Will the economy survive election promises?
The election is just over three months away, the campaign is on, and with any luck the economy will survive it.
No, I am not referring to the multiple ills from which the economy is said to suffer, from painful swelling of the trade deficit to hardening of the yield curve. It is the determined efforts to save it I fear — for nothing is as likely to kill the patient as the remedies proposed by its unlicenced physicians.
Let’s leave to one side Wednesday’s one-quarter percentage point cut in the Bank of Canada’s benchmark interest rate, the necessity of which strikes me as unproven. Central banks, as John Crow used to say, must operate like a motorist driving through fog navigating only by the rear-view mirror. That is, the evidence on which they base policy will typically be not only ambiguous and inaccurate, but months old, while its effects, as uncertain as they are, will not be felt until many months later.
That the economy was contracting six or even three months ago does not necessarily mean rates should be cut today — even assuming monetary policy had such certain and instantaneous effects as today’s neo-fine-tuners seem to believe. At that, beyond the short run the bank can really only effect changes in nominal variables — inflation, or nominal gross domestic product — not the things politicians hope it would and think it should, like unemployment or softness in particular regions or sectors.
Still, so long as the bank remains resolutely focused on keeping inflation at (or preferably under) two per cent, who am I to judge? Though the tendency of the U.S. Federal Reserve to gin up higher inflation the year after an election — in pursuit of higher output the year of — is well documented, I know of no evidence of any similar politicization of the Bank of Canada, under this or any previous governor. So there is no reason to think this rate cut has anything to do with the election.
Not so for just about everything else coming out of Ottawa these days. Politicians are forever trying to convince the public they have magical powers over the economy — witness the commitment of every successful candidate or party to “focus” on the economy, as if just by staring at it they could make it better — and never more so than when there is an election on.
Just the whiff of a downturn, real or apprehended, past or present, has them all in a frenzy. The opposition are demanding fiscal stimulus, while the Tories claim to have already delivered it, in the form of next week’s mail out of backdated child benefit cheques (a $3-billion “injection,” as Pierre Poilievre keeps calling it) each apparently oblivious to the fact that unless you actually alter the government’s net fiscal position — go into deficit, in other words — there isn’t any stimulus, even in Keynesian terms. Naturally, none of them admit to any such ambition.
There’s no particular reason for the government to resist a small dip into deficit: provided the recession is as mild and short-lived as it appears, the budget should return to balance soon enough. But neither is there any particular reason to increase the deficit. Businesses know that downturns, even serious ones, end at some point. What they want to know is what’s on the other side. Will there be policy stability, of a kind they can plan on when considering investments? Or can they look forward to years of rising taxes, the legacy of deficits foolishly taken on in the name of short-term fiscal stimulus?
Anyway, get used to it. In a tight election, every vote counts — or rather, not every vote counts: in a first past the post system, the votes of particular regions and ridings count for a lot more than others, and within those swing voters count most of all. So we are in for three months of high-impact, precision-targeted, full-metal-jacket pandering, with the economy as collateral damage.
The Tories, in particular, seem to be in a state of advanced panic. In addition to the baby bribe, nameless government sources are whispering to the National Post’s John Ivison about possible further tax cuts: not, it seems, another cut in the goods and services tax (even the Tories blanch at its $7-billion for each percentage point cost) but perhaps an increase in the basic personal exemption. For most people, this would have no effect on incentives — it’s the marginal rate that counts — at considerable cost in money we don’t have.
Meanwhile, the Globe & Mail reports that 83 per cent of federally-funded infrastructure projects are located in the 52 per cent of federal ridings currently held by the Conservatives.
The Temporary Foreign Worker program, largely a success story but broadly and unjustly maligned in parts of the country where the Tories hope to win votes, is to be further cut back and beaten up.
Even the free trade agreements that are the Conservatives’ chief policy achievement — the Trans- Pacific Partnership with Asia and the Comprehensive Economic & Trade Agreement with Europe — seem hostage to the election cycle, always nearing completion but never concretely realized, for fear that somebody somewhere might find some reason to object. Exasperated American officials are even threatening (off the record) to throw us out of the TPP talks, given our apparent obstinacy over supply management.
Cheer up, it could be worse. And by the time the campaign is over, it almost certainly will be.