After some scolding from economists on Twitter, we scribes appear to have mostly stopped describing the tens of billions of dollars that governments are spraying into the economy as “stimulus,” opting instead for variants of “rescue” or the more pejorative “bailout,” depending on our moods.
The reprimand over word choice was deserved: there is nothing stimulative about all the public money being deposited in the bank accounts of businesses and households; the funds are merely keeping the economy on life support, or, if you prefer Bank of Canada Governor Stephen Poloz’s metaphor, stopping the clock.
But restarting the clock will likely require a second wave of spending that absolutely will be intended as fiscal stimulus.
The Conference Board of Canada’s Index of Business Confidence, based on a monthly poll of some 1,500 executives, plunged to 43.8 this month from 86 in March, an unsurprising result that was nonetheless the lowest reading since the survey started in 2002.
More surprising, perhaps, was the note of pessimism the Conference Board detected about the future. The survey found that 63 per cent of respondents thought economic conditions would be worse in six months, while only 25 per cent predicted improvement. If the economy needs a jolt heading into the second half of the year, the onus may rest on the government to provide it.
The deficit will have expanded to about 10 per cent of gross domestic product, but adding some more debt should be manageable, at least for the federal government. If Japan can maintain a high standard of living with a debt-to-GDP ratio of 250 per cent, then surely Canada can find a way to muddle along in the short term even if the comparable combined burden of Ottawa and the provinces moves towards 100 per cent of GDP.
“The choice is between a smaller increase in public debt, but a slower and longer recovery, or a sizable increase in public debt and a swifter normalization of the economy,” Charles St-Arnaud, chief economist at Alberta Central, said in a report last month. “We believe the costs of doing too little significantly outweigh the risk of not doing enough.”
Direct payments to individuals and companies was the right way to cushion the blow from the economy’s sudden stop. But there is reason to be skeptical that those funds will do much to actually stoke demand. That’s because the combined debt of companies and households is 220 per cent of GDP, one of the highest levels in the world. A rational executive or individual in that situation will be predisposed to save money, not spend it.
That’s why infrastructure should play a major role in the next phase of the rescue, since big-project spending stands a much greater chance of generating economic activity. There are downsides. Economist Armine Yalnizyan has observed that more women than men have been fired or furloughed by this recession, and construction favours men. Infrastructure programs are also notoriously slow to get going. The reason there have been so few infrastructure announcements to date is because the systems that Canada has in place simply couldn’t spend the money fast enough to help.
But when you have a few months with which to work, instead of only a few days or weeks, then it should be possible to deploy some money that would generate maximum multiplier effects. Prime Minister Justin Trudeau’s decision to allocate almost $2 billion to clean up abandoned oil wells was smart because it builds on efforts that already were in place, while having a positive spinoff benefit of cleaning up the environment.
The Canadian Chamber of Commerce has another good idea.
Perrin Beatty, the lobby’s chief executive, on April 22 wrote to Infrastructure and Communities Minister Catherine McKenna and Natural Resources Minister Seamus O’Reagan and asked them to advance billions of infrastructure money that was scheduled to be spent over the next few years.
As structured now, such a flush of cash would bottleneck, since there are too few “shovel-ready” projects to spend the cash on. However, the chamber may have found a way around that problem. Beatty pointed out that the $2-billion National Trade Corridors Fund — representing about one per cent of the $180-billion infrastructure program — was so popular that it had to turn away proposals. Perhaps some were rejected on merit. But those that went unfunded simply because the cash ran out should, in theory, be ready to go. All that’s needed is a bigger allocation.
“Due to the high demand and relatively low proportion of projects funded, dozens of shovel-worthy projects were unsuccessful in previous calls for proposals,” Beatty said. “We encourage you to work with Transport Canada and fund projects that have already applied for funding through this program.”
Surely the government is giving the idea serious thought. It’s exactly the kind of thing it needs to do next.