National Post (National Edition)
CANADA IS HAVING A MUCH BETTER CRISIS THAN THE U.S.
Even though some fret about debt and deficits
You've likely heard the cliché that when the United States sneezes, Canada catches a cold. What if that no longer happens? What if both get sick, but Canada gets better sooner because it has a stronger immune system?
Beata Caranci, chief economist at Toronto-Dominion Bank, and Sri Thanabalasingam, a member of her team, have dug into employment data and determined that U.S. recessions in 2001 and 2008-09 were actually harder on Americans than Canadians, upending conventional wisdom about the North American economy.
The same is true so far of the COVID-19 crisis: Canadian employment in September was 3.7 per cent below its pre-pandemic level, while the gap in the U.S. was about seven per cent. That's enough for economists at Canada's second-biggest bank to conclude that it's time to check our assumptions.
In a world of simple analysis, three times is a trend, they said in their report, which was published on Tuesday.
Their observations come at a good time. You can feel the pundit class drifting ahead of itself by emphasizing the size of the deficit, while losing track of what all that spending has achieved.
It creates a negative vibe that could cause politicians to retrench before the work is finished, like they did in the aftermath of the Great Recession, when Conservatives and the New Democratic Party prioritized balanced budgets.
“This is a war,” Carmen Reinhart, the World Bank's chief economist, told Bloomberg Television last week. “During wars, governments finance their war expenditures however they can and right now there are dire needs.”
But while Caranci was rewriting old adages this week, one of her predecessors returned to the pages of the country's biggest newspapers to caution that history could be repeating itself.
Don Drummond, the former senior Finance official who left Ottawa in 2000 to run TD's economics shop, published a report for the C.D. Howe Institute that warns a budget crisis of the sort he helped to solve in the mid-1990s is coming.
The federal government “was not well positioned” for spending increases before the pandemic, and “it is even more constrained now,” he said in his report. “The September speech from the throne paid no heed to this reality.”
Canada's budget deficit was about one per cent of gross domestic product before the pandemic, a comfortable position for a country with a rock-solid credit rating, so Drummond is revealing his bias by stating that Ottawa wasn't in a position to handle increased spending.
The former mandarin sketched four scenarios about how Canada's fiscal future could unfold, and seems to favour one that would see annual deficits of about $25 billion for at least the next decade. Interest payments (on all that new debt) as a percentage of revenue could be kept at about 10 per cent, a target that David Dodge, the former deputy finance minister and Bank of Canada governor, has put forward as a reasonable marker. It would avoid the austerity that followed the Great Recession, but leaves very little room for the new spending foreshadowed in the most recent throne speech.
The flaw with Drummond's analysis is that it puts more emphasis on negative outcomes than the possibility that things could turn out better than he imagines. “Reasonable risk management strategy pays a lot of attention to the downside,” he noted.
Drummond flags the punishing interest rates of the 1990s, but says nothing about how the “bond vigilantes” of that era have essentially disappeared and there's no mention of how the boundaries of monetary policy have radically expanded.
A budget strategy based on a significant spike in interest rates might not be reasonable, either. The biggest central banks have made it clear that they intend to keep borrowing costs ultra-low for at least a couple of years, at which point they will shift to interest rates that are simply low by historical standards.
But even when that happens, the managers of vast pools of international wealth will still want debt to offset their riskier bets, implying constant downward pressure on borrowing costs.
“Many of us have been wondering where the bond vigilantes have gone; it's kind of surreal,” said Michael White, a portfolio manager at Toronto-based Picton Mahoney Asset Management. “We're kind of living out a new rule book.”
Toronto- Dominion's Caranci shows the upside risk of testing the new rules. No U.S. industry has returned to pre-pandemic employment levels, while utilities, education and professional services in Canada have all returned to normal. Participation rates were stronger in Canada before the crisis, and are even more so now, as Canadians have resumed looking for jobs at a faster pace than Americans.
Caranci said Canada's relative success at getting people back to work is the result of a more effective COVID-19 strategy, stronger “backstops” for parents and the willingness of governments to spend relatively freely. The latter shows up in the hiring of health workers and teachers, which has been much stronger in Canada than in the U.S., where states tend to be constrained by strict spending limits.
No one thinks Canada should spend at current levels for an extended period of time, but it would be a mistake to pull back too soon. Yes, it's unfair to saddle the next generation with our debt, but it would be worse to bequeath them a weak economy. That is currently a bigger issue for the U.S. than it is for us.
“If the past is any indication, there's a good chance Canada's job market will maintain resilience through the pandemic, offering the potential for less longer-term scarring than its U.S. counterpart,” Caranci concluded.