Reply to A. Coyne: Spend All That Money, Mr. Trudeau? Why Yes & On That!

(Revised Sept. 3, 2015)

The Tuesday confirmation by Statistics Canada that the country was officially in a recession the first half of this year is not much offset by June’s growth rate of only 0.5% (0.1% non-annualized), when compared to America’s 3.7%. The electoral debate on the merits of the Liberal promise to stimulate the economy and incur deficits can certainly continue.

Andrew Coyne (“Spend all that money, Mr. Trudeau? Why and on what?” National Post Aug. 29) is right in stating that the Liberal promise to double federal spending on infrastructure and incur deficits is not political suicide, given that governments in the red are regularly re-elected, including Prime Minister Harper. Nor that it will “wreck” the economy, as the Conservatives have charged.

He errs however in my view when he states that extra spending won’t “kick start the economy,” no matter what the size of the expenditure is, because “government policies, as a rule, simply don’t have that kind of transformative effect, for good or ill – certainly not in the mild doses the Liberals have in mind."

Let’s break this down by first examining the effect of large doses of stimuli during the two worst economic contractions in a century, should anyone doubt it, and then looking at the merits of milder ones, including the Liberal plan. 

Between 1932 and 1936, the New Deal in the U.S. and similar programs in Canada and Europe, along with quantitative easing, made significant progress towards ending the worst economic depression ever. That is until fiscal conservatives shut the valves off in 1937, frightened by growing national debt.

World War II and its obligatory expenditures was the ultimate stimulus that finally got us out of the Great Depression. Public debt in Canada reached 100% of GDP, 150% in the U.S. and 250% in the U.K., by war’s end.

Similarly in 2008-2009, had the major world economies not come to the rescue, “too-big-to-fail” corporations would have fallen like dominos along with the World financial system. And that’s just for starters.

Like the PM, Coyne was opposed at first to any stimulus in 2008-2009 to counter the largest financial and economic crisis since the 1930s – their default setting it appears.

According to Nobel laureate in economics and Princeton professor Paul Krugman, the stimulus saved millions of jobs and businesses even though it wasn’t large enough to pull us out of the Great Recession sooner. 

Instead, parliaments on both sides of the Atlantic facing mounting debt began cutting back by 2011, but then eased up again fearing a double-dip recession. Not in Canada. Harper was bent on eliminating the federal deficit in time for the 2015 election, come what may. 

What came our way were real annual growth rates under 1%, half as good as the American economy since 2010, and an official recession while our allies were still growing. 

No, the recession is not solely due to dropping oil prices, nor limited to oil and gas producing provinces. Our governments have something to do with it.

Program cuts, government layoffs, concentration on hydrocarbons, etc. have taken their toll. Our manufacturing sector, particularly in Central Canada, has been dwindling for years and the Quebec economy, where I live, isn't faring much better; the last three months of reported GDP in the province are all below zero and worsening (March-May 2015).

Are mild doses of stimulus then “all so pointless and ill-conceived: unnecessary, at best, and likely to involve considerable waste of public funds,” as Coyne claims?

It all depends on the severity of the recession and what the plan contains. Mild recessions and sluggish growth can be reversed with moderate stimulus, depending on its size and content. Canadian governments intervene all the time, boasting the entire economy or certain key sectors with subsidies, tax credits, quantitative easing, and moral suasion. Why would it all of a sudden be any different?

And, yes, what goes into the plan makes a huge difference, as Coyne correctly points out. Paying people to dig holes and fill them up again may be good for the economy, not so much for progress.

Coyne then asks whether Canada is actually in a recession now, since Stats-Can’s data is “three to nine months ago. Even if we were in recession then, there is nothing to suggest that we are now.” So why bother?

First of all our economic performance is anemic at best and has been for a long time, regardless of whether we are slightly above or below 0.0% growth right now. 

Secondly, a huge downturn in global stock markets as we've seen in August, especially in China, is usually a precursor and forecast of economic decline 6-9 months down the road. And it appears it won't correct itself amid all the volatility. 

So even if we show positive growth figures over the next few months, the trend likely won't last long, unfortunately. The sooner we react, the better. 

As former U.S. Treasury Secretary and head of  President Obama's  National Economic Council Lawrence Summers said during the 2008 economic meltdown, "It is a lot easier to correct the errors of overreaction than the errors of underreaction," and that every experience with financial crisis "suggests that since markets overreact, policy has to overreact as well. And that means strong action," as quoted in The Wall Street Journal.

Which brings me to Coyne's next point. He and many monetarists hold the view that by the time the stimulating measures take hold, the recession is likely already over.

It actually depends on the types of expenditures. Many can be move quickly such as income and payroll tax reductions, increases in family allowances and pensions, improving employment insurance eligibility and benefits, even repairs and to infrastructure that we desperately need. Renovations and especially building new infrastructure from scratch (bridges and housing, for example) takes longer.

More importantly, the announcement of fiscal measures and continued monetary easing alters consumer and business expectations. There is less chance they will stop spending or investing, and save for a deluge, when the outlook is brighter.

I’ll leave aside his questioning whether the Liberal proposal to invest in social housing, daycare centres and water treatment centres are actually bona fide infrastructure outlays, only to say they are and have economic, social and, in the latter case, environmental benefits.

More disconcerting is his neoliberal mantra advocating tolls and fees on anything the private sector can build, own and charge for. “If you can charge for them, they aren’t really public goods: the sorts of things that can only be paid for by taxes,” he argues. “And if governments needn’t fund them, they probably shouldn’t.”

Roads, bridges, schools, hospitals and fenced-in parks meet those criteria...

“Probably there are some things that only government can pay for that are not at present being adequately funded.”

Probably?

Robert M. David is an economist and teaches at the University of Ottawa and Concordia University.