Skip to client sign inSkip to content Skip to footer

Financial planning tips

September 01, 2015

The stupid economy

This new recession is the most important issue facing Canadian voters. And there are clear, well-considered choices available.

James Carville, the colourful political consultant who helped Bill Clinton win the White House in 1992, is famous for the middle section of his three-chord plan: “The economy, stupid.” That line, which began as a pointed reminder to fellow Clinton staffers, was a dagger to the heart of President George H.W. Bush by the end of the campaign. The U.S. recession of the early 1990s was instrumental in his undoing.

Two decades on, a new recession here at home risks the unseating of our own incumbent. It was confirmed yesterday that Canada entered into a technical recession, which is to say that our economy shrank in gross domestic product terms in the first and second quarter. While forecasters anticipate a return to positive economic growth in Q3, we’re probably looking at an annual economic expansion rate of something close to 1% this year.

All of this is to say that Canada’s stupid economy (my words; I’ve run out of polite descriptors after six-and-a-half years of writing this blog) is very much at the centre of the current federal election.

Liberal Party leader Justin Trudeau has pledged his party’s commitment to an infrastructure investment plan that will tap deficit spending in each of the next three years to stimulate the Canadian economy. This positions the Grits uniquely; both the Conservatives and New Democrats are committed to balanced budgets.

It is precisely the discussion we should be having in this election campaign. And make no mistake: The fact that this austerity vs. stimulus debate is back on the agenda says a great deal about the state of the Canadian economy now, seven years after the financial crisis hit home. Early-stage predictions that the downturn would be followed by a 10-plus-year period of slow growth have come true.

I would argue that what Trudeau is committing to is pretty conventional policy-making. The Conservatives under Prime Minister Stephen Harper took similar steps in the period following 2008. Government spending is required to pick up the slack when consumer and business spending falls off during a sharp downturn.

This is what the famous economist Milton Friedman meant when he said: “In one sense, we are all Keynesians now” back in 1966. (I’m taking a bit of liberty with context there; he completed the oft-quoted statement with “in another, nobody is any longer a Keynesian.”) Nevertheless, the comment was sufficiently influential that U.S. president Richard Nixon would paraphrase Friedman as he took the U.S. off the gold standard five years later, saying, “I am now a Keynesian in economics.”

The Keynes in question is of course John Maynard Keynes, who made history arguing for a mix of monetary policy (lower interest rates) and fiscal policy (government spending on infrastructure) to reverse the Great Depression. The great man’s influence could be seen directly in moves made by the U.S. Federal Reserve -- and just about every other major central bank -- following the collapse of Lehman Brothers in 2008.

The decision for Canadians this time around is as important as it is clearly defined. First, do you agree that government stimulus is the right thing to do in troubled economic times? Second, do you agree that the present state of the Canadian economy demands the kind of deficit spending the Liberals have proposed?

Bring on the debates.

Related articles