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.

5 comments

  • a key concern is that if the G7 this weekend ‘engineer’ a day or two’s worth of ‘turnaround’
    http://www.reportonbusiness.com/servlet/story/RTGAM.20081010.wmarketstaff1010/BNStory/Business/home , will that be used to justify Harper’s approach and support his election? The IMF has already come out lauding Canada. Elsewhere it has been reported that if a Canada and EU investment deal goes through, the US would be ‘happy to join’. And the Globe has come out in support of Harper. None of this bodes well.

  • In all honestly, if the polling is accurate and the tide is turning against Harper, then I will have a renewal in my faith in the Canadian public.

    My belief is a bit more of a dichotomy. On the one hand I think they figured out that the economy was finally going to sour and raced into an election.

    On the other hand I feel they had their heads so far up their arses that they had know idea that it was going to get this bad.

    For all the talk and faith that the Americans have in the ability of the state to come in and save the capitalists and the rotted core of the economic infrastructure, I am starting to belive the system is beyond saving.

    That is if you take history as a guide here. Think about it, even with all the efforts of FDR’s intervention and the state intervention, nothing seemed to be able to right side the capitalist ship during the great depression. It was only an all out war that destroyed just about everything existing that a solution was found.

    How far we will go into this depression space and how will our governments react and when will they intervene.

    We finally have our government potentially scratching there head that something is wrong.

    I guess the question is, how bad will it get?

    Thinking about the multimodal bubbles that we had going within the international economy going to artificially prop up consumption, i.e. credit and speculative flows fictionally propping up the stock of wealth and purchasing power, what will replace it. I do not think government intervention has the explosive power to right side the ship. However it can make it a bit more compassionate, that is if we can ever get the economic aid to those that actually need it.

    We have got to stop the bail outs and start focusing on the real problem. It is inherent problems of the system itself. Uneven wealth distribution and the class war, we need to address these core contradictions.

    We need a new deal for sure, but not the same old new deal. We need something more than what was put on the table the last time the system smashed itself to bits. Otherwise we are headed for something that will make our previous history, pale in terms of historical crisis.

    I hate to be pessimistic, but given the tools that the current global developed nations are considering, I see nothing positive or new that will actually work to fix the problem. Yes spending will help, and so too will the capitalists pretending for a short time they are socialists. But ultimately we need fundamental rethinking. We need a new paradigm.

    I firmly believe the economic world needs a reboot when it comes to ideas for economic governance and the new system must bring into the fold as its center piece, a green economy that has a lot more of a uniform wealth distribution than the current.

    But I am a dreamer and I do resign myself to these economic fantasy’s. I am a big “new economy” fan, however within that discourse, much is still undefined. It is time for the new economy to unleash itself and bring forth a new era in economic thinking.

    Did I also mention I am a big fan of economic anthropology. Think about our time within the industrial revolution. It is but such a short period in the big picture of time.

    We will never be at the end of history!

    Okay I’ll go back to my think tank and figure it out. I’ll report back in 20 years.

  • Good stuff Marc. Depression is the “shock” word being used to get ready for the deal this weekend along the lines of what Paul Volcker has been talking about: government guarantees of inter-bank loans, and bank preferred shares offerings picked up by governments.
    The problems are deep-seated and the depression scenario is on the table if the neoliberal agenda (micro-foundations for macroeconomics) goes ahead.
    The origins of this are in the shift from funding infrastructure through investment of defined benefit public pensions over to defined contribution schemes (including RRSPS), run accoording to market rate of return criteria. This was the effectively the privatization of public pensions, completed when Paul Martin moved CPP money into the market. Of course he and Dodge engineered the tax subsidization of RRSP money out of Canada, to improve “the rate of return.”
    What these fools missed was the return of capital to the owners matters as well
    How much better we would be with a real Canada Pension Plan paying more than the piddling amounts going out today, and legislated, transferable defined benefits pensions in the public sector. The money could be invested in real things not the crap dreamed up by under-educated financial economists who never read Jean Jacques Rosseau on the role of emotions in public life.
    Read more from me on this in a future rabble column.

  • Tax cuts won’t encourage spending enough to turn this situation around. What we need is a government that is willing to spend and put money in people’s pockets whether it be through massive public works projects (maybe building green projects such as wind turbines, etc), or other means.

    Let’s face it- the jobs that have been created in the last 5 years are low paying, temporary, contact jobs while the jobs lost are higher paying positions. This has already put a significant amount of pressure on people to reduce spending. A small tax cut will change nothing.

  • profits->investments->productivity->wages->consumption->profits

    the value chain of industrial capitalism modeled in relatively simplistic terms but defined by much complexity.

    Gorwing up alongside and intertwined with the value chain is the casino they call financial capital

    The sad part is, a majority of the profits from industrial are externalized into the financial instead of back into this chain. This causes problems of all sorts and now with the market crashing, potentially in the medium term we will see a return to the first.

    To keep the industrial going we had artificial demand being created from faulty credit that created the credit bubble. It seems quite weird that in creating the credit bubble the financiers made money and then graded the credit debt triple A and ported it to the global financial centers.

    That ultimately is what spooked the market and created this vacuum in trust. Now we have a spooked market and panic. Once that occurred we had all the insanely leveraged financial assets coming due, and has created a liquidity problem, which is again antagonized by a lack of trust between lenders. Log jam. More panic, more people rushing to sell, sell, sell, and stuff money in safety. But the only thing safe is a t-bill or mattress.

    $700 billion dollars latter and now apparently the Americans stepping into the role of banking.

    If we go backwards though the original problem goes back to accumulation and a breakdown in the wage allocation process.

    Assuming we do get back on the road in xxx amount of years does the old form of industrial monopoly capital actually work, i,e, without creating such polarization in wealth that the system collapses due to capital accumulation distribution problems.

    i.e. if regulators actually transform the financial markets to no longer be an avenue for casino capital, can we actually expect to see a return to brick and mortar, green looking investment. Will regulators return the finanicial markets to a role where they are supposed be be a support mechanism to the value chain and not an extrenal casino onto itself.

    Just thinking out loud.

    I do see investment being a great place to start the process of though and green investment will drive a lot fo virtusous processes. We will also need to revisit the wage allocation process.

    Precarious work has got to come to an end. We need a new labour deal. And we have got to somehow get that discourse going hand in hand with deficit spending. Strengthening organized labour is a must for the future. On many dimensions it is a prerequisite for the future to unfold.

    Accumulation of capital goes to fewer and fewer and that is bad for keeping the virtuous cycle going.

    With financia;.

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