Governments around the world are heading down a path to economic suicide.

So said Nobel Prize-winning former chief economist of the World Bank, Joseph Stiglitz, to hundreds of well-heeled financiers and decision-makers who paid a bundle to hear him in Toronto.

With a voice as gruff as gravel, and an energy bristling with urgency, he told governments in Canada and the rest of the world now is the moment to address unmet needs, and use underutilized resources. Failure to do so would unnecessarily prolong the tough times.

Addressing the 5th Toronto Forum on Global Cities, Stiglitz challenged leaders who say it is time for government to get their fiscal houses in order by cutting.

“The fundamental problem facing the global economy is lack of aggregate demand. It’s a vicious cycle: lack of demand leads to fewer jobs leads to less demand.”

Prime Minister Stephen Harper would do well to heed these words: Stiglitz says governments need to take on more, particularly now with interest rates at historic lows and before labour shortages loom large.

That’s as true in Canada as elsewhere. All over the country at present we have human resources and capital just waiting to be put into action, but too much uncertainty to deploy that potential.

The good news is that many nations have plenty of room to act in a way that will improve fiscal positions and economic strength.

Among such nations, Canada is perhaps best positioned to show how that can be done.

Economic growth is slowing to a grinding pace, as fears rise about which global reserve currency, the U.S. dollar or the Euro, will crumble first.

After trillions of dollars spent in rescuing the financial sector, and millions of people who have lost economic ground and continue to do so, all the elements for a repeat of 2008 are back in play, Stiglitz says. Underlying conditions of the world’s economic and financial structures are essentially unchanged and every bit as likely to trigger a credit crunch of the dimensions seen three years ago, almost to the day. Christine Lagarde, the new IMF boss, names it a crisis of confidence.

What would boost confidence in this setting?

Prime Minister Stephen Harper and Finance Minister Jim Flaherty have championed deficit reduction and austerity measures at G20 meetings since summer 2010.

But Stiglitz says the austerity agenda misses the point: budget cuts simply shift the risks to the private sector and raise the economic stakes, in both the short and long term.

“Austerity is a suicide path” Stiglitz said bluntly, the opposite of what the global economy needs.

Balancing the books by trimming public spending guarantees even slower growth given the underwhelming nature of private sector investments in job creation and production.

The solution isn’t more stimulus through more quantitative easing either, Stiglitz says. “It stretches credulity that more leverage will fix the problem.”

No, the solution is to tax and spend. Yup. That’s what the man said.

He also used a fancy term to explain just what kind of taxes and spending he meant, balanced budget multipliers. More on that in a minute.

The key deficit facing governments, communities, and far too many people, is a jobs deficit.

Stiglitz pointed out that the job situation is likely to get worse. In the U.S. normal productivity growth is 2.5 per cent to three per cent per year and labour force growth averages one per cent a year. He argues that the economy has to grow faster than that combined 3.5 per cent to four per cent a year in order to avoid adding more people to the ranks of the 25 million currently unemployed and underemployed in the U.S.

The U.S. economy is not growing anywhere near that pace. Without muscular action on the part of government, the job deficit is poised to grow, underwriting ever-greater economic, social and political instability.

Canada’s leaders are given to saying that we don’t face the same problems as the U.S., and thankfully that is true in some respects. But the dynamics laid out by Stiglitz are the same here. Canada’s labour force grew by just over one per cent a year in past four years; productivity growth is rising to 1.5 per cent a year, according to the Bank of Canada latest monetary policy report. That means the economy has to grow at least 2.5 per cent a year to absorb those two new sources of jobseekers, on top of the 1.4 million already looking for work.

But instead of 2.5 per cent, the central bank thinks the economy’s pace of growth will slow to about 1.9 per cent for 2012. That’s a recipe for more joblessness.

Some countries like Greece admittedly have little fiscal room to move. That is not the case for many others, says Stiglitz, including the U.S. and Canada. Both nations are “lucky” to have underinvested in public infrastructure for a long time. A lot needs to be done, and this is the time to do it.

Stiglitz said investments in infrastructure, technology and education typically yield returns of 20 per cent 30 per cent while borrowing for the federal government is roughly one per cent short term and two per cent to three per cent long-term. “You’d be foolish not to make those investments.

“Putting more people to work today means that over the next five to ten years the debt would be lower, GDP higher, the debt to GDP ratio immeasurably improved. The bonus is that things that need to get done get tackled before the costs of capital and labour both shoot up.

Stiglitz says governments have the levers needed to improve fiscal balances over the short, medium and long term if they both tax and spend using “balanced budget multipliers.”

The first example he offered on the spending side was unemployment insurance. Remember, the key goal is to increase aggregate demand, or at least not allow purchasing power to further deteriorate. Give money to the jobless, and they spend it.

In Canada only 37 per cent of the jobless receive jobless benefits today. That’s worse than in 2008 when we entered the recession. Modest and time-limited reforms to EI eligibility lifted the proportion to 54 per cent during the worst of the recession. Those reforms are over. If joblessness is about to go up, what’s the plan?

With regard to taxes, Stiglitz notes that the savings rate of those at the top is much higher than those at the bottom. The past decades have redistributed incomes towards the top, pulling money out of local economies because the rich spend more on imports, vacations and sock more money away. Why not put some of that money to work?

When challenged that there are perhaps unintended consequences of raising taxes, Stiglitz said flatly that evidence shows taxing those at the top has less effect on the economy than taxing those at the bottom. Though tax increases dampen the economy, “the positives more than offset those negatives if stimulus is invested in things that provide rates of return.”

The evidence bears him out: introducing a three per cent increase in taxes on incomes over $250,000 in Canada — affecting 0.7 per cent of tax filers — would raise about $2-billion. Increasing taxes by three per cent on incomes under $30,000 — affecting 54 per cent of tax filers — would raise only $154-million. Use that $2 billion to provide more education, infrastructure or research, and watch that money grow.

Stiglitz went further, saying some taxes actually have a stimulative effect on the economy. He used the example of taxes on pollution, which stimulate activities to reduce pollution as a by-product of some forms of production and consumption. That’s standard economic theory — price changes trigger changes in human behaviour, both when prices go down and when they go up.

The message was clear: In Canada and elsewhere, the most pressing problem isn’t how fast can we balance government books. It’s how fast can we get our people and their potential back to work.

The media characterized his speech as pessimistic. But as G.K. Chesterton once said “It isn’t that they can’t see the solution. It’s that they can’t see the problem.”

Stiglitz not only sees the problem; he’s offered up a buffet of hopeful and workable ideas. We’d all do well to listen.

This article was first published in The Hill Times and posted on The Progressive Economics Forum.

Armine Yalnizyan

Economist Armine Yalnizyan is the Atkinson Fellow on the Future of Workers.