BAD IDEA TO BANK ON GROWTH, GORDON,
Claims that Bernie Sanders’ economic proposals would increase the growth rate U. S. GDP to an average of 5.3 per cent over the next 10 years have been met with a certain amount of skepticism, if not outright derision. On the Republican side, Jeb Bush’s earlier promise to conjure up average growth rates of four per cent met with a similar reception — and look what happened to him. At some point, enthusiasm for stronger economic growth has to be tempered with what can actually be achieved in the short and medium run. ( In the long run, of course, almost anything can happen.)
Economic growth is also a recurring theme for the new Liberal government, but not to the point where they have made any specific claims about what sort of growth rates we might expect under their government. And a good thing, too: economic outcomes are always a combination of policy and of forces beyond government control. No government can deliver on a promise to increase economic growth on its own; the best they can do is argue that their policies led to a growth rate that was higher than it would have been otherwise. ( This, incidentally, is also the reason why ranking prime ministers’ economic “performance” using average growth rates observed during their term in office is a manifestly silly and misleading exercise.)
Like all economic forecasts, the projections recently released by Finance Minister Bill Morneau should be taken with a grain of salt. But there is little doubt that the prospects for economic growth in Canada have weakened in the last few years, for reasons both predictable ( demographic projections can almost always be taken to the bank) and unpredictable (oil prices).
There is at least a plausible case to be made for the possibility of a growth surge in the United States. The share of prime working- age ( that is, those between the ages of 25 and 54) Amer- icans is still well below the pre- crisis peak — which in turn was still well below the peak reached before the 2001 recession. If the U. S. could somehow increase prime-age employment rates back to where they were 15 years ago, the resulting increase in output could be enough to generate Sanders- level growth rates for a short time as employment rates recovered their lost ground. ( Sustaining those growth rates for 10 years requires a hefty dose of wishful thinking about increases in productivity.)
Canada doesn’t have this sort of idle labour capacity that can be called upon to generate even a temporary boost to growth. Canadian prime-age employment rates have recovered the levels reached in the 2000s, and would appear to have plateaued as female participation rates have levelled off. ( Recovering the heights of 2007- 8 would probably require the same sort of conditions we saw in 2007- 8: a booming world economy and oil prices in the stratosphere.) The most promising avenue for increasing employment rates is in persuading more older workers to continue working, but this is best seen as a way to attenuate the effects of population aging, not to offset them. A surge in growth fuelled by Canadians coming out of retirement would figure prominently on a list of least likely economic scenarios.
Let’s set aside for now the infrastructure spending that the Liberals plan on financing through borrowing. Borrowing to purchase a productive asset makes perfect sense — so long as it is indeed a productive asset.
The other plausible excuse for running a deficit is as a way of smoothing spending and taxes over time. An insistence on balancing the books in every year would require governments to make changes to their fiscal stance over the cycle, cutting back in bad times and expanding in good times. Instead of offsetting the cycle, government policy would become yet another source of business cycle instability. So it makes sense to ride out a temporary downturn with deficit spending.
The problem for Morneau and the Liberals is that this is not a temporary downturn, and it would be irresponsible in the extreme to make tax and spending plans for the next four years based on the assumption that the economy will suddenly roar to life five or six years from now. A lower trajectory for revenues will have to be accompanied with a combination of tax increases that were higher than what they promised, or spending restraint more severe than what was in their platform. ( It’s also worth remembering that these savings were to be on top of the spending restraint that was baked into the Conservatives’ last budget.)
This timing is unfortunate for the Liberals. Abandoning a balanced budget has removed the first line of defence against the wave of interest groups that had lobbied in vain for extra funding from the former Conservative government. They are even less likely to accept with grace arguments about fiscal restraint from a Liberal government that campaigned on running a deficit.
I’m reminded of the 2014 video on the economy that the Liberals posted on YouTube in 2014 — many of its themes ended up in the Liberal platform. When he got to the question of how to square increased spending with fiscal responsibility, Prime Minister Trudeau said that “the answer is growth.” It wasn’t a particularly good answer at the time, and it’s now even less convincing.
IT WOULD BE IRRESPONSIBLE IN THE EXTREME TO TAX AND SPEND, HOPING THE ECONOMY WILL ROAR TO LIFE FIVE YEARS FROM NOW.