As the economy slows down, should austerity pick up speed?

By Erica Alini - Tuesday, January 31, 2012 at 2:01 PM - 0 Comments

Statistics Canada

Canada’s GDP numbers for November came out this morning, and it was a rude awakening. The economy slowed down unexpectedly in November, with output dipping 0.1 per cent, as opposed to the consensus forecast of 0.2 per cent growth. “While it initially appeared that the Canadian economy smoothly decelerated late last year, it now looks like Canada stumbled as it approached the 2011 finish line,” CIBC quipped in a note.

Dragging down overall output was a 2.5 per cent drop in oil and gas extraction activity, possibly due to low oil and gas prices and softening demand for exports. Notably, construction in both the residential and non-residential sector was down 0.3 per cent.

Statistics Canada

The November slowdown is expected to bring down quarterly growth from a projected two per cent annualized expansion. Recession–defined by economists as two consecutive quarters of negative growth–isn’t necessarily upon us. But with Europe teetering on the brink of fiscal disaster, global demand cooling, and the Canadian housing market possibly due for a downturn–which could shave as much as one per cent off of GDP, according to some estimates–is it really time for the Harper government to pull the breaks on public spending?

Another concern is that, with rates already at record lows, there’s little the Bank of Canada can do to soften the impact of deficit cuts with expansionary monetary policy. As Stephen Gordon noted yesterday, there are steep costs associated with introducing austerity at the wrong point of the business cycle.

The Commons: Ipso facto governance

By Aaron Wherry - Tuesday, November 22, 2011 at 7:06 PM - 0 Comments

Sean Kilpatrick/Canadian Press

The Scene. Adherents to the faith of smaller government take note, for the Harper government has successfully identified and eliminated one of the prime inefficiencies standing between us and true freedom.

“This government cannot say how many jobs were created after having spent $47 billion of Canadians’ money,” lamented the NDP’s Peter Julian this afternoon of the government’s trademarked action plan. “The program was so badly monitored that no one knows if it was effective.”

Of this, Mr. Julian can claim the authority of the auditor general, who apparently found no attempt by the government to determine precisely how many jobs it “created” (in the messianic parlance) with its billions in bridges, roads and hockey arenas.

But just because the government can’t—indeed, won’t—add, doesn’t mean Mr. Julian can’t subtract. “We now know that 72,000 full-time jobs were lost last month thanks to the policies of this government,” he asserted with his next breath. “Now that the truth is out, when will this government put aside bogus and unsubstantiated job claims and take real and immediate action to create jobs here in Canada for Canadian families?”

Jim Flaherty would at least stand to respond to this. Continue…

The Canadian hired to save the world

By John Geddes - Monday, November 14, 2011 at 9:40 AM - 0 Comments

Sean Kilpatrick/CP

Upbeat stories to spin were in short supply at last week’s G20 summit at Cannes. The host, French President Nicolas Sarkozy, narrowly avoided disaster on his home turf when the destabilizing prospect of a Greek referendum on the country’s debt crisis faded. U.S. President Barack Obama remarked on how European decision-making in the face of economic calamity struck him as “laborious” and “time-consuming,” before heading back to Washington, where laborious, time-consuming efforts to cope with America’s deficit continue. Prime Minister Stephen Harper, though, claimed bragging rights on the Riviera thanks to the naming of Mark Carney, the governor of the Bank of Canada, to head an increasingly powerful body called the Financial Stability Board. “His appointment,” Harper said, “is both a tribute to his personal qualities and a reflection on Canada’s superior performance in monetary, fiscal and financial-sector policy areas.”

Carney’s emergence as the international poster boy for everything admirable about the Canadian economy is among the more improbable stories of the Harper era in Ottawa. It’s not that he’s Ottawa’s first appointed public servant to outshine the elected politicians. Former auditor general Sheila Fraser, after her 2004 report on the sponsorship affair that rocked the then-ruling Liberals, became the face of honesty in government. Retired general Rick Hillier’s outspoken pride in Canadian troops made him, as chief of defence staff, the voice of patriotism. But Carney offers nothing like Fraser’s down-to-earth quality or Hillier’s entertaining populism. He’s a Ph.D. economist and former investment banker, and seems like one. His star quality counts for more in elite circles than among Canadians in general. Still, during this prolonged stretch of anxiety over when the next recession might hit, a figure who embodies sophisticated economic leadership is an invaluable political commodity.

