Canadian (Non)Exceptionalism:

Crisis, Recovery, Austerity

Presentation by Jim StanfordEconomist, Canadian Auto Workers

CLMR Conference, Ryerson U., March 2012

Global Financial Crisis

Mother Of All Meltdowns

The Long-Awaited Demise

Of Capitalism

As We Know It

Big …

Where Did This CrisisCome From, Anyway?

Where Did This CrisisCome From, Anyway?

Wha’ Happened?• Speculative bubble (again):

– Centred in U.S. housing

• Fueled by aggressive, irresponsible lending– “NINJA” mortgages

• Speculators borrowed at 50:1 or more• U.S. housing prices began falling in 2006• Chain reaction of collapse, deleveraging• Blow to wealth, confidence, lending,

investment, spending RECESSION• Globalization made things far worse• Global austerity just a new phase of same

crisis.

The Economic “Recovery”…(Has anybody seen it???)

Do the Math

• Official unemployment: 1,500,000• Lost participation: 350,000• Involuntary part-time: 375,000• Waiting for a job to start: 130,000• True unemployment: over 2 million (12%)• No improvement in “employment rate”

since summer 2010.• Canada’s performance has been “ho-

hum”

Employment Rate Decline

61.0%

61.5%

62.0%

62.5%

63.0%

63.5%

64.0%

2007 2008 2009 2010 2011

Empl

oyed

as

% W

orki

ng A

ge P

op'n

-2.5 pts

+0.4 pts

Mediocre is the Word• Comparisons of Canada to other countries

must take into account our faster population growth.

• Relative to population growth, our performance has been mediocre:– 17 out of 34 in real per capital GDP since 2007– 17 out of 33 in employment rate since 2008

• We did better than others that experienced all-out bank failures:– US, UK, Ireland, Iceland, Italy

• But compared to the rest, we’ve done badly– Germany, Korea, Australia

• Canadian triumphalism rings increasingly hollow.

Change in Real per Capita GDP,

2007-2011

Change in Employment Rate,

2008-2011

The Coming Fiscal Austerity

DON’T FORGET! • Deficits are the consequence of financial

crisis & recession (not “overspending”).– Automatic deficit (less tax in, more EI out).– Stimulus measures.– Bank bail-outs in some countries.

• Slow recovery has undermined budgets.• Now governments and business (who

always wanted cutbacks) are going for blood:– Federal - Provincial - Municipal

Fiscal Math 101

Bad recession+ Lousy Recovery= Deficit

Ontario Provincial Deficit

-25

-20

-15

-10

-5

0

5

2003-4 2004-5 2005-6 2006-7 2007-8 2008-9 2009-10 2010-11

$ Billi

on

Impact of Recession: Ontario

• Double-barreled impact on revenues:– Decline in GDP (8-10% below previous trend)

= $10 billion lost revenue.– Decline in revenue as share of GDP (<1 point)

= $5 billion lost revenue.– Combined fiscal impact: $15 billion.

• Impact on program spending:– Automatic stabilizers (income supports).– Discretionary stimulus.

• Impact on debt service costs:– Follow-through growth of interest costs.– Low interest rates have been helpful.

Canada, Ontario Have No Debt Problem• Debts are low by historical and

international standards.• Deficits are clearly cyclical.• Interest rates are low (and likely to

remain there).• First task: put Canadians back to

work (paying taxes).

Ontario Debt Ratios

0

5

10

15

20

25

30

35

40

2002-3 2003-4 2004-5 2005-6 2006-7 2007-8 2008-9 2009-10 2010-11

% of

GDP

Net Debt

Accumulated Deficit

An “Animal Farm” Theoryof Debt

“Private debt good, public debt bad.”• But like any other borrower, public debt makes

sense to finance productive long-lived assets.

Fiscal Math 201:Numerators and Denominators

• Key constraint: debt ratio= Net debt GDP

• Reducing debt ratio requires reduction in the numerator and/or expansion in the denominator.

• Greece: The more they cut, the more GDP shrank, the worse the debt ratio became.

• Normal recovery? Ratio falls via denominator.• Crucial task: start the engine of true recovery.

