be; they are under-exposed to fast-growing emerging markets; those in the commodity sector can expect relatively elevated prices for some time; and they can all benefit from one of the most resilient financial systems in the world. In a world where deleveraging holds back demand in our traditional foreign markets, the imperative is for Canadian companies to invest in improving their productivity and to access fast-growing emerging markets.
This would be good for Canadian companies and good for Canada. Indeed, it is the only sustainable option available. A virtuous circle of increased investment and increased productivity would increase the debt-carrying capacity of all, through higher wages, greater profits and higher government revenues. This should be our common focus.
The reference to “incentives” surely refers to repeated cuts to the corporate income tax rate which have left companies sitting on mounting piles of after tax profits even as the real investment rate has remained seriously depressed. (See Jimbo’s fine CCPA paper for all of the details.) The same point was made by Don Drummond in a presentation to the Ottawa Economic Association last week.
So, it would seem that economists across the political spectrum are more or less agreed that corproate tax cuts have failed to do their intended job.
The key question is, what do we do about it?
Carney and Drummond essentially hope for the best, and certainly call for no change in policy.
But exhortation alone seems unlikely to make much of a difference. At a minimum. we should surely be reversing the 2012 cut in the federal corporate tax rate from 16.5% to 15% and re-directing the proceeds to targeted measures which have an impact on the real investment rate. I like the idea of a heftier increase in the rate, matched by the provision of investment tax credits to companies which invest their surplus cash in machinery and equipment, research and development and training. We could also increase public investments in areas – like transit – which crowd in private investment. That would raise the investment rate without increasing the government deficit.
- Polozogistics: Nine Thoughts About the Choice of the New Bank of Canada Governor (May 3rd, 2013)
- A Weak Week for Canada’s Economy (April 19th, 2013)
- Breaking The Taboo on Monetizing Deficits (February 22nd, 2013)
- Labour Market still weak: Bank of Canada (January 23rd, 2013)
- What Does the Bank of Canada Do? (January 7th, 2013)