As Harper’s comments in Cannes confirmed, Carney’s skills and Canada’s strengths are now being sold as a combo pack. And Carney is highly marketable. At just 46, he’s unusually young for a central banker, and cuts an athletic figure. (He ran the Ottawa marathon in three hours and 48 minutes last spring.) His bio comes complete with a Canadiana prologue any political mythmaker might envy. Born in the Northwest Territories, where his father was school principal in remote Fort Smith, he’s said one of his earliest childhood memories is the smell of the furs his mother bought for making parkas.

Continue…

Mark Carney: A central banker for a volatile age

By Andrew Coyne - Monday, November 14, 2011 at 9:40 AM - 0 Comments

Chris Wattie/Reuters

At 46, Mark Carney manages to look both younger and older than his years. This is fitting, as his approach to the economy combines a commitment to old-fashioned central bankerly verities—sound money, prudent risks—with a modish flexibility as to how these are to be secured.

That has been an unavoidable necessity in what we should perhaps now refer to as his day job, as governor of the Bank of Canada. Gone are the days when central bankers could simply focus on keeping the so-called monetary aggregates—M1, M2, all the gang—to a fixed annual growth rate, as monetarists had advised. While this approach had succeeded in reining in the Great Inflation of the 1970s and ’80s, it eventually fell victim to Goodhart’s law, named for a former adviser to the Bank of England: namely, that the moment you target any particular measure of the money supply it loses its usefulness—because people in financial markets find ways to innovate around the constraint. Central bankers have since had to steer by a variety of other measures, even as the overall objective—stable prices—has remained unchanged.

The lesson of that experience, that policy does not consist in simply issuing a set of rules, but rather exists as a continuing process of interaction between the regulators and the regulated, appears to inform Carney’s views on the causes of the financial crisis, and how to prevent another—a subject that will be his focus in his new, part-time job as chairman of the Financial Stability Board, the international body tasked with coordinating and overseeing the reform of global banking regulations. In speeches and interviews the governor has given, a number of related themes and concerns emerge. Among them:

Continue…

The recovery: Gone in a flash recession

By Chris Sorensen - Monday, October 31, 2011 at 8:00 AM - 0 Comments

If you have a tough time telling the difference between the plodding U.S. economic recovery under way and the dark days of 2009—you’re not alone.

Tom Porcelli, chief U.S. economist at RBC Capital Markets, recently coined the term “flash recession” to describe brief periods like last August, when the sputtering U.S. economy appeared to completely go off the rails. “You had essentially zero job growth and you had virtually no consumer spending—that’s a recession,” Porcelli said during an interview earlier this month with Yahoo! Finance. While Porcelli acknowledged one month of negative economic growth doesn’t meet the traditional definition of a recession, he argued that the current recovery is being driven more than usual by rising and falling consumer sentiment, while longer-term indicators like unemployment, stuck at around 9.1 per cent in the U.S., refuse to budge.

That would also explain September’s sudden spike in positive data—rebounding auto and chain store sales—as a flash recovery. And if Porcelli is correct, gauging the health of the U.S. economy just got a lot tougher. That’s because it now requires figuring out what’s going on inside the heads of millions of jittery U.S. consumers at any given moment.

‘These are not easy times for leaders’

By Aaron Wherry - Tuesday, October 25, 2011 at 10:39 AM - 6 Comments

The Prime Minister talks to Postmedia about the global economy.

In the case of financial-sector reform, as you know, substantial progress has already been made. Obviously, there are some in the financial sector who don’t necessarily like the proposals, and there are some legitimate complaints, and in Canada, we pay attention to what the financial sector says. But that said, one of the things we know is the financial sector can’t just write its own rules. The crash of 2008 made very clear that there must be credible regulatory systems on the financial sector or it can lead us in a position where we don’t want to be. That is being done, that has to be done.

Stephen Harper lectures the world

By Aaron Wherry - Thursday, October 13, 2011 at 2:50 PM - 13 Comments

The Prime Minister calls on Europe and the G20 to get their respective and collective houses in order.

