Wheat from the Chaff Blog

Here’s an interesting article that recognizes that inequality is not just a moral issue for bleeding heart lefties. It’s a very real problem for capitalism: too much equality might stifle innovation, but too little equality and the economic cycle will come to a grinding halt. Perhaps we should look deeper into the economic crisis, and ask ourselves why the financial instruments that got us into this mess (e.g. securitized mortgages, derivatives, etc.) were needed in the first place.

Canadian vulnerability in the face of the global economic crisis

March 31, 2009 Editorial
Canadian Center for Policy Alternatives

As Prime Minister Stephen Harper heads to London for the G-20 leaders’ meeting on the global economic crisis, he will undoubtedly tell other leaders that Canada is well positioned to manage the crisis domestically and provide advice on the international effort.

Canada is certainly better positioned than most to implement an aggressive fiscal stimulus package to cushion the blow of the recession, since we have one of the lowest debt-to-GDP burdens of any industrialized country. This advantage, however, is meaningless unless it is used properly. G-20 leaders will not hear from Harper that Canada enters this recession in a far more vulnerable state than in past recessions. Why?

First, since the mid-1990s, inequality in Canada has grown faster than in most OECD countries, including the U.S. Median incomes have stagnated while the top 5% have captured the lion’s share of income increases.

For many Canadians, stagnant wages and low interest rates depleted savings and led to the ballooning of personal debt as a way for many to maintain to their standard of living.

As the recession hit and economic insecurity rose, its Siamese twin, consumer demand, plummeted. People, fearful for their future, have cut back spending in order to repay their record debt and/or boost savings. For those in precarious employment and where family members have lost their jobs, the situation is much worse. These families are in survival mode.

For the economy as a whole, this fragile consumer demand situation is worse than it was in the early1990s, making Canada much less likely to pull its economy out of recession any time soon.

Second, and related to the first, is the shredding of Canada’s social safety net, and the overall contraction of the public sector. Cuts to social assistance, unemployment insurance, and other government transfers have weakened Canada’s automatic stabilizers, which kick in during recessions to cushion the blow for vulnerable citizens and help maintain consumer demand. According to the Parliamentary Budget Office, these automatic stabilizers today are only half as large as they were during the 1980-81 recession.

Historically, a large Canadian public sector provided stable jobs and vital public services, making it an effective counterbalance to contraction in the private sector. This stabilizing force in the Canadian economy is now dramatically smaller — down from 50% of GDP in 1994 to 34% of GDP in 2004. Without these supportive mechanisms, the recession will be deeper and more prolonged than in the past.

The third vulnerability is that changes over the past decade in the structure of Canadian production and exports have resulted in a dramatic proportional rise in resource exports and a corresponding decline in manufacturing exports.

Always a trade dependent country (accounting for about one-third of our GDP), Canada is now even more vulnerable to volatile commodity price and volume swings. This vulnerability is heightened by the fact that more than 80% of our exports go to the U.S. In the last six months alone, these exports have fallen by one-third.

Counting on a U.S. recovery to spark a revival of Canadian exports and free-ride our economy out of recession may have worked in the past, but the U.S. is not likely to come out of the current recession any time soon.

Recently, Harper has been peddling an upbeat Hoover-type message that economic recovery is just around the corner, a message that flies in the face of a deteriorating economy.

Acknowledging the growing severity of the crisis would prompt the government to re-evaluate its existing fiscal plan. Instead, we can expect our prime minister to stand on the G-20 world stage claiming falsely that Canada has done its 2%-of-GDP share of the international effort to boost demand. He will make no reference to the very real economic vulnerabilities underlying Canada’s economy.

With an intervention-averse Conservative government at the helm, Canada’s recession will be deeper and more prolonged than it needs to be. Many more people will suffer.

And the cost to the economy – and to our way of life – will be profound.

Bruce Campbell is the executive director of the Canada Centre for Policy Alternatives.