'There are no magic bullets or simple formulae for dealing with financial panics." So concludes Liaquat Ahamed in Lords of Finance, his recently published analysis of the financial panic and economic collapse that characterized the Great Depression. It's advice our own parliamentarians might well heed as they meet next week to consider the federal budget and stimulus package.
At the outset of the Great Depression, most politicians, economists, business people and editorialists were gripped by the widely accepted conviction that strict adherence to the gold standard was the best guarantee of a return to economic stability and growth, Mr. Ahamed points out. If opinion surveys had been conducted then, they would have shown a majority of the public supporting this view - mainly because it was the position most talked about and favoured by experts and opinion leaders. But this conviction proved to be completely wrong.
What is the relevance of this as Canadian parliamentarians meet next week?
Many of our politicians, economists and editorialists are also in the grip of a widely accepted conviction - the idea that "stimulative deficits" incurred by governments are the magic bullets to slay the recessionary dragon. Public opinion also supports this view, since no other alternatives are talked about or offered.
The stampede toward governmental deficit spending is being reinforced by the left/right division of our politics, which tends to present us with either/or choices. Either rely on government to achieve economic recovery or rely on freer markets - with conservatives traditionally advocating freer markets and liberals and social democrats advocating greater governmental reliance.
In the 1920s and 1930s, it was John Maynard Keynes - the "premier gadfly of economic orthodoxy," as Mr. Ahamed describes him - who challenged the old gold standard orthodoxy. Keynes called for a new paradigm: the idea that governments should run deficits when the economy is slow and surpluses when times are good.
Politicians loved the first part of this thesis (while ignoring the second part) because it provided an intellectual justification for doing what they liked best - spending other people's money, much of it borrowed, in vast amounts. It thus became the new conventional wisdom, leading to a vast increase in government activity, public debt and taxes until eventually challenged by new economic gadflies - such as Milton Friedman, who argued that excessive government growth and spending should be constrained, that taxes should be lowered, that we should look more to markets than governments for economic growth and stability. Until very recently, this conservative orthodoxy prevailed over much of the Western world. But with faith badly shaken by the recent financial meltdown, we are now back to - guess what? - a revival of faith in stimulative spending as the best answer to our economic woes.
Do we not need a new and better paradigm for dealing with our economic downturn? One that moves beyond either/or choices and toward both/and solutions? Both governments and markets have enormously important roles to play. In responding to this downturn, shouldn't the great imperative be to find the right relationships and balance between them?
The federal budget and stimulus measures to be presented to Parliament will focus on government initiatives supported by deficit spending. Provincial budgets presented over the next few months will do the same. But who will take the lead in proposing and promoting non-governmental, market-based initiatives, which are even more urgent for economic stability and growth? These might well include:
Private-sector infrastructure projects - for example, the pipelines, transmission lines and communications infrastructure needed to support continental energy security - and public-private infrastructure projects that lever public dollars spent on conventional infrastructure with dollars and expertise from the private sector;
Labour agreements (supported in part by employment insurance and provincial training funds) aimed at retraining, rather than retrenching, so Canada emerges from the recession with a more productive and competitive work force;
Private-sector initiatives to use science, technology and innovation more rigorously to increase Canadian productivity and competitiveness, especially in shrinking markets;
Advocacy measures to ensure government spending as a temporary relief measure must be accompanied by ironclad plans and commitments to get out of deficit as quickly as possible;
Consolidation of administrative expenditures and activities by NGOs and religious institutions to devote more of their budgets and efforts to serving Canadians suffering the social consequences of the recession.
A year from now, when the limits to what can be achieved through deficit spending have become more apparent, the search will begin in earnest for a new, better paradigm. How much better would it be if we were to begin that search now?
Preston Manning is President and CEO of the Manning Centre for Building Democracy