Events in the summer of 2011 have made it clear that global economic challenges are by no means behind us. What started as a sovereign debt crisis in smaller countries in Europe has now spread, causing extreme stress in the European financial sector and threatening global growth. Unfortunately, this time, the policy response to our shared challenges has not been as strong and co-ordinated as it needs to be. This slow response has resulted in missed opportunities, with each missed opportunity increasing the cost and difficulty of resolving the crisis.

We cannot afford any more missed opportunities.

Last month, Scott Clark and Peter DeVries noted that Mr. Harper was among those leaders calling on “surplus” countries “to increase their expansion of domestic demand” and thus wondered whether the Prime Minister was willing to participate in a global stimulus package (to the tune of $41 billion).

Learn from our mistakes

By Aaron Wherry - Wednesday, October 12, 2011 at 2:30 PM - 7 Comments

While the Conservatives have spent the last three years lamenting for the possibility of “opportunistic,” “unnecessary,” “unwanted,” “costly,” “needless” elections that could imperil the national economy and hurt the unemployed, the Finance Minister volunteered yesterday that, in hindsight, the Prime Minister probably wouldn’t have plunged the country into an election in the fall of 2008.

One of the most testing times in my career in public service was the recession that began in the Fall of 2008. In fact, we were in the midst of an election when it hit with full force. Had we been aware of the crisis on the horizon, the Prime Minister would have been unlikely to call the election. Nevertheless, that was the situation. So I found myself campaigning for re-election in Whitby-Oshawa while juggling an increasing number of phone calls with the G7 finance ministers as we all became more aware of the breadth of the worldwide economic crisis.

It was during that campaign, of course, that Mr. Harper offered his assessment that if there was going to be a recession it would’ve happened by then.

Don’t do something

By Aaron Wherry - Wednesday, October 12, 2011 at 12:07 PM - 17 Comments

Stephen Gordon questions those calling for the government to take action on jobs.

My reading of the data of which I’m aware suggests that current rates of job creation are consistent with those observed during the last expansion, and have been so for a year or so. Calls for the government to “do something” are misplaced; the labour market has been functioning normally for quite some time now.

Taking it to the streets

By Aaron Wherry - Tuesday, October 11, 2011 at 2:04 PM - 52 Comments

Brian Topp considers the Occupy Wall Street protests.

There are false roads open – like the fantasist right-wing populism of the American Tea Partiers. And there are better roads open – like modern, prudent, determined and fearless social democracy, of the kind Jack Layton was talking about. Perhaps we will go down that first road, brought to us in Canada in our mild Canadian way by Stephen Harper and his team. Hopefully we will go down the other, on offer in Canada through Mr. Layton’s team.

But the Wall Street occupiers are there to let the Wall Street revellers and bonus-hunters know that their own particular party – and the whole approach to government that made it possible in the United States and here in Canada – has just about had its day.

‘Vague bromides’

By Aaron Wherry - Wednesday, October 5, 2011 at 8:45 AM - 3 Comments

While the NDP was pleased to see its motion pass the House unanimously, the Prime Minister promptly dismissed it yesterday as “extremely vague.” Worse than that, Stephen Gordon thinks the motion misunderstands economic reality.

Policy recommendations about employment should be based on a realistic assessment of current labour market conditions. And when you put things in historical perspective, current conditions are at least as good as one might expect after two years of recovery.

Merkel under siege

By Michael Petrou - Tuesday, October 4, 2011 at 9:50 AM - 0 Comments

Eric Herchaft/Redux

Spare a sympathetic thought for German Chancellor Angela Merkel, leader of the most powerful country in the euro zone, and the one whose decisions will have a consequential effect not just on citizens of Germany, but the rest of the continent. “When Angela Merkel goes into a room at a summit meeting, it’s as if the headmistress has arrived,” says William Paterson, honorary professor of German and European politics at Aston University in Britain.

This is all well and good when the school—or a monetary union of 17 member states and 300 million people—is running well. But when half the students are wasting or hiding their lunch money, the teachers are overspending and asking the headmistress to cover for them, and—to stretch the metaphor—the headmistress’s own family doesn’t see why she should do so, it becomes a much more trying job.

