While Ottawa has been engrossed in political drama, the international economic crisis has rolled on relentlessly. Our leaders are running out of time to reassure Canadians about the economy going into 2009.
The very serious decline in global economic indicators is starting to take root, not in a proper evaluation of long-term economic prospects, but in market volatility that clouds decision-making, and in fears of a worsening environment that are rapidly becoming self-fulfilling.
Because of the now mainly psychological nature of the problem, it is apparent that the stabilization of the financial system and the liquidity provided by regulators and central bankers will not be enough to kick-start the economy. Finance ministers in Canada and elsewhere should also risk taking decisive fiscal measures.
The goal both in Canada and globally is to prevent deflation, a state of decline in the overall level of prices that prompts many consumers and businesses to perceive they are better off sitting on cash rather than spending or investing, due to the positive real rate of return on cash holdings.
An internationally co-ordinated stimulus is a practical requirement of any effective effort. Because the economic downturn is global, the direction of policy needs to be global. Joint action is also needed because of the huge problem of "free-riders" who would hitch their recovery to others' stimulative packages.
As well, international co-ordination is necessary to repudiate protectionism or "beggar-thy-neighbour" policies, such as competitive currency devaluation, that would very likely prolong the uncertainty and economic downturn. Stabilizing intervention in currency markets or, conceivably, in stock markets directly, would also typically need to be internationally co-ordinated to be effective.
For Canada, a particular focus of the international stabilization approach should be on co-ordinating with the United States. Ottawa will have to work very closely with the U.S. administration and, where necessary, advise and support it on a range of trade and industry stabilization measures. Canada should contribute to such policies if it can be assured that the U.S. administration will not accept measures that support activity solely within the United States at the expense of its neighbours. A prime example in this regard is the highly integrated North American automobile industry. At the same time, bailouts or loans without tough conditions requiring the industries to become more competitive would make little long-term sense.
While Canada ultimately cannot do much on its own to avoid a recession, it can certainly play its part in a global effort. Thankfully, Canadian governments have experienced a significant reduction in their debt burden in the past 15 years that should give them the breathing room to provide fiscal stimulus in the current dire circumstances.
There is a range of time-limited measures that could help in preventing an immediate collapse of consumption, which should be a key concern in the current environment. Examples would be a time-limited sales tax break, or tax-free RRSP withdrawals for certain durable good purchases.
To be sure, this would be borrowing from future consumption, but making the measures time-limited would give them a very quick effect that would provide a bridge for the economy until longer-term measures can have an impact. Moral suasion with financial institutions being strongly encouraged to deal with customers on a "business-as-usual" basis could also play a role.
In addition to immediate action, the government should also announce a set of measures that would take effect should economic conditions deteriorate further. These contingent measures must be part of the arsenal, both to improve expectations regarding jobs and incomes, and as a practical matter should real conditions deteriorate.
These contingent measures would be announced in advance but kick into high gear if a reliable indicator of economic conditions available more or less in "real time," such as the unemployment rate, were to reach a certain pre-announced distress level.
Thus, the finance minister could encourage Canadian governments to immediately commission preparatory work on a number of long-awaited projects that would also address Canada's infrastructure gaps. If the economic situation stabilizes, the plans could proceed but at a more moderate pace than if the unemployment rate reached the pre-announced distress level.
In the midst of this crisis, there also is an opportunity to continue implementing with renewed vigour a long-term prosperity agenda. The contingency measures discussed above could be focused on building the policy, physical and human infrastructure suited for the even more globalized economy which, I believe, will emerge from the crisis.
A strengthened policy infrastructure could address our capacity to nurture new entrepreneurs, to conduct business internationally, and to co-operate with other countries on matters of growing importance such as environmental governance and nuclear and product safety and security.
The physical infrastructure could address public services and buildings, climate change mitigation and adaptation, and security and physical movements within trade gateways.
The human infrastructure program could address the educational opportunities that lead to success in the international economy and international co-operation, improved access by Canadian workers to opportunities across the country, and structural issues with Canada's social safety net, tax system and in the delivery of public services that impede Canadians' ability to achieve their potential.
The point here is that the short-term crisis need not obscure the need for a long-term agenda, and that the finance minister can and must envisage measures that will effectively address both.