Canada’s Stark Options: Recovery or Regress?

[Here is the speech I intend to give later today at the CCPA workshop on ‘Canada: How can we avoid a lost decade?’ ]

If everything is (as economists seem to believe) relative, then Canada is doing reasonably well in the aftermath of the Crash of 2008. Its governing politicians are, of course, stretching credulity when congratulating themselves for having overseen a complete recovery (since neither GDP per capita nor the employment rate has recovered to their 2008 levels). Nevertheless, one can see what gives them the green light to boast so rashly: Canada is growing again and a significant part of the losses inflicted upon its social economy by the Crash, and the following Recession, have been pulled back from the abyss.

Our workshop today ought to be about a lot more than measurement of where Canada is today relative to its 2008 position. Let’s just settle on a vague consensus that, while the country is growing again, it is doing so slowly and has not, yet, managed to recover fully. The jobs it has regained are both fewer than necessary (to bring employment levels back up to 2008 standards) and poorer quality-wise.

With this issue settled, we should immediately turn to the pressing questions of the day. There are at least three such questions:

  1. How do we interpret Canada’s recent performance within a context of the global evolution of the Crisis?
  2. What lessons are there to be learnt from this analysis regarding the policies that the Canadian government must implement domestically
  3. In view of Canada’s G20 membership, and disproportionately loud voice in the other pivotal international fora, what should Canada’s position be in the global and regional economic policy debates?

I shall discuss these one at a time:

1. How do we interpret Canada’s recent performance within a context of the global evolution of the Crisis?

To gain a feel of why the Canadian economy behaved the way it did, after 2008, it is important to select a group of comparable countries. If one simply wants to offer a triumphalist take on Canada’s sterling performance, then compare it with Greece, Spain, or some other basket case of the world economy. But if one wants to extract maximum explanatory power from the comparison, I think that Australia and New Zealand are the clear options.

Besides the cultural proximity to the two Oceanic nations, Canada shares with them an impressively similar input-output matrix as well as a comparable position in the network of international trade. Canada and Australia, to narrow the comparison down a little, are resource-rich countries whose land provides the value-added which powers similar welfare systems and similar small but quite dynamic technology sectors.

Following the Crash of 2008, Oceania and Canada had reason to congratulate themselves for their banking systems. For unlike Wall Street, the City of London, and indeed the inane european banks, Canada’s and Australia’s banks, largely due to a sensible regulatory regime, did not fall prey to the implosion of the synthesised derivatives swindle. As a result, these two federal states’ public finances did not have to sustain the massive banking bailouts that put extraordinary pressure on states elsewhere.

To boot, both nations (Canada and Australia) found themselves the beneficiaries of China’s gargantuan fiscal stimulus, the purpose of which was to maintain Chinese growth at a time when the bottom was falling out of its export markets. While neither Australia nor Canada managed to escape unscathed, China’s success in, at least temporarily, maintaining their factories’ production at full capacity (indeed adding in the process brand new infrastructural works) provided the two Commonwealth countries the springboard from which to begin, after a short, sharp fall, the process of gradual recovery. In short, Canada and Australia rode the coattails of a remarkable Keynesian stimulus that has been ongoing in China.

After the Crash of 2008, the world effectively split up in three regions:

(a)  The imploding metropolis (US, Britain and the EU)

(b)  China (and to a lesser extent India)

(c)  The rest of the emerging economies

The first group had been the locus of financialisation prior to 2008 and, thus, the segment of the global economy in which the pyramids of private (or toxic) money were generated (created by Wall Street, the City and the European banks). Thence, that very peculiar form of money flowed out into the rest of the world, creating wave upon wave of imbalanced yet roaring growth. When the created pyramids of private money burned down, these countries began to melt down too. It started in the guts of their financial system, moved out to the public debt sector (once the states rushed in to save the banks) while, simultaneously, the contagion hit the real economy (via the credit system that went into a prolonged spasm).

