...against fictions and other tall tales

Wednesday, 28 September 2011

Economists to Parliament: fiscal policy must remain flexible, government cuts can't go too far, caution is the key word

Yesterday, economists of various persuasions and professional background sat before Canada's Parliamentary Standing Committee on Finance to give their views on the current economic context and the upcoming challenges facing the Canadian and world economies.

It is important to emphasize that not one of these economists advised Canada's federal government to accelerate its objective of reducing and cutting public expenditures.

The first economist to share his views was post-Keynesian economist Marc Lavoie, professor of Economics at the University of Ottawa. According to Lavoie, there is no doubt that the world is heading for another recession or, at the very least, several years of zero growth. Here are a few excerpts from Prof. Lavoie's submission:
"We are witnessing the Japanization of western economies...The Eurozone has structural deficiencies that make it impossible to avoid a crisis...There will be an earthquake in Europe, and North-America will be hit like a tsunami...Canada will not be able to magically escape from this economic crisis...The Canadian government must not introduce spending cuts. The government must implement a new recovery plan for infrastructure and renounce its objective of trying to achieve budgetary balance."
If you tend to agree with the above prognosis, Prof. Lavoie's submission is a must see (His submission begins at 1:55 and ends at 8:00 minutes). See here:



  1. FRB (nod!!) has been navigating that course for a while, and better than the pundits. your column on a declining GDP back in august was fairly comprehensive. in fact, all your columns on the canadian economy have been on target.

    thanks for the link on scof. i usually record f&b. i know lavoie's (nod) work and he is very credible, unfortunately, with too little time and incorrect questioning, he isn't permitted to address the real issue. targeting corporate taxes is one fiscal measure (you also signaled that a while ago on a great day's column) but i'm cynical about the effect. we've already commented in FRB that decreasing corporate free cash flow immediately triggers an expense cut-usually payrolls. lesson learned from the 2008 collapse. nothing suggests any difference than a tit-for-tat, unless you've attained the critical labour mass where further payroll cuts are equivalent to reductions in fixed costs, and will effect adversely the structural character of the organization targeted. fiscal policy must address a simultaneous incentive program for all manufacturing companies, major tax reductions for small businesses, including holidays, and BoC has to adjust the rate program immediately to weaken our dollar substantially. i appreciate Mr. Carney's consideration of ......... but macrodata is persuasively onside. no need to wait longer.

    all else is lip service. the quality of interventions by some committee members was disappointing. no one stood out, probably as a result of some impending or confirmed discomfort with the dire oncoming predictions of a major squall. they should be reading your column.

    stay the course, circuit.

  2. Indeed, I also sensed a discomfort from the committee members. The questions were telling. Not much there to really drive the point that current policies and preoccupations are ill-advised. As always, your take on the corporates is well-taken. MP Jean's final set of questions on corporate surpluses were a pleasant surprise. Lavoie's response that the lack of AD is exactly what MPs need to hear. Combined that with his comments on the slowdown in exports and the high level of personal indebtedness, the case for fiscal stimulus is easy to make. Unfortunately, I'm not overly optimistic on the fiscal front. As you say, BoC may have to play the lead role in the months ahead. Now's the time.

  3. Terence Kolacs ONT30 September 2011 at 21:42

    No one came so close to predicting the Canadian recession as you did. What a way, circuit, what a way!

  4. Thanks Terence. The signs were there. Consumer borrowing has been weakening since '09. Business investment *had* to slow. Although govt stimulus in Canada was decent in recent years, it was only a matter of time before this component ran its course. As Lavoie mentions, without exports (due to strong CAD), growth prospects are nil. An important indicator was the weak US GDP numbers in 2011Q1. The quarterly change from the previous period should have been an important signal to Canadian policymakers.

  5. FRB's last few columns and comments on the Canadian economy were very revealing. I agree with Terence that FRB has been on target for predicting the slowdown in Canada. The Lavoie exposé in Ottawa at the Committee meeting was alarming however, it was not as alarming as some by your commentators.

  6. @all(nod) I would just add to the current conversations that juo (nod) a few columns ago (Sept 13, 2011), highlighted the need for commodities to behave within parameters for Canada to be insulated from the global downturn. I am not as optimistic as juo on whether that is the case, or even possible. I will acknowledge that he had a further caveat as to the persistence of global aggregate demand, something that definitely seems to be waning on the horizon; however, I think he may have underestimated the obstinacy of governments to entertain public expenditure programs on a longer term.
    On the other hand, the BoC may be softening its humors with respect to its rate programs and its proferred targets. Fine calibration.
    Absolutely stay the course, circuit.