ANDREW COYNE

THE CANADIAN ECONOMY IS ILL, BUT THE REMEDY THE FEDERAL GOVERNMENT IS PROPOSING — MORE FISCAL STIMULUS FOR THE PATIENT — IS NOT THE CURE, IT’S A CURSE.

A s the finance minister prepares his fall economic update, the outlook is decidedly gloomy. July’s uptick in economic growth was almost wholly rooted in the oil sector. Otherwise growth has been slow to imperceptible for most of the year, underperforming even the spring budget’s cautious forecast of 1.4 per cent — a trend expected to continue at least into next year. Job growth has been even worse. Wages are flat. Household confidence is at its lowest level since the spring.

Naturally Bill Morneau is claiming victory. “In our last budget we made provisions about the level of growth and we put in a level of prudence,” he told reporters this week. “Now I can say we made a good decision because the level of growth is a bit lower than forecast.” Still, with the economy in such a sickly state, he is reportedly contemplating what remedy he might apply. The leading candidate would appear to be fiscal stimulus. “Ottawa is considering using the update as a vehicle to help boost the sluggish economy,” The Canadian Press reports, citing “government insiders,” while Bloomberg notes that “pressure to increase spending is beginning to grow,” what with “the weak economic outlook” and all.

Huh? Wasn’t stimulus supposed to have cured the patient already? Isn’t that what the last budget was about? Whereas the previous government had sacrificed the Canadian economy on the altar of fiscal austerity, the Liberals, harnessing the very latest in economic thinking, would spend billions more than they took in, and borrow the difference — an idea that was last new in 1936, but no matter. The budget was filled with wonderful estimates of the fiscal “multiplier,” the formula by which the loaves and fishes in private hands are redoubled by virtue of being borrowed and spent by government.

Stimulus there has certainly been. The Parliamentary Budget Officer reports spending jumped nearly six per cent in the first quarter of the current fiscal year over the last. Spending on “infrastructure,” in particular, is pouring out at a frantic rate, up 19 per cent, not directly but handed out in grants and contributions to thirdparties: a spree the PBO describes as “unprecedented.” Over the summer, the National Post’s David Akin reckons the Liberals handed out 1,447 cheques worth a combined $7.8 billion. On the tax side, meanwhile, there was the celebrated middle-class tax cut, introduced last December, and increases in child benefits.

And the result of all these billions in borrowed munificence? Diddly. As a way of kick-starting economic growth, fiscal stimulus, as attempted by the government of Canada in 2016, has had about the same success it usually has: whether in the United States in the 1960s, or Britain in the 1970s, or France in the 1980s, or Japan in the last two decades — or in Canada, for that matter, on those occasions it has been tried here. (The deficits sometimes credited with hauling the economy out of the 2009 recession kicked in well after the recovery had begun.) Yet somehow the answer is always the same. If fiscal stimulus has failed to revive the economy — again — the only possible solution is more stimulus.

Whether or not there is a general case for fiscal stimulus, it was always to be doubted how relevant it was to Canada, the proverbial “small open economy.” If our openness to international capital flows made classical “crowding out” unlikely — any shortfall of domestic savings could always be supplemented from abroad — the same made any stimulative effect of increased borrowing ephemeral at best. For foreigners can only lend us the Canadian dollars they make from us on trade: the increase in government spending is thus met by an offsetting deterioration in the balance of trade.

That, however, is not the point. It isn’t the remedy the Liberals have wrong, so much as the diagnosis. The weakness in Canadian growth is not a short-run thing, as in a recession, a matter of a temporary deficiency of demand. It is long-term — the weakness of this recovery has been observed for several years — and driven by a weakness of supply. The problem isn’t too few dollars chasing too many goods. It’s the economy’s productive capacity that is the constraint. In such circumstances, neither fiscal nor monetary stimulus are of much use. It isn’t a matter of macroeconomics at all. Really, it’s micro.

Consider the factors that are generally agreed to be holding the economy back. The collapse of oil prices? That’s a supply issue. The lingering after-shocks of the financial crisis in the banking sector? The aging of the population, and consequent shrinking of the supply of labour, as more baby boomers leave the workforce than young workers enter it? Chronically anemic productivity growth? All supply issues. You can issue as many government bonds as you like, force the Bank of Canada to buy them all, it’s not going to fix these sorts of problems.

To be fair to the government, it periodically gives evidence of some awareness of this. The infrastructure binge, for example, is sometimes justified in the name of stimulus, sometimes for the longer-term productivity gains it is supposed to deliver. But even billions in infrastructure spending are unlikely to deliver the kind of large, sustained boost to productivity needed to offset population aging, whose effects will be felt for several decades. For that we will need deep, even radical structural reforms — and a much deeper debate.