I'll bet the subject line of this post pulled you right in, right?
OK –it's hard for this subject to get, say, the attention Tiger Woods got yesterday from stock markets, but some of the points raised in a blog post by Laval University economist Stephen Gordon seem, to me, to be a good starting point for some discussions Canadians and their politicians ought to have about some of the basic operating parameters of our economy and some of the themes that a prime minister writing a throne speech this month might want to think about.
The folks providing comments to Gordon's post also make some good points. I like Angelo Melino's comment: He makes the point that Canada shouldn't be so smug on the world stage about its system of financial regulation and banks:
The ABCP fiasco stands out as the biggest failure of Canadian policymakers during the crisis. The "General Market Disruption" clause was a purely Canadian creation that managed the remarkable achievement of being so sketchy as to get a thumbs down from the big US ratings firms, even though they had no problems rating lots of subprime mortgage junk as AAA. We still have to get to the bottom of what went wrong there and whether or not it was just a "one-off" failure.
Gordon's post is written mostly for people who are economists or almost become one but it's still written in a way that anyone ought to be able to grab the key points:
It's pretty hard to make the case that the most recent recession was caused by errors on the part of the Bank of Canada and/or the Department of Finance. And it's only slightly less hard to make the case that the recession was exacerbated by Ottawa's mistakes. But it would be a mistake to be entirely complacent about the recent experience – what lessons should we take from it?
First, Gordon reviews the Bank of Canada's longstanding target of maintaining inflation at 2 per cent come hell or high water. This review is made, Gordon notes, as the International Monetary Fund's economists begin asking around if inflation targets would work better at 4 per cent. Gordon's conclusion: 2 per cent is working just fine.
Gordon then looks at the fiscal policy response to the recession, the notion that we're all Keynesians now — even Prime Minister Stephen Harper and his band of small-government, deficits-ought-to-be-illegal supporters — and that, as such, governments were right to throw billions upon billions at the problem.
But what did this extra spending buy? In the standard Keynesian one-good framework, it really doesn't matter what you buy; all that matters is pumping up aggregate demand. But as I noted over here, employment losses were largely concentrated in the Ontario manufacturing sector: 5.3% of Canadian workers absorbed more than 36% of total job losses . . .
I'm much less sure of the efficacy of spending money in sectors and regions that were untouched by recession. It sent the worst possible signal to the usual gang of well-connected, media-savvy interest groups: "We're giving money away, and we really don't care who gets it!". The result was a contest in which those with the sharpest elbows and the best PR campaigns won. This is not a competition in which the most marginalised elements of society do well.
My preference would be to refuse to play this game, and to focus on strengthening the social safety net for those who need it most.
As Parliamentary Budget Officer Kevin Page has pointed out on more than occasion, Canada's famous social safety net is now full of holes and doesn't necessarily do what its original designers intended to do. The key policy tool in that social safety net is employment insurance. A well-designed employment insurance system can act as an automatic stabilizer for economies. When an economy starts to slow and people are losing jobs, a robust EI system can pump more money into the system faster and with better effect than any government program can. That's because the money tends to go to the regions and groups that need it — "the most marginalised elements of society" — and they tend to spend all that assistance and that spending can, in turn, help reinflate the economy. A well functioning EI system, then, accounts for regional imbalances and targets help to regions hardest hit. A national infrastructure plan, by comparison, has to appear to be sending money to all regions equally and, indeed, opposition politicians and journalists have made it a point of holding the government to account to ensure that one party's ridings or one region doesn't get more than another group. (I'm one of those journalists tracking that distribution).
It's a point that probably no politician can make but "stimulus money" ought to go where it's needed most and not to all regions based on some per-capita basis. Take a look at the heat Harper and Co. took for bailing out the largely Ontario-based auto sector. Gilles Duceppe and the Bloc Quebecois are still carping that Ottawa ignored Quebec to favour Ontario's car industry. (I'm not so sure Duceppe's complaint is well-founded: Ottawa has also provided significant sectoral support to the forestry industry, which helps Quebec out, and has transferred billions of federal cash to the Quebec government with no strings attached, but I digress …)
But beginning with the Liberal administrations of Jean Chretien — who, to be fair, was fighting monster budgetary deficits — Canada's employment insurance system got progressively weaker and less robust. Going into the recession, more Canadians were not covered by EI than were. A patchwork of 30 or 40 different qualifying criteria led to charges that EI was unfair. (Ironically, the Liberals in the House of Commons now led the charge to change that patchwork system and it was their predecessors in government in the last decade that introduced that patchwork.) As a result, the EI system was not ready to be the rapid-response economic stabilizer that it could have been.
The government Conservatives did make some changes — many of them temporary — to EI but, presumably, as the recession eases and everyone looks to fix things so that we're better off next time, our tax dollars may be better off spent being allocated to a robust social safety net rather than on billions in a stimulus "spend it on anything" plan. Or at least that's my take from Gordon.
Tags: employment insurance, inflation targets, bank of canada, economy, fiscal policy
