New Growth Model Needed?

Canadian Gross Domestic Product (GDP) fell by 0.1% in August. The decline mainly reflected temporary closures of major oil rigs, mines and mills due to maintenance or labour disputes. This explanation is valid, as far as it goes.

However, the broader issue is that more widespread economic growth should be more than offsetting these isolated events. Today’s release reveals a continuing absence of such generalized growth. For four consecutive months, all-industry GDP has stagnated between $1,183 billion and $1,185 billion (chained 2002 dollars).

Public-sector expansion mostly offset private-sector weakness. But Statistics Canada attributes the pick-up in government activity to the end of Toronto’s municipal strike rather than to proactive stimulus measures.

Government intervention, more in credit markets than in the real economy, was crucial in arresting the economic free-fall caused by the financial crisis. However, Canada’s relatively small stimulus package has not yet been enough to propel positive growth.

Households and private businesses will be de-leveraging for much longer. We should look to the public sector not only as a source of short-term stimulus, but also as the potential driver of economic growth for some time. Fortunately, the much greater public investment needed to achieve growth could also meet important social and environmental goals that should be public priorities in any case.

UPDATE (October 31): Quoted on The Financial Post website

16 comments

  • “We should look to the public sector not only as a source of short-term stimulus, but also as the potential driver of economic growth for some time.”

    Why? So we can fight the public vs private sector debate only to loose when people see their tax bills rising? I am really not looking forward to a replay of the last thirty years.

    Maybe a growth model that let the public actually make productive investments which threw-off cash instead of just public goods investments which must be financed with tax dollars would be a good idea.

    Anyway I agree we need a new growth model I am just not sure the financial mechanics of the keynesian welfare state (solipsism) is the way to go.

    Politically it would probably be better if the state was less evident but more ubiquitous.

  • Travis: Business investment and exports are down, construction and consumer spending are weak. Only the government is left to pick up the slack.

  • Keith,

    I do not deny a role for the state. I am just not very interested in rehearsing the past thirty years. Corporations don’t wan to pay tax (and are mobile), individuals don’t want to pay income tax (and vote), and the vanilla economists by-and-large want a flat tax in the guise of value added sales taxes with some ad hoc, after the fact, targeted amelioration. To my mind all of this points in the direction of state that starts taking up an ownership stake in the production of goods and services.

    Why bother trying to tax profits when you can just lay a direct claim to a percent of them? Why shouldn’t the state start taking up a significant but non-controlling ownership stake in public and private corporations?

  • hell yes, nationalize the banks and lets get the investment back into production rather than over leveraged games with neligible effect on anything but profits that get cycled within that loop.

    And then nationalize the resource industries. Those two would be a good medium term goal for the country’s quest of a new groth model. We would need to have somekind of regional dispensation to the nationalization, of resources to sell it regionally.

    Seriously if we did those two things we would be much further ahead in terms of keeping wealth in the country.

  • StatsCan’s longer GDP report (15-001) breaks out private sector and public sector GDP (business and non-business sectors). Private sector GDP fell twice as fast (more than 0.2 points) as overall GDP; that’s an annualized rate of decline of -2.5%, pretty fast.

    Meanwhile, public sector GDP grew slightly. With the exception of January this year, public sector GDP has increased every month right through the recession.

    I noted on this blog back on October 1 that it was not at all certain that thrid quarter GDP would even rise. Now it’s virtually impossible. GDP would have to increase 0.5 points in September (or an annualized rate of 6.5 percent) to pull average third quarter GDP above its second quarter level.

    So I guess Governor Carney’s triumphant declaration in July (following that infamous 0.1 percent uptick in June GDP) was just a little premature after all.

    Interesting to contrast the Canadian August numbers with America’s 3.5% bump for the third quarter. Our CCPA study released yesterday points out that the US federal government has been increasing its program spending 7 times faster than Canada’s federal government. That might have something to do with the difference.

  • Yes, that distinction between the business and non-business sectors is also in the main release’s table.

  • Hi Paul,

    There is political problem with nationalisation. It will likely lead to the same anti state bias as taxes. Think if all the banks were nationalized and fees were cut in half. And then 5 years later raised by fifty percent. Everyone would view it as a tax grab even though they were 25% better off then they were five years ago. Also there is the issue of competition. Competition is not a panacea but within limits it has its uses.

    My thinking (out loud) is more like the state taking a certain percent of an ownership stake in all significant public and privately traded companies and then moving to a zero corporate tax regime.

    The idea here is to get the state ubiquitous in the economy without being evident.

  • Travis,

    I find the ubiquitous arguement useful, but is your idea more like an oversight layer over private interests, if it is terms of regulatory then I don’t see an awful lot of difference than the past, or are you imagining some other mechanism.

    I guess my real point behind nationalizing banks, is how does one get that virtous cycle of growth that is not based upon the last 20 years or more of asset bubbles consuming a majority of the investment dollars.

    How does one get private interests (given the crisis has still not produced much in the form of capital accumulation changes) to come out of the financial sector and start chasing returns to investment that are based on real investment.

    Without much in the way of systemic change in the economic fundementals we do not have much choice but to focus on chasing capital from the financial market investments and into business investment.

    I guess my question is, are there alternatives to the stick to perform that task, can we develop carrots for business investment. Until we somekindof mechanism in place to get investment back into the real economy, we will see no growth with employement attached. Credit capitalism, has run its course- hasn’t it.

