A Keynesian Moment, Without a Keynesian Government

The problem with the Conservatives' economic update of a couple of weeks ago is that Finance Minister Jim Flaherty and Prime Minister Stephen Harper didn't seem to be either inclusive of opposition opinion or in tune with international trends. Instead, they talked about restraint--starting with restricting public sector workers' right to strike, eliminating the right to appeal pay equity rulings and and eliminating taxpayer funding for political parties. And the need to balance budgets, possibly by selling off public assets, no doubt at a discount. Were those the right priorities in the face of our economic problems?

The conventional wisdom since the halcyon days of Reagan and Thatcher has been to rely on monetary policy to deal with cyclincal fluctuations: fiscal stimuli were often deemed to be either ill-timed in terms of their effects or difficult to turn off for political reasons, and hence inflationary. The Bank of Canada recently lowered its interest rates another 3/4 of a percent, partly in response to the federal government's lack of fiscal policy: no doubt the prime minister, a monetarist, feels good about himself for that. But what really is the scope for relying on looser monetary policy under these conditions? Even The Economist (on the whole a very neoliberal newspaper) has admitted that it is quite limited, and has called on Western leaders to agree on a fiscal jolt that follows President Obama's lead.

We are in what I call a "Keynesian moment"--a financial crisis (i.e. shortage of capital and liquidity for financing in the private sector, a credit crunch), combined with what is expected to be high unemployment, the worst recession since the 1930s, plus an aged and crumbling public infrastructure that is best attended to while resources are unemployed in the private sector.

All these things point to the need to spend more, and to not be afraid to run 2 or 3 deficits in a row in the neighbourhood of $20-30 billion each. That is roughly the equivalent of what Barack Obama and most of the G-20 countries are committed to doing, but all his adult life Harper has been ideologically convinced that Keynesianism was dead and his reluctance to get with the program is palpable. His talk about "doubling infrastructure spending", for example, is just pure spin. That is only impressive if current levels of spending on infrastructure are close to half of what they need to be---and they aren't. They are there for P.R. during the holidays and leading up to the January 27 budget and confidence vote.

A temporary extension of EI benefits would put money right back into the economy (given the high propensity to consume of EI recipients). I would consider it an essential part of an acceptable budget.