Wreck an economy, wreck a people
Just a couple of numbers give you an idea of how hard it would be to deal with any long- term suspended animation of the Canadian economy. Round numbers: last fall’s federal fiscal update had Ottawa spending $350 billion on programs, including grants to the provinces, this coming fiscal year.
Round numbers again: in the fourth quarter of last year, wages and salaries for all employees in Canada amounted to $ 260 billion. The income of corporations, their “net operating surplus,” was $80 billion. And the net income of everybody who was not a corporation or an employee — farmers and landlords, mainly — was $55 billion. So, total income for the quarter was $400 billion, give or take.
Any economy is a “circular flow of income and expenditure”: my income becomes my spending, which becomes your income, which becomes your spending, which becomes my income, which becomes … I’m getting dizzy so I’ll stop.
The goal in a crisis is to try to keep this circle unbroken. The virus causes two problems: declining income, because people get fired, and declining spending, both because people are scared and won’t spend on anything other than canned goods, cleaning products and toilet paper but also because in many cases what they’d like to spend on is either forbidden or unavailable due to problems in the supply chain.
Supply chain problems are knotty. Physicians and production engineers will have more to do with overcoming them than economists. Keeping people’s incomes up until the crisis has passed is more our line of work. But the two numbers quoted indicate the size of the problem. The federal government was planning to spend roughly $ 350 billion a year. The income it wants to try to maintain is roughly $400 billion a quarter.
Mind you, not everybody’s income will have to be supported. Most of us are still working and ( touch wood!) hope to continue. Many people have rainy- day savings. But put together two widely cited numbers — U. S. Treasury Secretary Steve Mnuchin’s speculation about unemployment rates spiking (very briefly, we all hope) at 20 per cent and Denmark’s plan to pay people 75 per cent of their incomes — and the money adds up fast. Three-quarters of one-fifth of $400 billion is $ 60 billion. And that’s just for one quarter. Suppose you had to spend that for a whole year. You get to $ 240 billion, which is two- thirds of planned program spending.
That number is almost certainly wrong. The calculations are not even backof- the- envelope, more like back- of- a- tweet. And we all hope the worst lasts only weeks. But the point is that Canadian income is a big number and buttressing it in any serious way will be expensive.
Where does the money come from? Ottawa will continue to get tax revenues from the parts of the economy still operating. But less than it had been counting on, both because the economy will be smaller than budgeted for, but also because some policy responses will involve tax forgiveness, either temporary or permanent, as last week’s package did. So a lot will have to be borrowed. Not an unprecedented amount: Ottawa borrowed bazillions during the world wars. But quite a bit.
“The world needs more Canada” is a boast more familiar to ourselves than to the world. But does the world need more “Canadas”? In other words, does it really need more bonds issued by the Government of Canada, not to mention all the other Canadian governments that will be going through similar calculations and with even greater urgency since at the moment the purchase or production of ventilators is orders of magnitude more important even than income replacement?
The mantra of the last few years has been that greater government borrowing is not really a problem because interest rates are so low. Yes, they are low. But after bottoming out a couple of weeks ago, rates on longer maturities have been rising. Not dramatically so, but enough to make you wonder whether they really would remain low if our governments, along with all other governments, suddenly doubled or tripled the amount they were trying to sell. “Doubling” is no exaggeration. The $ 27 billion Ottawa announced last week almost exactly doubles the federal deficit that had been forecast last fall. To say nothing of the tax deferrals and all the other measures the government said it would take if necessary.
Even if the market does decide it doesn’t want all these new Canadas, we still have the Bank of Canada to fall back on. But if the bank does buy up all or most of the new debt, of which there may be lots, that will effectively constitute a natural experiment in “modern monetary theory,” which Sandernistas and others say means a country with its own currency can issue as much debt as it likes and the only thing it has to worry about is inflation.
Compared to catching a deadly virus, that may not seem like much of a worry. But inflation is an economic scourge. Look at the damage it did in the “stagflationary” 1970s. The lesson that period taught? You wreck an economy, you wreck a lot of people in the process.