    Potentially there are new fictions being generated now, we have had housing bubbles, web bubblesm land speculation bubbles. If there is no change then the only alternative is another bubble? So where is it? Maybe we could make one in the green economy- who knows potentially there will be some different parameters of the leakage from the cycling casino of a green economy financial bubble into the real green economy. It might not be sustainable, but look what kind of wealth leaked into the real economy during the dot com bubble- enough to help build the web infrastructure.

    So realistically if you asked me the question- what is the new growth model, I hate to say this but the most optimistic I can conjure up with all antennas honed to realism given the polictical economy would be in some form of financial green economy bubble with some leakage into the real economy, that could make some impact on jobs, but not to potential if one were able to close the gates of wild speculative forces that gather drive these bubble and force the investment into the green economy fully. But this latter potential is just ain’t capitalism in its current form.

    pt

  • What we need is a new work model. “Growth” is an abstraction referring to an abstraction (monetized transactions). When the discourse becomes that divorced from concrete reality it is time to back up and ask, “what the heck are we really talking about?” Bureaucracies are notorious for speaking in the passive voice. Nobody actually does anything or makes a mistake. Mistakes were made. Growth is the grand-daddy of passive tense evasion.

    Even the president of the United States says we need a new economic paradigm. The catch is, though, that everybody is trying to fit their “new paradigms” into the Emperor’s musty old clothes.

  • PS: for a new model (sans the fetish) look to Peter Victor’s Managing without Growth and Tim Jackson’s Prosperity without Growth?. These books are not, by the way, “anti-growth”, they are against fetishizing a concept of growth that has little or nothing to do with human or ecological welfare and in fact now positively values the destruction of welfare.

  • Hi Paul,

    Like you I am not very optimistic that there is new growth model. And I can understand why those like Erin would be pushing a public infastructure Keynesianism. My idea about the state taking up an ownership position was largely confined to the problem of CIT. 30 years I would have thought something different. But with the rise of the neoliberal state, the states interests have become so thouroughly aligned with those of capital (ie sitting back and passively taxing the private sector) that putting the state in the role of owning a percentage of the private sector would not change much save for the mechanics of taxation. The idea Corporate taxes could be eliminated and in their place direct profit flows. One could envision the government directly providing capital to the productive side of the economy via direct and strategic involvement in the corporate paper market.

    I think, however, if we want to actually move to a new growth model we need to think about encouraging new forms of corporate organization in say collectives / cooperatives. Historically the problem has been access to credit. Here the state could play a central role. To my mind a series of competing cooperatives would be the new ideal growth model with the sate providing sole source insurance from everything from auto’s to pensions to health care. On certain public insurance goods like auto insurance we could imagine competing provincial plans who were able to sell into each others markets and thus provide a level of accountability through consumers capacity to switch plans.

    If the state were to provide credit to cooperatives it could in turn take an ownership stake or a creditor position thus making sure the public retained a right to a portion of the profits without the need for taxation.

    Regardless of the actual details I think we should not limit ourselves to thinking aout what possible new growth models are likely to look like gowing forward we need to start thinking and talking about NEW GROWTH MODELS that systematicallty seek to transform the cycle of:

    market failure — state failure — market failure — state failure.

    Only addicts and children behave like this. It is ultimately *capitalism* which is responsible for market and state failure and it is time to start thinking about how to transition out of it rather than going round and round on the sterile poles of market and state: neither are the cause and both are the solution.

  • Hi Erin,

    “Households and private businesses will be de-leveraging.”

    Got any tips?

  • Well if the problem with nationalizing banks and resource countries is about the perceptions people will end up with, break up and nationalize some of the media. Wonder if there’s any way to nationalize the #$%! Fraser Institute?

    Co-operatives are a Good Thing. But even with co-operatives, markets as they currently exist create perverse incentives that push them to do unpleasant things to survive. If ownership is purely from the production side, creating externalities (pollution, etc.) and free-riding on public goods and so on are still to their advantage. In Venezuela there seems to be a move to nationalize key industries and then push for worker control within the context of public ownership.

  • Travis: Earn more, spend less.

  • Cheers! your are the first generous guy I ever met!!!

  • When you get down to some real serious thinking about new models and such, I have to admit, it is a bit scary. Maybe given the witching night I am writing this has something to do with it but here is a small offering.

    All models are dead! Like a bunch of zombies, wealth is chasing what it can to make quick returns. Potentially we are stuck in this quagmire, and we are not going to get out for a long long time. I would have thought given the pain and suffering doled out on the global scale there would have been a whole lot more organized resistance and finally the need for fundamental change would have entered into the decision making space.

    However the results so far for progressive change, while encouraging at the midst of the crisis have waned. Potentially, I am too impatient and there is still a few more acts to this tragedy to come that will motivate the cultural mechanisms for change. Unemployment could still go higher, but for many policy makers this seems to be quite acceptable. What employment rates would incite the policy makers to become nervous?

    The bottomline, we are witnessing here some of the biggest challenges the industrial age or modernity has ever faced, environmentally, socially, and economically.

    Yet all we have is this spasmodic, dysfunctional, unsustainable capitalism that a majority seem to be chasing to lead us into these potentially earth shattering challenges.

    At least with zombies, if you shoot them in the head they typically die, capitalism, just was shot in the head, yet there it goes into the future stumbling without a head and somehow still alive.

    And hey I have heard that old evolutionary nature of capitalism story so many times. But does it really evolve, or is it more like every couple of decades after it performs badly the powers that be get scared or tired of the yells of the great unwashed and put capitalism in a new cage and eventually like a starving weasel, it chews it way out again.

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