Open Letter from Canadian Economists on the Current Economic Crisis and the Appropriate Government Response

Reposted from an e-newsletter circulated by the CCPA

The deepening global financial crisis, the decline in world commodity prices, and the growing possibility of global recession are exposing worrisome weaknesses in Canada’s economy. Complacent expressions of faith in our “fundamentals,” and other varieties of economic denial, will not protect Canadians from the coming storm.

Canada’s Economic Fundamentals are Anything but Strong

Macroeconomic performance has weakened dramatically since the current government came to power at the beginning of 2006. Economic growth has largely stalled. Productivity has declined. The recent expansion was largely propelled by high commodity prices and a housing bubble – both of which are now ending.

Labour markets have weakened, and employment is poised to decline further as the slowdown takes hold. Some sectors have already been badly hit. Over 300,000 jobs in manufacturing have been lost. Yet less than 40% of unemployed workers qualify for Employment Insurance benefits.

Excluding petroleum and minerals, our international trade performance has deteriorated. Incomes for corporations, governments, and some households have been inflated for a time by record global commodity prices. But over-reliance on resource extraction is not a sustainable basis for our future economic progress. Meanwhile, in large part as a consequence of this growing resource reliance, Canada has failed miserably to do its part in the urgent global effort to limit greenhouse gas emissions.

Although Canadian financial institutions did not engage as aggressively in risky practices as their U.S. counterparts, the Bank of Canada has already had to step in to provide many billions of dollars in short-term liquidity. Credit conditions in Canada are becoming more uncertain, restricted, and costly, and this will inevitably constrain spending and output in the months ahead.

Canadian households are more indebted than ever, with $1.25 of debt for every dollar of disposable income. Amid gloomy headlines, falling stock and housing prices, and precarious household finances, Canadians are starting to cut back on consumer spending.

Many Canadians did not benefit much during the good times: poverty rates in Canada did not meaningfully decline and real wages have hardly increased at all, even while corporate profits surged to all-time highs. But the prospect of recession now threatens all of us with hardship – whether we shared in the good times or not.

Crisis Demands an Active Government Response

The general approach of Canadian economic policy in recent years has been to reduce the scope of government (through tax cuts, deregulation, and privatization), ratify the growing resource orientation of Canada’s economy, and squander the chance to use revenue from the resource boom to enhance long-run productivity, prosperity, and stability. Some politicians wish to further reduce the size and influence of the public sector.

The dramatic events of recent weeks have destroyed the idea that markets are best left to their own, unregulated devices. The enormous costs of this complacency have been clearly demonstrated. Government and its institutions must now show leadership and play a more active role in stabilizing financial markets, stimulating real investment, and maintaining employment and incomes.

The spreading downturn in both the financial and the real sides of the economy is likely to undermine spending and employment levels in many regions and sectors of Canada’s economy. Income support measures, employment insurance in particular, should be strengthened. In addition, public infrastructure projects, including those aimed at reducing Canada’s greenhouse gas emissions and expanding affordable housing, should be ramped up to maintain employment and production (as private-sector activity declines).

The federal budget is narrowly balanced, and may slip into deficit (especially if real GDP begins to decline). The current government has pledged to prevent such a deficit at all costs, and this will mean significant cuts to public spending as the budget balance deteriorates. But that course of action would worsen the economic downturn and job losses. It is far better to maintain public programs to support employment and incomes, even at the cost of a cyclical deficit.

The Bank of Canada must continue to support the financial industry with liquidity, and should reduce interest rates to stimulate borrowing. But the government must also explore other avenues (including the use of public institutions, like the Canada Mortgage and Housing Corporation, the Business Development Bank of Canada, Export Development Canada, and other conduits) to expand lending to households and businesses. At the same time, the financial industry must be re-regulated to prevent the unproductive speculative excesses that caused the current crisis.

The global economy is heading into a challenging, dangerous period – perhaps the worst crisis since the 1930s. Canada cannot expect to be immune from those global developments. Economic history teaches us that government intervention is essential in times of crisis: both to stabilize markets and to shorten downturns with counter-cyclical measures.

Signed by: 85 economists
http://www.progressive-economics.ca/2008/10/07/open-letter/
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Canadian Centre for Policy Alternatives
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