The second group, mainly China, was already in a momentum of real growth; that is, it was experiencing something akin to an industrial revolution in its early, rude, stages. Even though it too was indirectly fuelled by the private money that emanated in Wall Street, and financed the US, British and other trade deficits which provided China and India with great demand for their wares, this toxic form of money was once removed from the heart of China’s industrial machinery (and of its state controlled financial sector). To put it simply, China managed to insulate its economy fairly easily simply by going all-out with an, effectively, Keynesian investment-led, New Deal like, stimulus.[1]

The third group comprises primarily Latin America and, to a lesser degree, Africa. These economies jumped on the coattails of China to ride out the Great Recession and, in the process, are now transforming their productive make-up. In Latin America, the industries that had been designed as intermediate good production appendages to US multinationals are closing down one after the other. This form of de-industrialisation (which has hit Mexico very badly) is compensated for by (a) the extraordinary rise in primary commodity exports (e.g. soya, beef, minerals) to China, and (b) the creation of a nascent hi-tech industrial sector (e.g. software and aeronautics) which holds a glimmer of hope that trade will China will not turn simply on ‘stuff’ that comes out of the ground. As for Africa, direct investment from China, Indian investment in software design, and greater demand for specialty food and other agricultural products from Europe, are changing the continent.

Interestingly, Canada, Australia and New Zealand belong to none of these three groups. They are not part of (a) [courtesy of the fact that their pre-2008 growth was not directly financed by private-toxic money creation (unlike Britain or the US)] and, by definition, they are not part of (b). The closest they come to is group (c). Just like Latin America, it is Chinese growth that helped Australia and Canada rise from the 2008 mire the way they did. But unlike Latin America (and Africa), neither Canada nor Australia are experiencing a structural change in their input-output matrix, in the make-up of their productive sectors. In fact, all that is happening to these two countries, and to New Zealand, is that they are being buoyed by a tide of Chinese-stimulus-induced demand.

If I am right, two conclusions are to be drawn from this. First, Canada’s and Australia’s recovery is precarious and highly susceptible to a potential Chinese slowdown. Secondly, Canada has managed the post-2008 period far worse than its government is suggesting. The first conclusion is straightforwardly derived from the above analysis and requires, therefore, no further elucidation. The second conclusion emerges naturally once we compare and contrast Canada’s and Australia’s performance:

Between 2007 and 2011, Canada’s GDP per capital fell by -1.4% while its employment rate also declined by -1.2%. During the same period, Australia’s GDP per capita increased marginally (+0.1%) while its employment rate fell a lot less (-0.4%). So, what explains this significantly inferior performance of these two comparable economies? The answer is that Australia was fortunate to have a government in place, at the time of the slump, that was not naturally disposed to the austerian logic. True, Canada’s conservative government was also shaken by the 2008/9 tumult into stimulating the economy. But, compared to Australia’s Labor government, which remarkably gave thousands of dollars to families no-questions-asked, Canada’s stimulus was meek and short-lived. This is the reason why Australia recovered, at least in terms of GDP per capita, while Canada only pretends that it did.

Looking beyond the present, Canadians ought to worry about their government’s impact on the future. History proves that, after a meltdown, even the best meaning governments tend to withdraw much needed stimuli well before they ought to. President Roosevelt made that mistake in 1936/7, falling prey to the sirens that urged him that it was time to rein in the debt. The result was the second Crash, in 1938; the economic consequences of which would have been horrendous had it not been for the even worse human consequences of World War II. President Obama repeated that mistake in 2009, and left it all to the hapless Mr Bernanke. The Europeans… well, the less we say about the Europeans’ austerian shenanigans since 2009, the better.

In conclusion, Canada was blessed with a position in the global trade networks that allowed it a speedy, if not full, recovery after 2008. Unfortunately, the natural austerian inclinations of its government limited the recovery’s scope and, much worse, is now jeopardising Canada’s short to medium term future. Canada should stop celebrating the fact that it is better off than the US or Europe and draw lessons from its cousin down under.

2. What lessons are there to be learnt from this analysis regarding the policies that the Canadian government must implement domestically?

The first lesson for Canada is that it needs to safeguard those features that allowed the nation to avoid the worst in 2008 and beyond: its strict regulation of the financial sector, the welfare state that kept a lid on inequality (relatively to the US and Britain), the emphasis on making and exporting ‘things’.

