The only way to save the economy

Peter C. Newman September 21 1992

The only way to save the economy

Peter C. Newman September 21 1992

The only way to save the economy



Once the constitutional fuss is over and the government starts governing again, Ottawa will be forced to confront a problem that makes the Charlottetown accord sound as simple as a Lucy Maud Montgomery fairy tale.

For three years now, Canada’s economy has been in a comatose slump that has defied all the standard recipes for recovery. The theory was that lowering interest rates would get people building houses again and spending money at stores, while industry, taking advantage of the low rates, would start to modernize plants and expand production lines to meet the increased demand. It hasn’t happened.

The Bank of Canada rate has been in a virtual free-fall, dropping to 4.93 per cent from 7.82 per cent over the past six months, although it did edge up last week to 5.14 per cent ( Similarly, Washington’s Federal Reserve Board has cut interest rates two dozen times over the past three years in its own futile effort to boost the U.S. economy, lowering rates from 9.75 per cent to the current three per cent.) Both Canadian and American central-bank officials predict that they can cut the rates a bit further, but they are rightly worried that at some point very soon, the integrity of their currencies will be threatened.

Up to this point, it has probably been a useful exercise. Had interest rates stayed high, the recession might have been a lot worse, and the lower rates did allow governments, corporations and citizens to deal more effectively with their debts. But that tactic has now reached its limits. Monkeying with monetary policy is not going to revive the North American economy.

There’s only one other route open to governments who want to prime the economic pump, and that’s more spending that will kick-start an aggressive new round of economic growth. Such a possibility has been blocked by the perfectly rational notion that this would amount to economic suicide, because it would add to budgetary deficits and

A massive boost in federal spending may sound insane at this point in our economic cycle, but we might have no choice

national debts that are already so ludicrously high, they can probably never be repaid. (The Canadian deficit is at about $32 billion and our national debt is more than $400 billion.)

A massive boost in federal spending may sound insane at this point in our economic cycle, but it looks increasingly as if we may have no choice. Any such move, if it’s not planned with the exquisite care of a championship chess game, would spook the bond market, drive up interest rates, and rekindle inflation. In the old days, when Keynesian economics still held sway, it was possible to pump federal surpluses (accumulated precisely for this purpose) into the economy with little long-term harm.

Instead of shovelling funds indiscriminately into make-work projects, Ottawa will have to figure out some highly subtle but effective methods to stimulate the economy without overheating it. Probably, the government’s first priority should be to stop coddling big business, which has contributed nothing but layoffs to the economy in recent years, and concentrate its efforts on small and medium-size firms, where nearly all the job creation has taken place. That boost could take the form of tax credits instead of outright grants, though some way must be found to encourage companies of

all sizes to do more research and development

Another approach—and this one would take megabucks and should include the provinces as well as the federal treasury—would be to provide emergency subsidies to cities and municipalities, whose own fiscal crises have forced them to raise taxes and postpone public works. The Federation of Canadian Municipalities recently estimated that at least $20 billion must be spent immediately just to keep our bridges standing, highways passable, and sewer treatment plants in service. One way to dampen inflationary expectations would be to disperse these funds as interest-free loans.

The toughest measures to devise would be tax cuts. That would require Ottawa to get into the hazardous political area of curtailing or eliminating universality, so that those people who really need more money, get it—and spend it That’s been exactly the problem. Lowering interest rates hasn’t prompted consumers to start spending again; lower taxes might.

One of the many challenges in trying to revive the economy will involve changing corporate mind-sets. Company planners will have to be convinced that long-term strategy can’t be ignored entirely for the sake of short-term survival. At the moment, too many companies are maintaining their earnings by cutting expenses—instead of expanding, or even thinking of expanding their capital investments. That puts the lid on new job creation, which in turn, discourages consumers—who watch industry running for cover—from spending.

The most persuasive argument in support of a fiscal offensive on the recession is that we have run out of alternatives. We have, in fact, officially been out of the recession for several quarters now. But unemployment continues to grow, and real incomes are not rising.

The worst signal of all is the exponential growth of what Statistics Canada euphemistically calls “discouraged workers.” They are the men and women who tried their best to find jobs—and have given up. Their ranks have swelled to 100,000. Apart from the personal tragedy each of these individuals represents, their plight is not even granted statistical recognition, in that they are not included in unemployment figures. (That explains why unemployment in Newfoundland dropped last month to 20.3 per cent from 21.3 per cent)

Another astounding statistic recently issued from Ottawa shows that a million Canadians are being permanently laid off each year—and that this figure held through most of the 1980s as well as the past three years. In less recessionary times, of course, many of these people find other jobs. But the disruption to working patterns seems to go on, regardless of the economy’s health.

Most of the million Canadians due to be laid off in the next 12 months will probably not be able to find alternative work. That could drive unemployment rates to levels that no Canadian with a social conscience could accept.

And that’s why Ottawa will have to start boosting expenditures again, no matter how horrendous the risk may be of expanding our already-bloated deficit.