This is roughly the position in which Merkel finds herself as the popularity of her Christian Democratic Union (CDU) party crumbles, and the governing coalition it leads shows signs of imploding. The eurozone is facing a financial crisis, driven by soaring sovereign debts of member states such as Greece, Portugal, Italy, Ireland and Spain. Greece’s situation is the most serious, with some observers predicting that a default on its debts is inevitable. Such an event would hurt all the economies in the union (not sparing those outside it) and dramatically weaken the euro. And so, multi-billion-dollar bailout packages have been pledged, with more on the way.

Continue…

On the road to recession

By Kate Lunau - Monday, October 3, 2011 at 10:20 AM - 0 Comments

Canadian retail sales were down 0.6 per cent in July, largely dragged down by sluggish sales at car dealerships, which fell 3.4 per cent in that month. That’s bad news for an industry that had been relatively stable over the past year—but still relatively minor compared to the auto crisis now unfolding south of the border. “The problem is in the U.S.,” where the vehicle sector looks headed for a double-dip recession, says automotive consultant Dennis DesRosiers.

With “dismal sales” from May through September, the U.S. auto industry will soon have experienced two consecutive quarters of negative growth, DesRosiers says, the hallmark of a recession. Canada certainly isn’t immune to the difficulties either. Vehicles and auto parts made here are mostly sold to American consumers. And as recent data shows, Canadian consumers are already spooked: retail sales are up 3.9 per cent year over year, down from a pace of six per cent at the end of 2010.

As for what’s bogging down the American auto industry, it’s everything from financial panic in Europe to the debt crisis and high unemployment in the U.S. “There’s a saying that if you have a job, you need a car,” DesRosiers says. “The opposite is also true.”

The Commons: Say everything

By Aaron Wherry - Wednesday, September 28, 2011 at 7:06 PM - 64 Comments

The Scene. A day after the Prime Minister’s Office delighted in demonstrating their man’s eagerness to meet with the Governor of the Bank of Canada and the Finance Minister—both of them, at the same time—the leader of the opposition stood and asked if Mr. Harper might tell the House what the three men had talked about and what plans they had made. Here is how the Prime Minister responded.

“Mr. Speaker, as I have said many times, we have an economic action plan. That’s why we received a mandate from Canadians. Obviously, we are concerned about developments in Europe and elsewhere, but at the same time, the Canadian economy has created more than 600,000 jobs. This is one of the best records throughout the industrialized world. We will continue to do so.”

Apparently this much was news to Mr. Carney and Mr. Flaherty. (Later, the Finance Minister would say he could not comment on the contents of these discussions because the meeting in question was “private.” Which is a funny adjective to apply to anything that is announced with a news release, then videotaped and photographed for public distribution.)

On matters of the economy, the Prime Minister has mostly settled on two responses: say nothing or say everything. Here, obviously, he had chosen to go with the former. It most other cases these last few weeks, the government has gone with the latter. Continue…

Can Canada avoid another recession?

By macleans.ca - Wednesday, September 28, 2011 at 4:42 PM - 5 Comments

Less worse off

By Aaron Wherry - Tuesday, September 27, 2011 at 10:55 AM - 13 Comments

Stephen Gordon considers how much credit the government can take for our relatively good economic situation.

What of the role of the federal government? The proper way to evaluate policy is to consider the counterfactual: what would have happened if the federal government had behaved differently? I can think of many ways that the government could have made things much worse — the spending cuts that were its initial reaction were certainly ill-conceived. But since that austerity program was abandoned, it’s hard to point to a serious error that significantly deepened and/or prolonged the recession.

So the Conservatives cannot claim all the credit for those cross-country differences: Canada was luckier than the United States and the other G7 countries. The best it can say is that it didn’t make any serious mistakes that made the recession significantly worse.

What’s the use of saving money?

By Jason Kirby and Chris Sorensen - Tuesday, September 27, 2011 at 9:30 AM - 38 Comments

Getty Images; Photo Illustration by Taylor Shute

Steven Patterson and his family moved to Vancouver from Cambridge, Ont., in mid-2008, just as the financial crisis hit. After years of scrimping and saving to pay off their first mortgage, they had earned a tidy profit when they sold the Cambridge house and put the proceeds into GICs, where the money would be safe and easily accessible should they decide to buy another home in B.C. Three years later, Patterson, a 42-year-old IT manager, is still sitting on the sidelines, renting, while real estate prices march ever upward in a city where a three-bedroom bungalow covered in warped siding can fetch $1 million.