Secondly, the government must grasp the fact that its stimulus was insufficient and, moreover, it must understand that turning to austerity and debt-fetishism now will be detrimental not only to growth but also to debt-reduction. This is not the 1990s when the Canadian government successfully run its debt down through ‘fiscal consolidation’. In the 1990s, the world was growing fast. Canada managed to replace public sector with private sector jobs by deflating while in the slipstream of a ‘flying’ US economy. Similar policies today, in the midst of a dearth of global growth, may well lead to an increase in deficits as grows splatters and the tax take dives.

Thirdly, Canada ought to keep its eye on its profound differences with the US economy. Where Mr Bernanke must use quantitative easing (since this is his only weapon against recessionary forces), Canada cannot rely on lax monetary policy. It would be a great error to adopt the queer logic of ‘expansionary-austerity’ which, in simple terms, means: to combine fiscal austerity with ultra-low interest rates. Canada should, instead, keep interest rates relatively high (to prevent bubbles from infecting its real estate and other sectors of the resource-fuelled economy) while adopting an expansionary fiscal policy.

Fourthly, the main game, from a Canadian perspective, must surely be its medium to long term strategy for becoming less dependent on the haphazard demand for primary commodities. This strategy will determine Canada’s future and cannot be designed intelligently without taking into consideration the third and last question below.

3. In view of Canada’s G20 membership, and disproportionately loud voice in the other pivotal international fora, what should Canada’s position be in the global and regional economic policy debates?

Canada takes pride in its internationalism and the fact that it punches above its weight in the various international fora. Rightly so. Today, however, a great burden rests on Canada’s shoulders, in this regard.

Our world is in Crisis because the Global Surplus Recycling Mechanism that came into being in the 1970s, and kept the world economy on a precarious but nevertheless dynamic growth path, broke down irreversibly in 2008. That Crisis never went away. It migrated from one sector to another, from one continent to the next, mutating in the process in ways that fooled some into thinking that the original Crisis subsided. It is my view that the uncertainty facing China, the existentialist crisis of Europe, America’s inability to turn the corner, the Great Boom Crisis in Australia, the debate about Canada that we are having here today, all these are nothing more than manifestations of the absence of a functioning Global Surplus Recycling Mechanism.

Canada’s government is aware of, and angry at, Europe’s spectacular failure to mend its crisis. But is it aware that Europe’s crisis is the result of the fact that Europe never had a proper internal Surplus Recycling Mechanism? And is it aware that this ‘lack’ became apparent when the Global Surplus Recycling Mechanism (i.e. the combination of US deficits and Wall Street’s shady operations) broke down?

Canada’s government understand that the so-called ‘global imbanances’ are the root cause of the global Crisis. But then it turns around and congratulates itself for the fact that internal balances within Canada are in check. Alas, this ignores the fact that the reason for Canada’s low internal imbalances is that Canada benefits from the global imbalances that are, according to the Canadian government, out of control.

In this sense, Canada finds itself in a terrible predicament: To keep its economy balanced and growing, the world must live under substantial global imbalances that are… unsustainable. And why is this so? Why can Canada not grow, with its internal balances intact, while the world returns to a sustainable path, its global imbalances corrected? Because this is not something that can be accomplished by self-regulating markets. This is the task of collective action at the global level. It requires something like a new Bretton Woods. Or at least effective coordination between the G20, the IMF and the World Bank. If Canada is still proud of its loud voice in these fora, there has never been a better time to use it.


Canada has had a bearable Crisis. Only it could have had a much better one. As for the near future, Canada is on the verge not only of another lost opportunity but, I very much fear, of a catastrophic mistake. To keep at bay the prospects of a dystopian future, its government must ignore the sirens of ‘expansionary austerity’ and use its international kudos to help piece together the next global surplus recycling mechanism without which recovery, for Canada and for the rest of the world, will not come for at least a generation.

[1] In the long term, of course, it is unlikely that China will continue to be able to do so. Its consumption rate having crashed (from a low 43% in 2008 to an abysmal 28% in 2011), China’s government is now between a rock (the prospect of a painful slow down, if it lets the stimulus subside) and a hard place (the property market bubble, inflated by the stimulus, bursting).


