Wrong time for policy-makers to hesitate on spending to rescue economy during virus war
The day before Justin Trudeau announced his economic rescue, Gerald Butts, the prime minister’s former principal secretary, advised his more than 74,000 Twitter followers that if they were looking for insight on the “economic fallout” from COVID-19, they should follow Jason Furman, a Harvard economist who served in Barack Obama’s White House.
“Former Obama economic advisor and super smart guy,” Butts tweeted.
Butts might have alerted his filter bubble to the existence of Furman a little sooner. The former chair of the Economic Council Advisers was there when Obama inherited the beginnings of the Great Recession from George W. Bush. Furman told Vox last week that the new coronavirus crisis “feels much worse than 2008.”
Among his suggestions for the current set of policy-makers who are duty-bound to confront the global recession that is now upon us: “First, just don’t be too finicky about clever design and targeting.”
Maybe it’s just me, but Team Trudeau has looked a bit finicky in its response to the coronavirus crisis. There are no obvious faults with the $27-billion worth of support for individuals and businesses, other than the total — about one per cent of gross domestic product — was on the small side of what’s needed, and there was nothing in the bundle so novel that it couldn’t have been pulled off the shelf a couple of weeks ago.
Bill Morneau, the finance minister, also said that he would allow companies to defer tax payments until September, a pledge that Morneau budgeted at $55 billion, bringing the combined value of economic commitments to about three per cent of gross domestic product, or half of what Sweden put forward on March 16.
Ted Carmichael, a former Bay
Street economist, and Jim Stanford, a former union economist, both said the Canadian package was too small relative to the size of the problem.
Fortunately, Morneau seems to know that. He called the Wednesday announcement the “first phase” of a response that will scale to match an evolving threat. He indicated that he could soon have more to offer specific industries, in particular tourism and the air transportation. He also said he would work with provinces such as Alberta and Newfoundland and Labrador individually to help them offset the startling collapse of oil prices in recent weeks.
“As your minister of finance, I will do whatever it takes,” he said at a press conference in Ottawa. “Our approach is elastic.”
Currency traders were underwhelmed. The Canadian dollar was trading at about 69 cents to the U.S. dollar, down from around 72 cents at the start of the week. To be sure, there is a lot of heavy weather in global markets right now, but nothing Trudeau and Morneau said on Tuesday did anything to offset the pounding that Canada is taking.
It’s the wrong time to hesitate. Many economic heavyweights, including Olivier Blanchard, the former chief economist at the International Monetary Fund, have been urging governments to spend in the neighbourhood of at least five per cent of GDP, if not more. “The world is de facto at war — against the virus, rather than against each other — this is the good news,” Blanchard tweeted on March 15. “Let’s not be squeamish.”
But like I said, maybe it’s just me who thinks the Trudeau government wasted time trying to be too cute. Others had positive things to say about Morneau’s initial effort, including Stephen Poloz, the Bank of Canada governor, who called the elasticity of the government’s various initiatives “a very desirable feature,” adding later that “this fiscal package is going to make a big difference.”
Any rescue plan must get cash to individuals quickly, offer incentives for employers to keep their workforces intact, and provide enough short-term financial support so otherwise profitable businesses aren’t wiped out by forces beyond their control.
A tax holiday will help with the latter, as will $10 billion in new capital for two Crown lenders, Business Development Bank and Export Development Canada.
(By comparison, Germany, a country with a serious cultural aversion to public debt, said last week that its companies will have access to “unlimited” bridge funding.) Most of the new money was set aside for individuals and households, and will be dispersed through existing programs such as the GST rebate and the Canada Child Benefit.
“The key question today might be whether tailored and targeted is better in practice than a broadbased approach of just cutting everyone a cheque,” said Rebekah Young, a former Finance economist who now works at Bank of Nova Scotia. The new package “makes the best of the tools we have,” and might ultimately have a bigger impact than a bigger program because the cash will be dispersed to households with the greatest propensity to spend it, Young said.
The new demand-side measures gave at least one executive comfort. To date, the most active recession fighters have been Poloz and his team at the central bank, who have deployed an impressive array of lending programs aimed at containing the cost of credit.
That’s great, said Kurtis Mcbride, chief executive of Miovision Technologies Inc., but companies also will need orders.
“Beyond these initial measures, the best thing the government can do is step in and address this demand shock,” Mcbride said in an email. “We need to provide funding to customers to buy things from vendors versus just trying to shore up the working capital of companies.”
Morneau appears to have the makings of decent rescue package.
Now he needs execute with pace. The time for tinkering is well past.