Good economic ideas seem to be in short supply
As Canada’s top politicians were duking it out over the appropriateness of a pro-Trudeau tweet from Barack Obama or a Conservative leader with American citizenship, the rest of the world had other things on its mind.
In the seven weeks since the election was called, the United States and China have rekindled their on-again-offagain trade talks and seem to have avoided another dramatic escalation. Tariffs remain on hundreds of billions of dollars worth of trade. Brexit has been to the brink and back several times. The Donald Trump “chaos trade” — where traders make billions in anticipating what extreme action the U.S. president will take next — has become a thing, according to Vanity Fair.
And the International Monetary Fund has downgraded its expectations for global growth — again – for 2019 and 2020.
In Canada, instead of debating visions for how to navigate this perilous new world of brinksmanship and vindictive protectionism, we are caught up in a parochial campaign whose economic focus is narrowly trained on competing tax cuts and tax hikes, real or imagined.
Canadians will head into the polling booths on Monday without a clear idea how their next prime minister — regardless of who he or she is — will handle the global turmoil almost surely heading our way. We do know a few things. The risks to Canada’s economy right now remain in the realm of just that: risks, not realities. But increasingly, forecasters, the IMF and central banks alike are incorporating risks more fully into their forecasts because the stakes are so high and the volatility so severe, with spillover effects on business decisions.
The traditional medicine for economic weakness and turmoil is monetary policy, but we can’t count on that like we used to. Interest rates are already very low. The Bank of Canada has a bit of space to move lower, but why would it? At this point, the economy is chugging along, the housing market picked up over the summer and is giving consumers a boost, and the central bank is loath to do anything that would encourage already heavily indebted homeowners to take on even more debt.
The response to a slowdown and to crumbling business confidence for the mediumterm will probably lie in fiscal policy. Are we ready for this? If we are, it’s certainly not because the parties and their leaders revealed or hashed out competing plans.
Canadians can take some comfort in the fact that the federal books are in solid enough shape to finance stimulus — if the governing party is willing. But that’s not a sure thing. The last global downturn 11 years ago is instructive. Even as Lehmann Brothers collapsed, financial markets around the world seized and global trade ground to a halt, the Conservatives under Stephen Harper campaigned in the fall of 2008 on staying out of deficit no matter what. They formed a minority government in October 2008 and quickly ushered in an austerity mini-budget — as promised during the campaign. The move precipitated a political crisis in Ottawa, and the opposition parties attempted to forge a united front to change direction. They were stymied by the Conservatives, but by February 2009, Harper did dramatically alter course. He brought in a massive stimulus package in short order, using billions in infrastructure spending to cushion the blow.
Then is not now, of course, and there are some key differences. The Conservatives under Andrew Scheer are not as ideologically opposed to running deficits as Harper was, and Scheer is not contemplating balancing the books for another five years. The Liberals have committed to doing what it takes to stimulate the economy if it turns sour. So there’s a lot more political flexibility around deficits now than there was a decade ago.
But infrastructure is not the elixir it once was either. Back then, the federal government turned to infrastructure because it was considered a quick and productive way to pump billions of dollars into the economy at the time it was thirsty. But now, we are infrastructure’d out. After years of heavy spending in that area, the sector can’t keep absorbing any new money in an efficient way. It’s not really a fiscal-policy tool any more.
A federal government looking for ways to insulate Canada from a downturn would have to be more creative.
In a recent paper on fiscal stimulus, Scotiabank economists point to boosting transfers such as employment insurance and the Canada Child Benefit if Ottawa needs to inject quick money into the economy.
But that still leaves the bigger issue of navigating through a world where the economic superpowers, United States and China, are angry, unpredictable and at each other’s throats, compromising the entire global economy. If the campaign is an indication, good ideas for Canada are in short supply.