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Ideology has taken us from champ to chump
By JIM STANFORD
UPDATED AT 11:16 AM EST         Monday, Feb. 2, 2004
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The evidence is mounting that Canada's economy has quickly faded from being champ of the industrialized world, to become one of its chumps. For six years straight, beginning in 1997, we matched or exceeded growth rates in the U.S., and we led the G8 over that period. Today, in contrast, we're growing at a fraction of the pace of the U.S., Britain, and even Japan.
Last year's bizarre string of economic accidents gets some of the blame: SARS, blackouts, forest fires. But the latest GDP numbers prove we were still stuck in the mud long after these temporary troubles had passed. Remember, the U.S. economy had its own troubles last year, yet bounced back impressively. What explains our fall from economic grace, despite our much-vaunted "fundamentals" (like balanced budgets and low inflation)?
Sadly, our problem is rooted more deeply than the fleeting misfortunes of 2003. We're suffering once again from a demonstrated tendency by Canadian policy-makers to show more commitment to their own doctrinaire rules than to the concrete well-being of Canadians. Far from protecting us from downturn, our strong "fundamentals" -- and more precisely, the rigid policy rules which protect them -- are actually making things worse.
Let's start with the Bank of Canada, which enforces our most famous economic rule: keeping core inflation between 1 and 3 per cent, come hell or high water. Following this rule, the bank concluded two years ago that Canada's economy risked severe overheating (despite 7.5-per-cent unemployment), and boosted interest rates five times in 12 months. This opened a huge gap between Canadian and U.S. interest rates, and sent the loonie soaring.
Strangely, Alan Greenspan kept cutting U.S. rates; he wanted to ensure growth got back on the fast track, and he doesn't worry about any one-dimensional policy rules. The Bank of Canada stuck to its guns for a few fateful months, ensuring our stagnation persisted long after the last SARS patient was sent home. By the time it started wiping egg from its face last fall, the damage was done. Today our interest rates are still two-and-a-half times U.S. levels. But financiers know U.S. rates will rise, where ours (courtesy of a self-inflicted slowdown) can only fall.
I and a few hundred other economists have warned for months that, one way or another, the loonie will come down: either the easy way (through pro-active rate cuts), or the hard way (through economic slowdown and reactive rate cuts). The Bank could have prevented the whole senseless episode by cutting rates sooner and deeper. But this would have required it to look beyond its myopic policy rule.
An even more perverse rule is guiding fiscal policy. The new conventional wisdom in Canadian politics states that budgets must always be balanced, regardless of social priorities or economic circumstances. This leads to all kinds of bizarre outcomes -- such as governments cutting spending because the economic slowdown has reduced their revenues. Oh, great: Now, on top of bankrupt steel giants, plunging exports, and mass layoffs, we can throw a few billion dollars worth of government cutbacks into the economic brew. That will surely help.
Finance Minister Ralph Goodale boasted to the Toronto Board of Trade last week that Ottawa's tough-love approach has made us the only G8 economy with a surplus. Considering that we are now duking it out with France and Germany for worst per-capita economic performance in the entire G8, this achievement rings pretty hollow. You hardly have to endorse mega-deficits (like those being incurred south of the border) to accept that a little fiscal flexibility can be a good thing. Most other countries have been incurring small deficits, consistent with a stable debt burden, that helped them weather economic slowdown much better than Canada.
American policy-makers in particular feel little compulsion to stay faithful to high-and-mighty ideological principles. The economy's weak? Let's get it going again, with every tool at our disposal: tax cuts, deficits, incredibly low interest rates, trade protection, and deliberate currency devaluation. As a result, the U.S. economy has roared back to life big time -- not coincidentally, just in time for George W.'s re-election campaign.
I'm not for a moment suggesting we emulate the American recipe, with its lopsided favouritism to the rich and its aggressive militarism. But we could learn a thing or two from American policy-makers' willingness to act flexibly and creatively to promote their reading of the national interest. Theirs is a victory of pragmatism over ideology. Their central bank has no inflation targets; their government makes no undying promise to balance the books; they never let free-trade agreements get in the way of protecting American jobs.
And today we are eating their dust.
Jim Stanford is an economist with the Canadian Auto Workers.
© 2004 Bell Globemedia Publishing Inc. All Rights Reserved.
