The wrong road to recovery

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Both the Liberals and the Conservatives seem to think economic recovery is at hand. When Finance Minister Flaherty prudently speaks about the need to continue spending until the recession is clearly behind us, his unstated message is that things are coming back to normal. Former Liberal Finance Minister Martin talks about the need for a roadmap to eliminate spending deficits, implying they are no longer needed because the economy is turning upwards. Worse, Liberal leader Michael Ignatieff has taken to attacking the Conservatives for over-spending referring to the danger of Canada hitting the "deficit (sic) wall."

The real victims of the recession -- the people who lost their jobs, and those who cannot find one -- have not benefited from the Conservative government so-called stimulus package. Despite the obvious injustices visited on workers and the unemployed, the Liberals have not thought it necessary even to produce an anti-recession policy package of their own. Since a caucus coup removed Stéphane Dion from the leadership, the Liberals have dropped talk of green jobs and a new economic prosperity.

This economic crisis is the worst in 70 years. However, in its basic aspects, it looks much like many others dating back to the 19th century. Asset prices (e.g. stocks, houses, dot com companies) balloon, suddenly the market for them collapses, then people lose their jobs, and those with money decide to hoard, not spend. The spending drop creates the downturn, job losses accelerate it.

The late Hyman Minsky characterized capitalism as subject to endemic financial instability. In boom times people invest money, and expect to see ever increasing returns. When the bust comes, new spending stops and the economy gets stuck, with no recovery in sight.

In a sluggish economy, the central bank can ease credit conditions. Lowering interest rates spurs spending. But, in a recession, when for most people money no longer burns a hole in their pocket, easing credit does not work: monetary policy is ineffective.

Since Keynes, economists have known that in a stagnating economy, government spending must take over. Minsky argued that the best way to stop a slowdown was to put money in the hands of people who who would spend every penny, those at the bottom of the income scale. When you are failing to make ends meet, hoarding of money is not an issue. Anything extra gets spent in the community.

Canada has adopted an anti-Minsky strategy. Provincial governments are already cutting back and imposing austerity. Provincial spending reductions offset federal government spending increases, and make the recession worse.

A Minsky strategy would see provincial governments increasing minimum wages, welfare rates and student assistance. The federal government would be re-introducing genuine unemployment insurance, so that virtually all job losers would be covered, and not one in two as at present.

What the Conservative government has done is help out those least in need, the big five chartered banks, while neglecting those most in need, marginalized workers and the poor. The government recently renewed its $125 billion commitment to buy bad mortgages from the banks ($69 billion has already been uses), while offering only $1 billion in new help to the unemployed.

To deal with the regular financial upsets, and stop them from leading to a depression, central banks were given the role of lender of last resort to the banking system. Coincidently, bank owners benefited from a safety net along with depositers Hyman Minsky thought that in severe recessions governments also had an analogous role as employer of last resort. Why help out banks whose business clients had gone bankrupt and defaulted on their loans, and leave workers who had lost their jobs by the same process to fend for themselves?

The current recession is not over. The role of governments is to create jobs, and bring along a recovery, not cut spending, and make things worse. Liberals and Conservatives alike still have a lot to learn from the experience of the great depression.

Duncan Cameron writes from Quebec City.

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