Stimulus – Between Orthodoxy and the Unthinkable

The ever deepening global and national economic crisis has produced highly divergent views among mainstream economists on how radical a change is needed to orthodox fiscal and monetary policies with  their focus on balanced budgets and low inflation.

At one extreme, the recent Economic and Fiscal Statement indicates that the prevailing Department of Finance view is still that only very limited and temporary fiscal stimulus is needed. Indeed, that document  said that “the government is planning on balanced budgets or better for the current and the next five years” and claimed that tax cuts dating back two years should be counted as Canada’s contribution to G-20 efforts.

The call for an immediate significant stimulus by the opposition parties has a lot of support among mainstream economists, such as Glen Hodgson of the Conference Board and Don Drummond, Chief Economist of TD Bank.

Yesterday, Drummond  – whose economic group  is now forecasting a fairly serious recession – called for a carefully targeted two year stimulus package focused on infrastructure, income supports for the working poor, and even improvements to Employment Insurance – precisely the areas highlighted in the opposition accord.

The question arises as to how much is to be spent, and over what period. I have argued before that what we need is not just immediate stimulus, but a period of public investment led growth. Given the free fall of the US and global economy and very high levels of household debt, I find it very difficult to concieve that we can return to the previous growth model by late 2009.  It can be argued that the economic situation in Canada is currently not as serious as in the US, but it is highly unlikely we will be able to escape a very serious downturn if the US remains mired in a slump.

I note that some of the most impeccably orthodox economists are now saying that the US and global  economic crisis demands measures going far beyond low interest rates and debt financed fiscal stimulus.

In today’s Globe and Mail, none other than former IMF Chief Economist Ken Rogoff calls for higher inflation as the way out and notes that: “Fortunately, creating inflation is not rocket science. All central banks need to do is to keep printing money to buy up government debt.”

And Clive Crook – the Washington correspondent and columnist for the Financial Times of London advises the Obama Administration as follows:

“In a speech in 2002, Mr Bernanke pointed out that “the effectiveness of anti-deflation policy could be significantly enhanced by co-operation between the monetary and fiscal authorities”. A big fiscal stimulus, financed by Fed purchases of government debt, would be “essentially equivalent to Milton Friedman’s famous ‘helicopter drop’ of money”, he said.

For a prudent central banker, unalloyed monetising of the deficit is the last taboo – this, after all, is Zimbabwe’s idea of monetary policy. But in this remarkably perilous situation, the prohibition must be set aside, and better that this should happen before deflation has set in and entrenched itself. Do it now, and make it plain you are doing it. If it makes analysts and commentators complain about the inflationary consequences, so much the better: the aim is partly to buoy expectations of inflation.”


  • The point I pick up on in your article is to “buoy the expectations of inflation”.

    I am not convinced that such expectations can take hold by monetary policy “tricks”. that is perhaps wishful thinking. I do agree it may provide the impetus to distract away from deflationary talk.

    However other actions such as corporate decisions to concede to the race to the bottom as the way out of this by collectively implementing wage cutting and layoffs more than mutes such optimistic tendencies of “inflationary expectations”. Especially within the major industrial sectors such as auto and forestry. It is within these sectors that we need to stabilize the wages and not accept the race to the bottom.

    We need to prevent these pillars of wealth from being destroyed. It will be upon these shoulders, as tattered, mislead and abused as they might have been, that we can build upon to make our journey forward through this economic crisis. It is the stability in our foundations that we must ensure survive and it is the leadership that Canadians require to safe guard our economic foundation to get ourselves right sided. It is then we can start spinning out the of inflationary discourse in the mainstream economic speak.

    It will be the actions within the core sectors that will win us this battle against deflationary spirals and the strategic hand that needs to be on the till of the boat to pull us away from the reef are thoughts that realize short term competitiveness for companies over the next while have got to take a back seat to preserving our socio-economic fabric.And I would define that fabric as a quite encompassing piece of cultural real estate.

    This to me means implementing a grand project, a grand vision to focus our efforts upon that will benefit us and at the same time stimulate the economy. We have all talked about it and we all know about it, yet for some reason we have not figured out that markets and traditional approaches of the mainstream are not the most efficient methods to bring it about.

    As we have been assur3ed of last week, Mr. Harper and his government do not understand these basic facts. Mr Clement and Mr. Flaherty have done nothing but continually pester the CAW for wage concessions to deal with the auto sector. They have also done nothing for the forestry sector this despite the Steelworkers and the CEP’s attempts to persuade the tories to act.


  • The project as you might have guessed is the green revolution. The question is can we bring it about, this crisis brings us a unique opportunity. Kind of a reverse shock doctrine for the people and the planet.

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