  • Pretty good analysis, but still falling back on growth as a proper indicator of world health, rather than redistribution of wealth, and not emphasizing that for the world to stay better off, governments must convince their citizerns that a lowered standard of living IN MATERIAL TERMS can be compensated for psychologically by social service. (hat tip to Kucinich)

    • Pretty good analysis, but still falling back on growth as a proper indicator of world health, rather than redistribution of wealth …

      Ralph Nader made the same point regarding corporations in the United States. Imagine if American corporations were legally forced (as they obviously won’t do it voluntarily) to “recycle” their billions in cash or cash equivalents on their balance sheets. Like pay a dividend, for starters. Apple alone has nearly $100B cash on hand. That’s a lot of cash. How’d they do it? That’s easy — the company exploits China’s labour and environmental arbitrage. (If there is a hell, Steve Jobs should be crispy brown by now.)

      … governments must convince their citizerns that a lowered standard of living IN MATERIAL TERMS can be compensated for psychologically by social service.

      If governments don’t convince their citizens, the “exponential function” in due time will.

  • For those of you still doubting that Europe’s problem is not economic in nature, but rather a severe political deficit here is some undisputed proof.

    Let me enhance your viewing pleasure from this Davos panel discussion of four European “leaders”, by way of a few introductory remarks:

    1. Irish leader – the only guy in this panel that makes any sense.
    2. Danish leader – an “Arbeit Macht Frei” fascist with nice legs but no brains.
    3. Polish leader – an uncomfortable guy who joined the EU to protect Poland against the Russians, but now he has to deal with other issues.
    4. Finish leader – An inarticulate human reindeer deserving a perpetual hunting season.

    So, 1 out of 4 or about 25% competence ration in Euro politics. Do I need to say more?

    • OH MY GOD!

      Dean, these people don’t have a clue, except maybe Kenny. Platitudes from hell out of the mouths of these people. Disgusting.

  • Briliant, Yanis, and easy to comprehend.

    Canada will not change course under the Harper administration. If Canada muddles through, the Conservatives may hold on to power, at least for a while. If they don’t muddle through, Harper’s will be another failed govt ejected by the electorate. Have you noticed it doesn’t matter where you look, if you are in power you soon won’t be, if your country is going down hill? Left-right, it doesn’t matter when so many people are so upset.

    Hollande is starting to sound like a winner in France, just as Sarkozy announces he will probably not be around for a second term. Orban will be defeated in Hungary. Rajoy just defeated the Socialists in Spain, etc in Ireland – but nothing for the people anywhere. It makes me sick.

    • Dear David, I would like to comment on your final paragraph, as far as Hollande is concerned. He’s definitely looking like a winner, not least because Sarkozy chose to play Merkel’s puppy in all financial options. I suppose April’s election will serve him right!

  • In your speech, you mentioned the term “Global Surplus Recycling Mechanism” four times. Are you the first to come up with this term? I am asking because I did a google search, and I only came up with . . . 95 search results! Moreover, most of the hits were attributed to this blog or to amazon’s website (The Global Minotaur). Then I narrowed the search to “Surplus Recycling Mechanism,” and here I got 5,500 search results. Ok, it was somewhat better, but it was still a very dissapointing. In your writings and speeches, you (and Stuart Holland) have eloquently and clearly communicated the importance of a well-functioning GSRM to the world economy. (A SRM is one of the three pillars of The Modest Proposal.) I just find it shocking that it’s not discussed more. Very sad.

    Btw, for the fun of it, I googled “Dancing With the Stars” (temptation was too great). Over 40 million hits! Talk about misplaced priorities, eh?

  • surprise!… were was canada so far? anyway, some of the worlds analysts recently, estimated chinas brilliant future. they believe by the year of 2025, china will become the leader power in the world?i thank you for keeping us informe correctly.

  • Dear Yanis,

    Thanks for this very perceptive thinking-through of our situation–and for your thoughtful interviews on TVO’s Agenda program as well.

