The Folly of Scrapping Stimulus
World leaders are now learning the folly of hastily declaring victory over the worst effects of the Great Recession. Turns out we’re not even remotely out of the woods after the worst economic collapse since the Depression of the 1930s.
With the Great Recession consigned to the history books, austerity became the mantra among the advanced economies that had suffered most from the epic downturn.
Ottawa turned its attention from economic stimulus back to deficit reduction and spending cuts. The Obama administration’s record $787-billion stimulus program wrapped up, as planned, after a two-year run. And U.S. deficit hawks took control of Congress, with a winning argument that Obama’s spendthrift ways were bankrupting the country. Rick Perry, a Republican presidential hopeful, has said the stimulus “has proven for once and for all that government spending will not create one job.”
David Cameron, the new British PM, had recruited our own Paul Martin to help shape an austerity program for No. 10. It was to be modeled at least in part on former finance minister Martin’s success in eradicating a $43-billion Canadian federal deficit in the 1990s.
In deficit-averse Germany, Chancellor Angela Merkel balked at assistance for troubled fellow European economies that wasn’t tied to punishing cultural makeovers of beneficiaries like Greece and Portugal accustomed to lavish social spending.
What a difference a year makes.
A single dissident setting himself on fire in Tunis early this year quickly led to the toppling of three North African dictators. Notably, the “Arab Spring” has been led not by religious ideologues or ethnic nationalists. It has been spearheaded by university-trained youth who’ve known only joblessness and underemployment since graduation.
Today the eurozone is hanging by a thread, with even major economies like Italy and Spain suffering a speculative run on their bonds. Merkel and the other “moralizers,” as U.S. economist Paul Krugman dubs them, have learned that tough love isn’t the cure for a Greece and Ireland requiring new bailouts whose repayment terms are not, as in the first round, more punitive than genuinely rescuing.
Cameron’s austerity initiatives, which in truth are relatively mild, have met with the same popular antipathy as Greek rioters have expressed. The relatively young coalition government lead by Cameron, in Ottawa this week to praise the resilience of the Canadian economy, is already deeply unpopular.
The U.S. economic recovery has stalled, and Obama’s job-approval ratings have plunged accordingly, to a mere 41 per cent in the most recent Gallup survey. The U.S. stock markets have gone into a funk. About 14 million Americans are out of work. And four million Americans are at risk of losing their homes, in addition to the two million Americans whose homes already have been foreclosed.
Close to 1.4 million Canadians remain out of work, three years after the onset of the Great Recession. This week the International Monetary Fund (IMF) downgraded its forecasts of Canada’s economic growth this year and next. On May 2, about 60 per cent of Canadians voted for parties other than Prime Minister Stephen Harper’s, making an overtly empathetic NDP the government-in-waiting for the first time in its history.
Reality bites. In a word, the reality is stimulus.
From London to Berlin, and Ottawa to Washington, the world’s leading economies reacted swiftly to the onset of the Great Recession with massive stimulus programs to relieve the financial stress of their people.
The stimulus worked like a charm.
By 2010, Canada had led its G8 peers in emerging from recession. Canada recaptured the 400,000 jobs lost in the Great Recession, again ahead of its peers.
The Obama stimulus arrested pandemic job loss across all industries, and created or saved an estimated three million jobs. It yielded what I believe is the biggest swing in GDP performance in modern U.S. history, of about 12 per cent. GDP was shrinking at more than 6 per cent when Obama was inaugurated in 2009, and was growing by more than 6 per cent by the end of that same year.
Much of the U.S. stimulus was directed to state governments. With the end of the stimulus – which Texas Governor Rick Perry, among others, made liberal use of in job creation – states have laid off thousands of teachers, police, firefighters and other essential-service workers.
As in America, France’s stimulus initiatives put construction workers back on the job, restoring Versailles and century-old hospitals, schools, bridges and other aging infrastructure – the foundation for a more productive economy when good times returned.
Obama, who also found public funds to rescue the U.S. auto industry, joined French President Nicolas Sarkozy in using stimulus funds to grubstake enterprises in alternative energy and other 21st-century industries, where jobs are less likely to be “offshored” than traditional manufacturing employment.
The stimulus efforts of the coalition government that Merkel leads kept that nation’s jobless rate below 6 per cent, even lower than Canada’s current 7.3 per cent and America’s 9.2 per cent. And that was despite Germany’s export-driven economy, reliant on sales to other advanced nations in economic distress. Even Japan managed to emerge from a two-decade-long economic malaise.
Then the roof caved in after the stimulus programs dried up.
We should have known better. One of the few calamitous mistakes of Franklin Roosevelt was to ease up on stimulus efforts after his 1936 re-election landslide. Unduly sanguine that the Depression was by then a spent volcano, FDR brought on a significant increase in joblessness, wiping out much of his earlier New Deal gains.
With the world economy still in the ICU, public opinion polls now find respondents imploring governments to resume economic stimulus as their chief priority.
Earlier this month, Harper appeared to abruptly switch his focus to job creation after the latest employment report showed Canadian job creation has gone into reverse, with the country losing a net 5,000 jobs in August.
And in what’s described at No. 10 as “Plan A+,” Cameron is now girding to unveil a major job-creation initiative, likely focused on infrastructure projects where jobs can be created most quickly. That followed hard on the heels of Obama’s $444-billion jobs package – a volte-face for a U.S. chief executive who earlier seemed determined to capitulate to a G.O.P. agenda with just one item, deficit reduction.
The U-turn, if it holds, cannot come soon enough for Michael Bloomberg. “You have a lot of kids [who] can’t find jobs,” the New York mayor said last week. “That’s what happened in Cairo. That’s what happened in Madrid. You don’t want those kinds of riots here.”
© 2011 The Toronto Star