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Harper economics: Planets revolve around the earth and austerity creates growth

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What a month it's been. While the first half of 2015 has not been kind to Canadians and the economy, July has proven to be worse.

On the economic front, we have had a tumultuous month capping a tumultuous first half of the year. When Bank of Canada governor Stephen Poloz described Canada's economy as "atrocious," little did we know how atrocious it was going to get.

Indeed, the data for May is in, and it's not exactly pretty. Now we find out that in May, Canada's GDP contracted for the fifth consecutive month in a row -- something that is rarely seen. Keep in mind that a recession is defined as two consecutive quarters of negative growth. Well, Q1 was negative. And now, with both April and May suffering negative growth, short of a miracle, June will either be negative or, if positive, most probably too weak to compensate for the rest of the quarter. This spells recession.

There are some naysayers who claim that while there may be a "technical" recession, Canada is not exhibiting the classic signs of a recession, like high unemployment. They point to Canada's robust employment numbers and its stable unemployment rate, as proof that, while in a weakened state, we are on solid ground.

Those who claim this are either friends of the Prime Minister's or are deeply in denial.

Such tomfoolery ignores the numbers behind the statistics, such as, for instance the fall in labour market participation. Once factored in, Canada's unemployment rate is closer to 9 per cent -- hardly something to be happy about.

Many of course will blame the oil crisis or some external factor, such as the turmoil in Europe, and undoubtedly such factors play a role. But there is more at play here. In fact, manufacturing faced a significant decline. And despite the low dollar, our exports have yet to increase significantly, and many claim they will remain weak for quite some time. So while some are claiming this "downturn" -- Mr. Harper's favourite word -- is limited to certain geographical areas, the reality is far bleaker, and the recession is proving to be spreading all over the country.

And while external events are a large part of it, blame must also be placed on economic policy, and in this case, directly at the feet of the Harper government, for its refusal on the one hand to even recognize the recession (or the possibility of one), and on the other, to address it head on. After all, a government must govern, and on the economic front, Mr. Harper has shown very little leadership, preferring policies aimed at giving tax breaks to the rich, undoubtedly the very same people who will vote for him in October.

But as an approach to dealing with this generalized and well-entrenched weakness of the Canadian economy (don't forget, we are nearing the eighth-year anniversary of the financial crisis), Mr. Harper's economics have failed us miserably. On top of that, he seems single-mindedly obsessed with balancing the books (which we now find out are no longer balanced). There may be a time and place to balance the books, but now is not the time. Every economist today will tell you that Mr. Harper's pursuit of balancing the federal budget in times of crisis and indeed, in times of recession, is simply a bull-headed and wrong idea. It does not help the economy; in fact, it hurts it -- and hurts it deeply. At the very least, it is preventing the economy from taking flight and keeps it well anchored in a depressed state.

What we need now is more fiscal stimulus. We have heard this from many economists now, and Mr. Harper must deliver the goods. Mr. Poloz is doing his best. Indeed, interest rates were reduced yet again. But these drops in interest rates will have negligible effects: increased monetary stimulus at this point in the game is not the way to go. There is now considerable agreement on this as well. But Mr. Poloz has very little choice. In the absence of any fiscal stimulus, it has fallen on his shoulders to do something -- anything, and lowering the rates another 25 basis points is, well, better than nothing.

Mr. Harper's behaviour in all this seems rather odd. We are well aware of the absence of empirical support in favour of austerity, yet austerians like Mr. Harper insist on claiming that their approach is somehow superior, that contractions in fiscal stimulus will somehow, magically, be expansionary.

Imagine 16th- and 17th-century geocentrists being shown proof that the earth actually revolved around the sun, and dismissing the new science as fuddleduddlery, and continuing to insist all celestial bodies revolved around the earth. This is the world in which austerians live: first, deny fiscal stimulus can have any positive contribution to economic growth, despite the mountain of scientific evidence. Next, deny the mountain exists. Mr. Harper is a modern-day ecocentrist (well, ecorightist may be a better term): he clings to outdated views of the economy despite the wealth of evidence against them.

In the face of the lack of evidence and empirical support for their views and policies, one can only conclude that ideology and powerful interests are what keep these ideas afloat. This is where Mr. Harper's policies come in: adopt policies that bring rewards to those who support you to the detriment of the rest, since they will contribute to your party that will get you elected and perpetuate those failed policies.

In this world, austerity and balanced budgets have nothing to do with economics: it's all politics.

Louis-Philippe Rochon is associate professor of economics at Laurentian University and founding co-editor of the Review of Keynesian Economics. Follow him on Twitter @Lprochon

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