Ottawa must be prepared to intervene in economy
Despite months of what’s consistently been branded a “recovery” in the wake of the recession of 2008 and 2009, we find ourselves once again in very uncertain waters.
As of this writing, stock market roller coasters are giving investors wild rides in all directions, some of Europe’s biggest countries are fighting bond markets, and the United States is dealing with its first ever credit rating downgrade. Taken together, it means there’s a much greater chance of a return to recession now than there was, say, a month ago. What are governments to do? What may be needed – even more deficit spending – does not seem to be on anyone’s menu. Politicians should not be so quick to take entire strategies off the table in such fluid circumstances.
It’s no secret that governments deployed massive fiscal and monetary stimulus measures in the past two years in an effort to combat a recession that began soon after the last time we were in a similar situation to today’s. In 2008, when it seemed we really did stand at the edge of the abyss, legislators around the world reached broad consensus on the need to support collapsed private demand with deficit government spending. The paradox of the current crisis is that it is at once the result of the debts incurred to fight the recession and a manifestation of the fact that in many countries, stimulus spending did not go far enough. This seems particularly to be the case in the United States.
Tensions run high
The recent ugly fight in that country over the normally-routine step of raising the debt ceiling has laid bare some of the deepest divisions ever faced by the American body politic. The last-minute deal to avert catastrophe turned out to be as ugly as the process that produced it. It has entrenched short term austerity and done nothing to combat the American fiscal situation in the long term. Right now, that is the precise opposite of what is needed in the U.S.
Consequently our neighbours now face the very real prospect of another recession brought about by what has become a dysfunctional political climate. Powerful people drawing lines in the sand to satisfy small constituencies now threaten to snatch defeat from the jaws of victory in what remains the world’s most important economy.
Canada will feel impact
Here in Canada, though our position is much stronger, we cannot ignore the storm gathering around us. We are, to put it bluntly, too small and too dependant on demand from the very countries now in crisis to be immune to the challenges they face. Even though we’re in a stronger fiscal position than all other G7 countries, we still now face the possibility of a return to recession. The very fact that the news is so dominated by negative economic stories is enough to move people not to spend, which could make it a self-fulfilling prophecy.
So it may be necessary, if things get worse, for our governments to step in once more on the fiscal side of the equation. This would, for a short time, disrupt the government’s path back to a balanced budget. That remains a very important policy objective, and will not be abandoned. For governments to dress themselves in the straightjacket of absolute refusal to take a certain policy course at any time in the future is a best unwise, at worst completely irresponsible.
All this remains hypothetical. We have not yet returned to recession. Nor has any other developed country. But what seemed an almost-impossible prospect just a couple of months ago now seems a much more distinct possibility. As such, we have to be prepared with any and all policy options.
Our governments’ collective commitment to a return to balanced budgets is admirable and very important for the long term prosperity of our country. But to reach a prosperous long term, we need to be ready to take short term steps that we had not anticipated. Weathering the current economic storm may well take more flexibility than a dogmatic approach to fiscal policy will allow.
