Summers favours governments acting agressively to fight off hard times, resisting the temptation to believe upbeat forecasts for when the recession might end. “It’s a lot easier,” he reportedly said in late October, “to correct the errors of overreaction than the errors of under-reaction.”
Summers’ advice to see in the slump a chance to act decisively, and maybe grab a lasting edge, is certainly attractive. But how? Ignatieff suggested using this period of upheaval, when many companies are thinking about what it takes to survive, to actually encourage them to make the investments needed to get ahead. “How can government help small- and medium-sized businesses invest in information and communications technology so they can improve their productivity and get more market share?” he said. “Let’s look at what we need to do to address some of the productivity and investment challenges that will help us bottom out and get back in business quickly. Let’s not just measure the budget by the size of the stimulus.”
Inevitably, though, the size of the stimulus has to be a major question. In his contentious Nov. 27 economic update statement, Flaherty suggested stimuli the Tories have already introduced, especially $31 billion in tax cuts next year, might be enough to carry Canada through the recession. But by this week, when he met with Liberal MPs, Flaherty seemed to have bowed to demands for much more. Ignatieff wouldn’t even hint at how many billions it would take to satisfy his party. “I’m not going to negotiate in public with the government on the size of stimulus,” he said. “We’re into the middle of it.”
Economists are split on how much should be spent, in what areas, and how soon. But most agree time is running out. The Bank of Canada officially declared on Dec. 9 that the Canadian economy is in recession. Nobody really knows how long it will last. This week, the independent Conference Board of Canada called for $10 billion to $13 billion in federal stimulus in 2009, from boosts to unemployment benefits, to tax credits for low-income Canadians, to faster infrastructure spending, all on top of ongoing intervention in financial markets to make sure companies can keep borrowing. But Peter Dungan, an economist at the University of Toronto’s Rotman School of Management, said anything Flaherty announces in late January would take at least a few months to be approved, and the economy could be recovering anyway by late 2009. “Much of the stimulus,” Dungan said, “would miss the worst part of the downturn.”
Liberals agree it would have been better to have moved much faster. But McCallum, a former Royal Bank of Canada chief economist, said this recession will likely drag on long enough that even measures that take months to roll out out will help. He said prime candidates for quick cash include “shovel-ready” infrastructure projects, like deferred maintenance on university campuses, and bridge and road upgrades. Projects like these have the advantage of not needing long planning or environmental assessments, although standard contracting processes can’t be avoided. It’s not clear, though, how paving highways and adding more insulation, say, would pass Ignatieff’s basic tests about helping the needy and creating the economic winners of the future.
More detail might, or might not, be forthcoming from the Liberals before Flaherty tables his budget late next month. “On a parallel track we are developing our own plan,” McCallum said. “How and when that will be deployed is a matter to be determined in the future.” Ignatieff refused to be pinned down. “I think we will have some constructive suggestions to make in early January,” he said. “But I have to stress: we’re the Opposition, they’re the government.”
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