    An analysis as lucid and humane as yours is unlikely to make any impact on the policies of Harper & the howler monkeys who inhabit the key posts in his cabinet. (But who knows–perhaps the age of miracles is not entirely over….)

  • “The irony is that Germany’s very emphasis on putting fiscal tightening before everything else has actually now put Greece in a stronger position to default.

    If that is not what Angela Merkel intended to happen, she will almost certainly need to give some ground in these debt negotiations to prevent it. Assuming it is not already too late. ”

  • Nice appearance on the Agenda Friday Yanis. This government you speak of would surprise the hell out of me if it proved up to the task you have set for it. Considering its stance on Kyoto (sayanara) and its ‘western’ (tar sands) orientation plus its budgetary ineptitude I expect another asteroid impact with Sudbury is a more probable outcome. Also have you had a look at our personal debt levels lately? Ouch! Not much wiggle room there if the China ‘miracle’ becomes a mirage.

  • Mr. Varoufakis,

    you don’t make any sense…..typical academic B.S.

    First, you were an “advisor” to George Papandreou, one of the biggest disasters, and one of the worst “leaders”, in Greece’s 5,000 year history. When you advise a “socialist” idiot, who hurt his country tremendously (and was only Prime Minister because of his name), what does that say about you? About your credibility? You Greek, silk underwear wearing “socialists”, sure are funny. Couldn’t run a lemonade stand on a warm beach, yet think you’re qualified enough to comment on the Canadian economy. It really is funny.

    Second, you come from Greece….a corrupt, bankrupt, basket case of a country with third rate universities. Had you been a diaspora Greek, with full tenure at Stanford or Harvard I would take you more seriously.

    Third, it is an absurdity to link Canada’s prosperity to China. What percentage of FDI into Canada is from China? What percent of Canadian exports go to China? And how much more dependant is Australia on China than Canada? Canada depends on the US….and if Canada could weather the storm during a massive economic slowdown in the US, then that says a lot about how resilient the Canadian economy is.

    Fourth, as someone how does business in both Greece and Canada I can tell you that Canada is LIGHT YEARS ahead of Greece. If Canada is in any sort of rough shape, then you better invest in bottled water and canned meats, because Greece is totally screwed and has no hope.

    Epilogue… says a lot about Greece when Toronto and Montreal are being flooded with young, highly educated, Greeks, looking for ANYTHING to do in terms of work. You don’t see Canadians flooding Athens do you? Please stop commenting on Canada and worry about the Third World rat hole, called Greece.

    • Of all the notions that came out of ancient Greece (and which we modern Greeks usually demean and ignore), the one that has most value for me is the notion of isigoria: the idea that one’s arguments should be judged on their merits, as opposed to who this person is, what she or he has done, etc. So, when you wrote that I make no sense, I thought you were about to criticise my arguments. Instead, you criticised me for being… Greek, etc. etc. Nevertheless, I am quite happy to take you on. Yes, I was an adviser to Papandreou. And just when ‘we’ were on the verge of gaining power, I resigned. Guess why: Because I discovered I had been wrong to be on his side. I would have thought that a capacity to leave just before ‘desert’ was served, on the basis of principle, might have counted for something in your books. Secondly, yes, I am Greek. Nothing I can do about that. However, when you say “had you been a diaspora Greek, with full tenure at Stanford or Harvard I would take you more seriously”, you are committing several errors. The first is that you violate the beautiful notion of isigoria (by playing the man and not the ball, so to speak). Secondly, you give me an opening to say that it so happens that I am a diaspora Greek (23 years abroad, a daughter living in Australia etc.). Thirdly, you make it impossible for me to resist asking you whether full tenure at the University of Cambridge counts (yes, I had it until I moved to a full tenured job at the University of Sydney). On matters of substance, whether you like it or not (and independently of what a basketcase Greece is) Canada’s growth is wholly dependent, either directly or indirectly, on Chinese growth. If you do not believe me, check it out. Lastly, I am afraid that I shall continue to comment on every part of the global economy, since we live in an interrelated world. Canada’s, China’s, Germany’s Thailand’s woes are my woes, at least as much as Greece’s are. You, quite naturally, have the right to not read/listen to me. (Perhaps you will allow me to suggest that you should tone down the rage against Greece. It clouds your judgment and inflames what seems like a state of inner despair. I say this in the friendliest of spirits. For I have experienced this torment amongst many second/third generation Greeks.)

