By Philip Cross, April 12, 2016
A rash of data show the Canadian economy easily exceeding expectations early in 2016. Led by the private sector, the economy created 41,000 jobs in March, lowering the unemployment rate to 7.1 per cent. Real GDP jumped 0.6 per cent in January, double the already bullish expectations of forecasters and its fourth straight gain.
The buoyancy of the economy belies the assertion that the federal government needed to run large deficits to kickstart the economy. The day after the budget was tabled, Prime Minister Justin Trudeau defended the deficits as necessary because the economy was “significantly worse than during the election phase.” It turns out that the economy on its own was already quickening its pace the very moment he spoke those words.
To be clear, the economy’s underlying growth rate has not suddenly accelerated. The recent bounce in growth largely originates in the passing of factors which temporarily suppressed growth in 2015, such as retooling auto plants and unseasonable weather. The economy was never really doing as poorly as the opposition pretended during the election campaign, anymore than it has now taken off. The steady growth of jobs at 0.2 per cent in each of the last four quarters is a better barometer of the underlying trend of the economy. There never was an economic rationale to resort to risky deficits to cure whatever ailed it.
The buoyancy of the economy belies the assertion that the federal government needed to run large deficits to kickstart the economy.
Since Trudeau has no demonstrated ability to analyze the economy, let us charitably say that he was just parroting what his various economic advisors counselled during the election campaign. The interventionist economists whose advice he sought, of course, were bearish on the economy. It is not hard to find economists in this country who are pessimistic about its economic prospects, since this justifies their repeated calls for more government stimulus.
Recommendations for more government action to boost the economy are a mainstay of Canadian economics. John Crow, the acerbic former Governor of the Bank of Canada, recalls in his 2002 memoir Making Money the repeated assaults from academic and trade union economists on anti-inflation policies in the 1980s and 1990s. He found this symptomatic of “the persistence and vehemence of the inflation-support school within the Canadian economics profession.” Crow characterized “yet another” (they do get tiresome) petition protesting the Bank’s sound money policies as “tendentiously melodramatic,” also an apt phrase for the apocalyptic assessments of Canada’s economy last summer. While critics of the Bank were too legion to name, supporters could be cited individually. Crow notes wryly that the criticism stopped once inflation had been wrestled to the ground, a tacit admission the Bank’s assessment of the benefits of low inflation was correct while the majority of economists in Canada had been on the wrong side of that history.
Wishing for more inflation was not even the height of left-wing economic lunacy in the early 1990s. CAW economists proposed that Ontario deal with its debt problem by defaulting, making “going for broke” literally a policy goal that the union did realize for GM and Chrysler in 2009 (hopefully the ensuing job losses and wage cuts have dampened its enthusiasm for bankruptcy as a policy tool). One can understand that then-Governor Mark Carney’s decision to address a CAW convention in 2012 made eyes roll among the Bank’s old guard such as Crow. And make no mistake, John Crow is not just any old school proponent of defending financial stability and fighting inflation; his school is “one room, no recess, eat lunch at your desk.”
It is time for a grown-up discussion about the limitations of monetary stimulus and debt-financed spending.
Now the Bank of Canada under Governor Steve Poloz – named head of research at the Bank during Crow’s term as Governor – is implicitly tightening its monetary policy as the loonie appreciates, offsetting whatever stimulus comes from running deficits. The overdue withdrawal of some monetary stimulus reflects research (notably by former Bank of Canada Deputy Governor William White) that ultra easy monetary policy creates distortions, such as discouraging saving and encouraging debt, that ultimately depresses growth over the medium term. Recently on the Bloomberg Surveillance morning show, asked if central banks had run out of monetary stimulus tools, White replied “God, I hope so.”
The cover of the federal budget document, Growing the Middle Class, shows a parent leading a child by the hand. This is an apt metaphor for how the Trudeau government sees its relationship with the economy, where immature, timorous, infantile Canadians are shown the path to future growth by following sage, confident, adult government leadership. The budget’s underlying philosophy of a paternalistic state steadying a faltering business sector is wrong-headed; its economics in touting program spending as investment is deceitful; and its accounting is a sham, as demonstrated by the revelation last Friday (after prodding from the Parliamentary Budget Officer) of a five-year plan where spending on benefits for the middle class falls an improbable 75 per cent.
The reality is that the economy was doing well enough on its own and does not need more stimulus or hand-holding from government. Instead, it is time for a grown-up discussion about the limitations of monetary stimulus and debt-financed spending.
Philip Cross is the former Chief Economic Analyst at Statistics Canada