That might seem like a prudent move in an uncertain economy, but Patterson says his cautious approach has come at a steep price: all his money is steadily being eaten away by inflation, which the meagre interest income from his GICs can’t cover—particularly after the taxman takes a cut. Meanwhile, several of Patterson’s friends have taken advantage of those same low interest rates, loaded up on debt, and bought into Vancouver’s frothy housing market in recent years. And they have enjoyed a windfall—at least on paper—as the value of their homes continues to climb. As for Patterson, “I’m only a few thousand dollars ahead—minus inflation,” he says, clearly frustrated. “So actually, I’m way behind, and I don’t have a house.”

Welcome to the world of ultra-low interest rates, where profligacy is richly rewarded and saving is, well, for suckers. Those who’ve opted to be austere with their personal finances have found themselves on the losing end as governments and central bankers have worked to get people to borrow and spend in the wake of the global recession. While emergency interest rate cuts were to be expected after the financial crisis seized up lending markets, it’s been nearly four years since central banks started slashing rates to the lowest levels in history. For that matter, over the last 10-year period, following the 9/11 terrorist attacks, the Bank of Canada’s benchmark interest rate stayed above four per cent for just six quarters (in 2006 and 2007), while the average headline rate of inflation over that time was 2.1 per cent.

Continue…

The wrong medicine

By Aaron Wherry - Monday, September 26, 2011 at 9:46 AM - 4 Comments

Douglas Porter quibbles with the Prime Minister’s prescription for economic woe.

“We could be making some of the same mistakes. Certainly, there are echoes of 1937,” agreed Douglas Porter, deputy chief economist at the Bank of Montreal. Last week, Prime Minister Stephen Harper and British Prime Minister formed an unusual alliance of debt hawks, coming down firmly on the side of stricter austerity as the way out of the crisis – at least in Europe … 

Mr. Porter said Mr. Harper’s call for global austerity is “precisely the wrong medicine at this time.” Government bond yields in Canada, and in most other countries, have sunk to multi-year lows in recent days. That’s a sign that financial markets are stressed about economic growth prospects, not government deficits or inflation, according to Mr. Porter. “Governments shouldn’t be aggressively cutting spending when the economy is gasping for air,” he said. “That’s certainly the wrong prescription.”

Fear on all sides

By Aaron Wherry - Friday, September 23, 2011 at 10:00 AM - 0 Comments

Bruce Anderson listens to the rhetoric.

In answer to almost any question about the economy, the Prime Minister and his ministers are at pains to tell Canadians how the perilous state of the global economy keeps them up at night. There’s not a lot of hope in their message: They talk about how employment is up since the onset of the recession, but in reality it’s a “let’s ensure we don’t get hurt too badly” theme. This is an unusual thing for incumbents to do – but for the moment anyway, it’s sensible strategy.

The opposition parties are also focused on fear, not surprisingly. There’s a difference of course: They are focused on how much worse things will get if Ottawa doesn’t do something. This would be a stronger political footing if news from the rest of the world didn’t get it its way. Canadian economic troubles are routinely drowned out by far more shocking situations, in so many other places.

The prosperity gap

By Aaron Wherry - Friday, September 23, 2011 at 9:00 AM - 5 Comments

Alex Himelfarb considers the ramifications of inequality.

When Warren Buffett argued that the rich should pay more than they do (heck, even Adam Smith believed in progressive taxation), across the U.S. media we were told what a dangerous idea this is. Why would we penalize productive folk only to give the money to the unproductive?  Why do we penalize success, they ask?  Here, in Canada, the language is softer.  Why would we tax so-called job-creators?  Of course there are important economic considerations in how much and whom we tax – but “job creators”? As though they  do not benefit from earlier generations more willing than us to sacrifice and pay taxes to build and defend a country of opportunity? As though the rest of us somehow do not contribute to the growth in the economy through our labour, consumption and creative ideas?

‘We’re not quite staring down the barrel. But the pattern is clear’

By Aaron Wherry - Thursday, September 22, 2011 at 6:04 PM - 7 Comments

The prepared text of British Prime Minister David Cameron’s speech to Parliament this evening.

