[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.[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.
Epilogue
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).
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