Canada’s Beggar-Thy-Neighbour Economists

It has come to my attention that some economists claim that our sovereign federal government is more or less powerless to kickstart the economy because of our great dependence on the United States and therefore should do next to nothing:

“Mr. Orr and other economists urged Ottawa to ignore pleas to boost stimulus spending further – a move that would deepen a budget deficit already slated to hit $33.7-billion next fiscal year.

They say the power to revive economic growth is out of Ottawa’s hands because Canada is utterly dependent on sales to the recession-ridden United States, a $14-trillion (U.S.) economy that buys 80 per cent of this country’s exports.

“It’s largely more about the U.S. recovery than it is about any stimulus package in Canada,” Toronto Dominion chief economist Don Drummond said. “We just so desperately need the U.S. and world economy to recover before we’re going to get some traction.”

Granted, Canada is a fairly small player in the global economy (but not that small — we’re still in the G-8 and G-20).  Granted, our economy is hugely dependent on the United States for its exports. Granted,  a global economic recovery is needed.

BUT this does not absolve our government of its responsibility to do its part and deficit spend. Even the IMF recognizes this simple truism.  If it’s a global problem, then all the players need to be on board.  Not a select few — or one (U.S.) on whom everyone else free-rides.

Orr’s argument — to the extent it has been accurately reported (and I’m willing to accept that it hasn’t been) — is also bizarre because it is predicated on a beggar-thy-neighbour quasi mercantalism that economists never seems to apply to the Asian economies, another area of the world hugely dependent on exports to the United States and where mainstream economists are constantly urging “more spending” either by consumers or governments.  Somehow, they never transpose that logic to Canada, presumably out of some misplaced fear about budget deficits.

Finally, even if deficit spending isn’t enough to right the ship on its own, that in no way means we should stand idly by and do nothing — you don’t stop bailing your boat just because water’s still coming in or just because buddy over there has a bigger bailing can.  If anything, you redouble your efforts so that the amount you collectively bail out exceeds the amount coming in.

And so in a world where big C(onsumption), big I(vestment), and big (X-I)(net exports) are all taking a bath (pardon the mixing of metaphors) here and abroad, big G(overnment spending) is the only way to go.

3 comments

  • Charles Campbell

    I suppose it’s not exactly inconsistent, but still a bit audacious, for some of these folks to hold simultaneously that Canada should let the U.S. stimulus do all the work of refloating the Canadian economy and then express shock at “Buy American” provisions in the U.S. stimulus package.

  • To put the same observation another way, Arun’s post helps explain why Canadian pundits were so shocked by Buy America. If Canada’s entire economic strategy is to allow American stimulus to boost our exports to the US, then preferential procurement does threaten our economic future.

    On the other hand, if Canada itself finances a significant public works program, then a parallel Buy Canadian policy could stimulate our economy directly and/or provide bargaining leverage to negotiate exemptions from Buy America.

    It’s worth noting that the bank economists who oppose a second stimulus package for fear of a temporarily larger deficit were recently advocating permanent tax cuts as stimulus. More generally, the political right is or was alarmed by Canada’s alleged “freeloading” on American defence spending. Apparently, freeloading is only acceptable when it comes to civilian spending.

    The CCPA has called out the Canadian government for piggybacking on American stimulus.

    I thought I saw Orr on TV last week seeming receptive to the idea of a second Canadian stimulus package. But I am having trouble finding his recent paper online.

  • Arun: I think I would put it more strongly than you. Under the assumptions that: fiscal policy is the fix; there are some spillovers from fiscal policy between countries (I’m not sure I buy the second, depending on exchange rate theory, but leave that aside), then: countries in a good debt/income position (like Canada), and with low foreign debt (ditto), and with good investment potential (ditto) should do MORE than their equal % share.

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