Mr Speaker, Mr Speaker of the Senate, Mr Prime Minister, Hon Members of the Senate and Members of the House of Commons…

Je vous remercie du grand honneur que vous me faites en m’invitant a m’exprimer devant ce parlement historique.

I want to begin, in this place, by paying tribute to Jack Layton and I offer sincere condolences to Olivia and his family. His energy and optimism were above politics, and I know he will be missed by all those who serve here.

One of the things I am finding about this job is that whichever countries I visit, members of the Royal family have got there first.

Continue…

Is America in a depression?

By Jason Kirby - Wednesday, September 21, 2011 at 6:20 AM - 12 Comments

Shannon Stapleton/Reuters

Everywhere Darren Enns looks these days he sees the devastation wrought by America’s grinding employment crisis. As the treasurer of a construction union in southern Nevada, the state with the highest unemployment in the country, Enns has watched as friends and colleagues—the bricklayers, electricians and drywallers who thrived during Las Vegas’s housing boom—struggle to move on to other careers. Few succeed. Many have simply given up hope. “When you look at the unemployment rate during the Great Depression, we’re beyond that in the construction industry here in Las Vegas,” he says. “We’ve got close to 70 per cent unemployment, so for us, the economy is extremely depressed.”

When the financial crisis tipped America into a deep recession in 2007, it was tempting to draw comparisons to the Great Depression of the 1930s. Those fears subsided once the stock market pulled out of its nosedive and America’s economy began to grow again, albeit at a crawl. It was a brief respite. Four years later, American towns and cities remain overrun with millions of unemployed workers even as the economy risks slipping back into reverse. It raises the question whether the U.S. ever really emerged from recession in the first place. Instead, some are suggesting those early fears may have been justified after all: the United States appears to be in the throes of an outright jobs depression.

Earlier this month, Robert Reich, a professor of public policy at Berkeley and the secretary of labour in the Clinton administration, said the current crisis is an extension of the “depression” that began in December 2007. Meanwhile, Richard Posner, a high-profile judge in the United States Seventh Circuit Court of Appeals and regular political and economic commentator, said it’s time for America to give up any false hopes that the economy is on a path to recovery. “If we were being honest with ourselves, we would call this a depression,” he wrote in the New Republic. “That would certainly better convey both the severity of our problems, and the fact that those problems have no evident solutions.”

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The Commons: Jim Flaherty against the world

By Aaron Wherry - Tuesday, September 20, 2011 at 6:18 PM - 13 Comments

The Scene. Once more Jim Flaherty finds himself with so much to answer for.

“Mr. Speaker, more bad economic news,” lamented Nycole Turmel this afternoon. “The Conference Board of Canada dropped Canada’s rating on income equality. The middle class is falling further behind. Inequality has increased in the past 10 years. Surprise, surprise. It is the same 10 years of the big tax cuts for the big corporations. Is this not another example of the Conservatives’ economic inaction plan?”

She drew out this bit about it being an inaction plan, lest anyone miss the wordplay.

“Mr. Speaker,” Mr. Flaherty responded, “our Conservative government is focused on what actually matters to Canadians, creating jobs and economic growth.”

For sure, Canadian families are likely not meeting around the dinner table each night to discuss inequality coefficients and peruse the latest line graphs. But surely those at the poorer end of the equation are at least vaguely aware of this issue.

Given a moment to think about it, Mr. Flaherty decided he might at least venture an answer to this concern. ”Mr. Speaker,” he said in response to a question from the NDP’s Peggy Nash, “the most important equality plan for Canadians is a job.”

Continue…

Paul Martin’s prescription

By Aaron Wherry - Monday, September 19, 2011 at 2:15 PM - 16 Comments

In between cups of coffee—15 per day? Really?—Paul Martin explains how the world and Canada should be reacting to global economic turmoil.

In Canada, he would like to see the federal government take advantage of this country’s relatively strong finances to quickly make needed investments in infrastructure, education, and research and development. Those, he says, will be the key to Canada’s prosperity in a world where success will hinge on the ability to compete with, and tap into, Asia.

“Our economy is slowing down, we’re going to be affected by the [downturn in the] United States and we’re going to be affected by Europe,” he says. “We have to penetrate those rising Asian markets, and we’re not going to do that unless we have got the best-educated work force, unless we’ve got the best infrastructure, and unless we are creating our own Apples.”