The phrase “paradigm shift” was coined by the historian Thomas Kuhn to describe the process by which an old belief system, long entrenched and widely shared, is suddenly overthrown by a new one. But how to describe the sudden revival of an old belief system to replace the new?
How, in particular, to explain the remarkable re-embrace of deficit spending (“fiscal stimulus,” in the phrase of the moment) across much of the developed world—not only by the political class, for whom its appeal is obvious, but by much of the economics profession? How, when so little fresh evidence has been offered of its effectiveness, and so much of the original critique that first discredited it remains intact? And how, in Canada of all places, which suffered more than most from a previous generation’s experimentation with deficit finance, and where the case for Doing Something would seem less pressing than elsewhere?
Yet here we are, with a Conservative government preparing to run a string of “stimulative” deficits the likes of which we haven’t seen since the early 1990s—as high as $40 billion, according to one report—urged on by the Canadian Council of Chief Executives, the Conference Board of Canada, and the editorial board of the Globe and Mail. Dissent, at least in public, has been confined to free-market think tanks, the Canadian Taxpayers Federation, and the odd crankish columnist.
It isn’t as if its new-found adherents show any great enthusiasm for the cause. It seems more resignation: we might as well try this. Or rather: people expect us to try this. Or perhaps: we will be punished if we don’t try this. For to the left of the Conservatives are four other parties, all of whom may be relied upon to criticize the government for not going far enough.
What we are witnessing is a kind of policy panic, a herdlike rush every bit as mindless as the financial panic that preceded it. If we have not gone as far as the Americans—at 2.5 per cent of GDP, even a $40-billion deficit would be dwarfed by the $2-trillion, 10-per-cent-of-GDP monster the incoming Obama administration is preparing—we have done so with even less justification. There, at least, the economic situation is such as to justify a little panic: the worst recession in at least 25 years, and possibly 70. Here, we have not as yet even met the technical definition of a recession.
I don’t doubt we will, though how deep and how long it will be is anybody’s guess: the worst-case scenarios currently forecast a peak unemployment rate of eight per cent, which would have been cause for celebration not so long ago. But the recourse to “fiscal stimulus” is a non-solution to a non-problem, or at best the wrong solution to the wrong problem.
Most recessions, indeed virtually all of those in living memory, are policy-induced. If not quite deliberate, they are at any rate the consequence of a tightening of monetary policy, generally in response to an earlier, too-loose policy.
This one’s different. This isn’t a policy recession. It’s what’s called a “balance-sheet” recession, driven first by the credit crisis—the collapse of financial markets, and the associated unwillingness of financial institutions to lend, either to the public or each other—and then by the efforts of businesses and households to retrench in its wake. Banks lend less. Households save more. Everybody hoards cash.
While the credit crisis has been most acute in the United States, its effects will inevitably be felt in Canada: with roughly 40 per cent of our economy devoted to exports, and 75 per cent of these delivered to the U.S., a one per cent decline in spending south of the border will tend to reduce the demand for Canadian products by about three-tenths of one per cent.