    • Hey Mr. Kanadas:

      The Third World rat hole sends you a friendly reminder( we usually do this before you discover the horse head underneath your bedsheets):

    • Question: Which country in the EU27 has the largest percentage of PhDs (and of PhDs from top UK-US based universities)? Greece. That they are being wasted in another matter…

    • I know that, they were my classmates. Most of them do not live in Greece by the way and for those the education was not wasted. Most likely Lebanon tops the Greek percentage, but is diffcult to track, since they have a drawer full of passports, each.

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  • Αγαπητέ Γιάννη (εγώ το γράφω με 2ν!)

    Παρακολουθώ τις απόψεις σου σε τακτικότατη βάση και μόλις τελείωσα το βιβλίο σου για τον Μινώταυρο. Σήμερα λοιπόν (17/5) από τις 20:00-21:00 άκουσα ένα πρόγραμμα στον “Ράδιο 9” με τη συμμετοχή 2 οικονομολόγων, ο ένας μάλιστα αναπληρωτής καθ. στο πανεπιστήμιο Πειραιώς. Οι απόψεις ήταν λίγο ως πολύ οι γνωστές κατεστημένες: φταίμε εμείς, οι δανειστές θέλουν να πάρουν τα λεφτά τους, καλοί άνθρωποι κατά τα άλλα. Θεώρησα λοιπόν υποχρεώσή μου να παρέμβω στο πρόγραμμα με τις …δικές σου απόψεις. Τα κατάφερα τελικά. Τους είπα λοιπόν στον αέρα ότι δεν άκουσα καμιά αναφορά στις απόψεις του καθ. Βαρουφάκη, ο οποίος έχει και διεθνή φήμη, σχετικά με το ότι το Ελληνικό πρόβλημα οφείλεται πολύ περισότερο στη στραβή δομή του ευρώ με την έλλειψη μηχανισμού ανακύκλωσης πλεονασμάτων παρά στην κακή Ελλάδα. Σε αυτό προσέθεσα και κάτι δικό μου: ότι θα πρέπει να θεωρήσουμε τα Ελληνικά μνημόνια όχι ως δανειακές διευκολύνσεις με τις οποίες ένας δανειστής κοιτάει πως θα πάρει τα λεφτά του, αλλά ως συνειδητή απόπειρα της Γερμανικής ελίτ να οδηγήσει τη χώρα όσο γρηγορότερα γίνεται στην ύφεση ώστε να αγοράσει το οικόπεδο φτηνά και τους σκλαβους τζάμπα.

    Οι απάντήσεις ήταν μάλλον χλιαρές, κατά τη γνώμη μου, αλλά το ενδιαφέρον ήταν ότι ο συνάδελφός σου είχε μια περίεργη αντιμετώπιση: το πρώτο που μου είπε σαν απάντηση ήταν ότι “ο κ. Βαρουφάκης είναι ειδικός στη θεωρία παιγνίων και όχι οικονομολόγος, έχει πει όμως ενδιαφέροντα πράγματα, όσο δε για τη διεθνή φήμη, υπάρχουν και άλλοι οικονομολόγοι όπως ο Νομπελίστας κ. Πισσαρίδης …. και άλλα άνευ ουσίας.
    Επειδή έχω ζήσει για λίγο το πανεπιστημιακό κλίμα και το σιχάθηκα (ΕΜΠ-Manchester Uni-Imperial College-Πολυτ. Κρήτης) σκέφτηκα ότι θα ήθελες να ξέρεις για το περιστατικό.

    Φίλε Γιάννη, καλή τύχη στην ξενιτειά, προσπαθώ και εγώ να αποχωρήσω από την Ελλάδα, χωρίς όμως επιτυχία προς το παρόν.


    Γιάννης Κωτσιόπουλος
    Ανοιξη Αττικής
    [email protected]

    PS If your site has a problem with Greek, pleas send me an e-mail and I will send it the comment to you as an attachment or translate it in English.

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