By JIM STANFORD
UPDATED AT 11:16 AM EST         Monday, Feb. 2, 2004
Advertisement
The evidence is mounting that Canada's economy has quickly faded from being champ of the industrialized world, to become one of its chumps. For six years straight, beginning in 1997, we matched or exceeded growth rates in the U.S., and we led the G8 over that period. Today, in contrast, we're growing at a fraction of the pace of the U.S., Britain, and even Japan.
Last year's bizarre string of economic accidents gets some of the blame: SARS, blackouts, forest fires. But the latest GDP numbers prove we were still stuck in the mud long after these temporary troubles had passed. Remember, the U.S. economy had its own troubles last year, yet bounced back impressively. What explains our fall from economic grace, despite our much-vaunted "fundamentals" (like balanced budgets and low inflation)?
Sadly, our problem is rooted more deeply than the fleeting misfortunes of 2003. We're suffering once again from a demonstrated tendency by Canadian policy-makers to show more commitment to their own doctrinaire rules than to the concrete well-being of Canadians. Far from protecting us from downturn, our strong "fundamentals" -- and more precisely, the rigid policy rules which protect them -- are actually making things worse.
Let's start with the Bank of Canada, which enforces our most famous economic rule: keeping core inflation between 1 and 3 per cent, come hell or high water. Following this rule, the bank concluded two years ago that Canada's economy risked severe overheating (despite 7.5-per-cent unemployment), and boosted interest rates five times in 12 months. This opened a huge gap between Canadian and U.S. interest rates, and sent the loonie soaring.
Strangely, Alan Greenspan kept cutting U.S. rates; he wanted to ensure growth got back on the fast track, and he doesn't worry about any one-dimensional policy rules. The Bank of Canada stuck to its guns for a few fateful months, ensuring our stagnation persisted long after the last SARS patient was sent home. By the time it started wiping egg from its face last fall, the damage was done. Today our interest rates are still two-and-a-half times U.S. levels. But financiers know U.S. rates will rise, where ours (courtesy of a self-inflicted slowdown) can only fall.
I and a few hundred other economists have warned for months that, one way or another, the loonie will come down: either the easy way (through pro-active rate cuts), or the hard way (through economic slowdown and reactive rate cuts). The Bank could have prevented the whole senseless episode by cutting rates sooner and deeper. But this would have required it to look beyond its myopic policy rule.
An even more perverse rule is guiding fiscal policy. The new conventional wisdom in Canadian politics states that budgets must always be balanced, regardless of social priorities or economic circumstances. This leads to all kinds of bizarre outcomes -- such as governments cutting spending because the economic slowdown has reduced their revenues. Oh, great: Now, on top of bankrupt steel giants, plunging exports, and mass layoffs, we can throw a few billion dollars worth of government cutbacks into the economic brew. That will surely help.
Finance Minister Ralph Goodale boasted to the Toronto Board of Trade last week that Ottawa's tough-love approach has made us the only G8 economy with a surplus. Considering that we are now duking it out with France and Germany for worst per-capita economic performance in the entire G8, this achievement rings pretty hollow. You hardly have to endorse mega-deficits (like those being incurred south of the border) to accept that a little fiscal flexibility can be a good thing. Most other countries have been incurring small deficits, consistent with a stable debt burden, that helped them weather economic slowdown much better than Canada.
American policy-makers in particular feel little compulsion to stay faithful to high-and-mighty ideological principles. The economy's weak? Let's get it going again, with every tool at our disposal: tax cuts, deficits, incredibly low interest rates, trade protection, and deliberate currency devaluation. As a result, the U.S. economy has roared back to life big time -- not coincidentally, just in time for George W.'s re-election campaign.
I'm not for a moment suggesting we emulate the American recipe, with its lopsided favouritism to the rich and its aggressive militarism. But we could learn a thing or two from American policy-makers' willingness to act flexibly and creatively to promote their reading of the national interest. Theirs is a victory of pragmatism over ideology. Their central bank has no inflation targets; their government makes no undying promise to balance the books; they never let free-trade agreements get in the way of protecting American jobs.
And today we are eating their dust.
Jim Stanford is an economist with the Canadian Auto Workers.
© 2004 Bell Globemedia Publishing Inc. All Rights Reserved.