...against fictions and other tall tales

Thursday, 21 June 2012

Canadian-style austerity: Don't try this at home

Canada's Prime Minister, Stephen Harper, wants world leaders to believe that the Canadian approach to austerity is "what the world needs".  Obviously, Prime Minister Harper must be unaware that, since the fourth quarter of 2010 when real (total) government expenditures (outlays plus fixed capital formation) effectively peaked, the percentage change in final domestic demand in Canada has slowed significantly.  As shown in the chart below, growth in domestic demand is nearing recession-like levels (click on chart to enlarge).

Chart 1: Gross Domestic Product and demand, Canada, Source: Statistics Canada

The current slowdown in domestic demand should come as no surprise.  Cutting public sector expenditures in the face of weakening consumer spending and dwindling growth in business investment is hardly a sensible approach to economic policy-making (see chart 2).  And it would be a recipe for disaster for nations that, unlike Canada, cannot count on external demand to potentially fill the gap created by public sector expenditure cuts.

Chart 2: Components of final domestic demand, Source: Statistics Canada


  1. keynespendulum21 June 2012 at 22:33

    Very good snippet!! I agree that Mr. Harper may be too hard on the economy, but do you think it's too late to reverse its course?

    1. Budget bill just passed, Parliament adjourned today for the summer...or maybe you mean for the longer term? The remainder of the year won't improve much. That said, I actually believe Harper, Flaherty et al when they say they would reverse course if the economy worsens considerably. (Though, they would never admit to having had a hand in it...)

  2. Reading a good article this early on a foggy morning is a delight, especially when Chart 2 is so visibly explicit!!!, I can see the light beyond the breaks. The reason why we cruised through the 2009 and ongoing recession is that government was compensating during the troughs. But this last cutback is most untimely. The measure of good policymakers and a good PMO, because I think Mr. Harper is a well-intentioned leader, is the ability of policy to be reversed with very little adverse effect on the economy. The logistic component of policy steers its success-the timing of implementation and the speed of phase-ins and calibrations.

    At least there's a captain steering this vessel because the crew is wanting and the BoC assuming a not particularly timely complacency. Both Messrs. Harper and Carney have some time to adjust their sights on the hurdles that your maps show (Europe is also a convenient map that can be shown)and exercise diligent navigation.

    Mr. Harper can certainly re-energize his PMO and Mr. Carney find comfort in the Fed's recent pronouncements. Both are courageous personalities: it's time to show it. As you say, Canadian style austerity is following the blind into the abyss: except for resource revenues which are tumbling alongside commodity markets, manufacturing is nearly inactive and offers no support to an ailing economy. There is no merit in following Europe! Captain- shipwrecks on starboard!

  3. Thanks Swells. I agree, veering starboard is a bad idea (though, I should say that I'm not particularly inclined to rightward shifts in the first place!). Indeed, chart 2 speaks for itself. In regard to the timing issue, I'd just add that with inflation being of no concern at the moment, the scope for changing course increases. As for PMO and BoC, my recommendation is for less comms specialists and more economists and policy wonks.

  4. keynespendulum23 June 2012 at 22:48

    Good comments, circuit. Very much like you and your readers, I'm baffled by the continuous insistence by economists on monetary topics and details and lack of rhetoric and accompanying silence concerning the imbalances that trade deficits are permeating.

  5. Circuit!! nice take kp. i think you picked up on swells' nuance. these ocean types are sometimes difficult to figure out, but not as eccentric as the obstinates in europe. one of the issues that makes the eurozone crisis a dilemma for many is that bailouts won't reset commercial trade equilibria in the mediterranean. for years ('90s) germany was at a slight commercial disadvantage with parts of the med until the euro played its subtle swerve. Keynes actually found great comfort in insisting that deficits should normally be addressed alongside creative trade and industrial policies, leaving aside the role of taxes for the moment. with aggregate demand slowing down across the spectrum, including emerging markets, european bailouts and bailing-outs will become the chuckle or snicker of the day, the town, the world! Keynes could not conceive growth without employment and viable demand. yet, europeans are actually contemplating that unthinkable. how much more dystopian can europe become? i guess it depends on the political landscape. the problem will be ongoing into 2014 as one of your abler readers suggested a while ago.

    Great add-on circuit.

  6. JH, these are good points...and keep the Keynesian insights coming!
    I really don't understand why Keynes isn't more of an influence these days. BTW, I think the expression "subtle swerve" is really appropriate. I share this viewpoint.

    With respect to the issue of industrial policy to address fiscal deficits, this is one reason I am against simplistic austerity, which is the preferred course of action in recent years. Not much creativity there. Although most large nations are open, the world is a closed economy. When most large economies are heading for a slowdown or weak growth, no major nation can rely on export growth to offset cuts in domestic demand. Also, I would add that larger economies *require and depend* on domestic demand for growth rather than external growth. With cuts affecting employment levels, the result is simply weaker demand. I think Keynes is right here:

    "Look after unemployment and the Budget will look after itself" (1933)

    As for the bailing-outs (!), it seems pretty clear to me that some members will decide to go alone at some point in the future. It might not occur anytime soon, but unless a true fiscal union with an accountable official who has budgetary responsibilities is established and the ECB is given a responsibility to act as a backstop, I don't see much future for the EU as it is now (dystopia is a good word here). The cat is out of the bag; even if things settle down in the near term, investors have a memory. Also, changes to the political union are essential. To claim that a fiscal or banking union can be established without dumping the unanimity rule for treaties is fantasy. A bit more parliamentary debate and decision-making would benefit the union.