But Where’s the Engine??

Growth Needs an Engine…

• Some sector must lead the way with leading injections of expenditure (hopefully productive).

• Resulting employment and income leads to circular generation of more employment and more income.

• In a credit money system, the leading sector must also be borrowing…Creating the new money needed to buy

new output.

Possible Engines• Investment (business, government)• Exports• Construction (private, public)• War (hope not!)• Public works• Consumers?

– Rarely, because consumer spending usually follows cycles (and amplifies them), not leads.

How It’s Supposed to Work…

• Businesses borrow funds, put money into motion in the real economy.

• Resulting stimulus generates employment and income several times over.

• Real production, productivity, and innovation are supposed to result.

• We can argue over the terms (wages, taxes, regulations)…… but no arguing about the “engine”:

private capital accumulation.

What’s Gone Wrong• Businesses are investing too little.

– Not even reinvesting their cash flow.• Businesses are channeling excess cash

back into the financial system.• Financial innovation, speculation, and

credit creation become a sideshow.– Irrelevant to real production at best,

destructive at worst.• Consumers become the default engine.

– Fueled by rising consumer debt.• Government stimulus can only do so

much.

GDP by Domestic Sector

70

80

90

100

110

120

2006 2007 2008 2009 2010 2011

Cycl

e Pe

ak =

100

Government

Consumers

BusinessInvestment

A Growing Hoard

$300

$350

$400

$450

$500

$550

$600

2006 2007 2008 2009 2010 2011

Cash

and

Sho

rt-Te

rm A

sset

s ($

bil)

Non-FinancialCorporations

Signs of a Structural Problem

• Profit-driven private capital accumulation cannot generate enough work to fully utilize our human resources.

• Long-run consequences:– Chronic labour market weakness– Sluggish innovation, productivity growth,

competitiveness– Excess financial capital

• Canada is not alone: U.S., Japan, others• Where’s the engine???• Need to go “beyond stimulus” to address

this bigger structural economic problem.

Job Creation Strategies• Without recovery, deficits will remain.• Traditional engine of growth (private

sector investment) is not working.• Labour needs visionary, credible

alternatives:– Avoid spending cuts; expand public services.– Longer-run capital / infrastructure spending.– Targeted sector strategies.– Other novel ways to channel investment:

• Government as venture capital funder??? [Shiller]• Social sector / co-ops / other non-profits???

Our Economic “To-Do” List

• Explain where this crisis came from– It wasn’t caused by workers– It was caused by finance– It wasn’t a random accident– It will happen again, if rules aren’t

changed

• Reclaim the value & legitimacy of real work and production

• Resist attempts to make us pay• Fight for an alternative economic vision

that puts production ahead of finance

Taking Back Credit1. Regulate finance:

• Ban dangerous, unproductive activity.• Require safer practices (leveraging, quality

of debt, firewalls, globalization).

2. Tax finance:• Tobin tax?• Corporate income tax: 3% = $1.5 b/yr.• Eliminate tax subsidies.

3. Take back finance:• We can create money out of thin air as well

as a private bank can.• Use that power for production, not

speculation.

Watch Out…WE are Now the Target

• Conservatives have exploited fear, confusion, and power over media to blame workers (esp. public sector) for crisis caused by private finance.

– “Shock Doctrine” (Naomi Klein)

• Now they will try to make US pay for a crisis THEY created.

– Especially union members

• Foster inequality & envy among workers.– “Divide and conquer.”– “Misery loves company.”

Declare “War,” End Recession

• 1939: Recession ended immediately– Enormous social challenge– Side-stepped profit motive for initiating

work and production

• 2011: Do it again:– Declare war on pollution, poverty

We Produce… …They Don’t

We Didn’t Cause the Crisis…They Did

www.policyalternatives.ca“Canada’s Incomplete, Mediocre Recovery”

www.economicsforeveryone.ca

Twitter: @JimboStanfordFacebook: Jimbo Stanford

Canadian (Non)Exceptionalism:

Crisis, Recovery, Austerity

Presentation by Jim StanfordEconomist, Canadian Auto Workers

CLMR Conference, Ryerson U., March 2012