Resisting recession

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The Liberals want Canadians to ask who should we trust to run the economy? As the economic situation sours, people tend to blame governments for not doing enough to turn things around. The Liberals hope they will be seen as having the "sure hands" needed to handle bad times, and plan to make the economy an issue that helps them win the next election.

There are two problems with this way of thinking. One, the door is still wide open for the Conservatives to pre-empt the Liberals, and roll out an anti-recessionary package; and two, it is not at all clear the Liberals know what to do to advert a recession.

With the Liberals in power, the slowdown of the early 1990s only ended when the Bank of Canada reduced interest rates below American rates, thus provoking a sell-off of Canadian dollar securities, and a steep devaluation of the Canadian dollar. Since it was the high interest policies of the Bank that accelerated the slowdown (initiated by the 1989 Free Trade Agreement) in the first place, perhaps it was only natural that it would end when, under a new Bank governor, they reversed themselves. But, ending the recession had nothing to do with the Liberals.

By cutting back on unemployment insurance benefits and eligibility after the 1988 election, the Conservatives ensured that many Canadians would suffer more serious effects as the economy tumbled. In their 1995 budget, the Liberals cut back further on the recession safety net, and reduced transfers to the provinces for social spending of all kinds, ensuring life for the victims of economic hardship would worsen — in good times, as well as bad.

A recent Harris/Decima poll suggests a majority of Canadians anticipate an economic downturn. Indeed, in much of Canada, people not profiting at least indirectly from the resource boom are already living through a recession.

A recession occurs when spending falls. This happens because families and individuals reduce consumption, or businesses slow investment, or foreigners cut purchases from Canada, or some combination of all three. However total spending only falls, and a recession follows, when government spending fails to pick up the slack caused by falls in consumer, business or foreign purchases. This is not a matter of opinion, it is how the economy works.

To listen to the Liberals attack the Conservatives, the issue facing the economy is avoiding a government deficit, when in fact a deficit is exactly what is needed to advert a recession, unless the Liberals expect the U.S. to rescue the Canadian economy, as it did once we devalued our currency in the 1990s.

Developing a strategy to resist recession today starts by acknowledging that the U.S. economy is in recession, and that we can expect no help from exports to the U.S. in fighting our own recession. Second, it must be understood that increases in prices for energy and food reduce household budgets for other items by a corresponding amount, ruling out a surge in consumer spending, and suggesting trouble ahead. Third, when businesses expect reductions in consumer spending, they cut their own spending. This leaves government spending as the only strategy available to resist recession.

Those economists who have not fallen victim to some form of market fundamentalism understand the need for governments to devise anti-recession spending packages. There is much room for debate over what form such spending should take.

Speaking in Laval, Quebec last Thursday Stephen Harper repeated that his government's policy was based on their "convictions as conservatives," therefore lower taxes, reduced debt and expenditure restraint characterized their fiscal policy. He ruled out "subsidies to alleviate short term problems," and praised the 2008 budget changes that introduced tax breaks for increased personal savings.

Tax cuts targeted at the wealthy and business make a recession worse since the money is saved, or spent abroad not in Canada. Encouraging more personal savings reduces spending as well. Business invests to make a profit out of consumer spending, not because savings are available.

Harper will continue to talk a business as usual policy until he is forced to acknowledge the Canadian economy is in trouble. The evidence he, and everyone else, will be unable to ignore will be a rise in unemployment. In the meantime the opposition parties need to test out their anti-recession policy.

Resisting recession will require a program of government investment financed by borrowing, increased transfers to people with low incomes, and a willingness to allow current operating expenses to exceed current revenues, a spending deficit. Based on what we hear currently from the Liberal front bench, there is just as good a chance the Conservatives will adopt this approach, as the Liberals.

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