"This is not the time for panicky actions," said Finance Minister Jim Flaherty, in defending his rejection of economic stimulus in last week's fiscal update.
By "panicky," I presume he wasn't referring to reversing policies fast enough to give whiplash to a salsa dancer, and accusing opposition leaders of, in effect, planning a coup d'état. Rather, by "panicky," Mr. Flaherty means stepping in to stimulate lending, incomes, and spending in the midst of a private-sector meltdown. That kind of interventionism runs squarely against the underlying faith in the efficiency and virtue of unregulated markets that has guided conservatives throughout the Anglo-Saxon world for three decades.
Mr. Flaherty won't let mere global recession interfere with the tried and true principles of laissez-faire. Therefore, contrary to both the trend in other countries and the clear signals that his government had been sending since the election, Mr. Flaherty's update provided not stimulus, but anti-stimulus. The actions announced in the update (limiting equalization payments to have-not provinces, reducing wage increases and pay equity payouts to civil servants, and other vague spending cuts based on "better management") will together reduce federal spending by several billion dollars per year.
On the basis of these cuts, Mr. Flaherty then claimed his government would squeak through with a razor-thin surplus of $0.1-billion in each of the next two fiscal years. This despite conceding that the economy is heading south, and fast though Mr. Flaherty still insists on calling it a "technical recession." (Try telling one of Canada's newly unemployed that this is just a "technicality," and you'll probably get socked in the jaw.)
Against a total budget of $250-billion per year, a $0.1-billion surplus is akin to leaving a 4 cent tip on a $100 meal. It's more an insult to the intelligence of the recipient, than it is a meaningful margin. These fiscal back-flips, motivated by intense embarrassment at the prospect of tabling a deficit budget, were widely dismissed as preposterous. Even mainstream economists acknowledge that deficits are prudent, not reckless, at a time of macroeconomic contraction.
Mr. Flaherty's cuts will reduce purchasing power, rather than increasing it, at a time when the rest of the world is doing the opposite. America, Europe, Japan, and even China (whose GDP growth will slow to a mere 7% this year) are injecting trillions of dollars to support spending and jobs. The International Monetary Fund has projected overall global stimulus averaging 2 per cent of GDP. That would work out to close to $30-billion in Canada's case. Instead, the Conservatives would free-ride on the coat-tails of others' efforts to arrest the global downturn, and hasten recovery.
As they now try to cling to power in the coming days, the Conservatives will attempt to play the economic card once again. Don't change government, they will argue. At a time of global crisis, we can't afford change or instability. We must keep a steady hand on the till.
This argument is unlikely to gain much traction, for a number of reasons. First, it deeply contradicts their own actions last week. The stand-pat economic statement, laden more with belt-tightening than stimulus, implicitly assumed that things can't actually be that bad (otherwise government would have done something). And the politically charged nature of the ill-fated attacks on opposition parties and public-sector unions confirmed that it is the Conservatives who put politics ahead of the economy.
More fundamentally, having a steady hand on the till only helps if the boat is heading in the right direction. If there is one thing we learned from the Great Depression, it is that policy mistakes (like raising interest rates instead of lowering them, contracting credit instead of expanding it, and cutting spending instead of increasing it) can take a bad situation and make it much, much worse. The Conservatives, ignoring the advice of a huge spectrum of professional opinion at home and abroad, seem determined to repeat those errors.
If an opposition coalition moves to stimulate bank lending, accelerate infrastructure projects, keep key industries in business, expand Employment Insurance, prevent home foreclosures (like those that devastated U.S. real estate), and otherwise keep incomes and purchasing power flowing, then changing the hand at the till is the best thing we could do.
Jim Stanford is an economist with the Canadian Auto Workers Union.