[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:
- How do we interpret Canada’s recent performance within a context of the global evolution of the Crisis?
- What lessons are there to be learnt from this analysis regarding the policies that the Canadian government must implement domestically
- 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.
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.
 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).