Even though the end is nowhere in sight, governments are being forced to imagine what the world after the coronavirus will look like.
In the early stages of the biggest global crisis since the Second World War, the economic responses of policy makers in Canada and around the world have been all about immediate needs – largely those of people whose workplaces have been abruptly shuttered, and their need to be able to buy groceries and other essentials, and to keep their homes.
The here and now will likely be the primary focus of the next few rounds of economic relief to come, too. Prime Minister Justin Trudeau’s Liberals signalled that the emergency relief package passed by Parliament this week – totalling $107-billion in aid and tax deferrals, and relatively modest compared to what many other countries have announced – is just a starting point.
As money rolls out through the new Canada Emergency Response Benefit (CERB) and other measures, Ottawa will be trying to figure out where the gaps are and who is slipping through them, and respond quickly with further measures.
But what sort of economy are people supposed to return to when they come out of lockdown? How effectively will the unprecedented sums spent during the crisis shape the eventual recovery? These questions will become more and more inescapable as governments continue to spray the firehose.
“It is putting out fires," says Wojciech Kopczuk, a Columbia University professor who recently organized an effort by hundreds of economists to encourage the U.S. Congress to swiftly open the taps. “But it is putting out fires with an eye toward what happens after.”
The trouble is there’s no consensus among economists about what policy makers should do, including whether it’s possible to simply “freeze the economy” – newly popular shorthand for emergency measures big and effective enough that everything snaps back to normal when the COVID-19 crisis is over.
Certain sectors, including oil and gas, airlines, restaurants, hotels and bricks-and-mortar retailers, are already suffering much more than others, and the most severe casualties are different than the ones in the 2008-2009 financial crisis. Mr. Trudeau also has to consider the roiling economic debate in Washington and the massive policy responses from the Trump Administration and Congress.
Already, policy makers in Ottawa are contemplating what stimulus measures they’ll have to roll out over the next several months to reignite the economy, and to provide relief to households, businesses and entire sectors that have suffered deep and lasting damage.
Based on conversations this week with leading economists, government sources and others, even after rolling out more than $100-billion in aid already, there is still a contentious debate over what help – and how much – should come next.
HOW MUCH INEFFICIENCY IS ACCEPTABLE IN THE NAME OF URGENCY?
From the moment governments started rolling out economic relief measures, one of the central debates has been around how they should balance getting money into the system quickly with making sure it gets to recipients who really need it.
That debate will continue as the government continues to add new measures, and focus shifts somewhat from households to businesses.
Some economists argue that time is so much of the essence, governments should avoid letting the perfect become the enemy of the good. “You should think about how to do these things fast – this should be the foremost focus,” says Mr. Kopczuk, the Columbia University economist.
It’s important not to overthink the danger of some waste, he argues. Enhanced liquidity provided by central banks won’t provide immediate help to many sectors and businesses that don’t have easy access to credit. They need governments to start spending right away.
That urgency, coupled with concern about the ability of government to set up and administer complex programs quickly, was behind the push to provide a temporary universal basic income. Conservative policy veteran Ken Boessenkool has recently championed such an income, and argued that the government should effectively just send cheques to every household during the current crisis.
Other economists and analysts remain more cautious, however. They prefer relatively targeted programs to make sure enough help goes to those struggling most, even if administration is somewhat more complicated.
University of British Columbia economist Kevin Milligan notes that a potential additional advantage of layered programs over immediately sending big payments to everyone is flexibility. “An important element is the scalability of all this,” he says – being able to adjust benefit or loan programs up and down, as restrictions to public behaviour and economic activity may be removed or added over the months ahead.
Ottawa will almost certainly have to adjust benefit and loan programs up or down in the coming months as restrictions on individual behaviour and economic activity are revised or removed. No one knows how long this crisis will last or in what form, so one of the better arguments against blanket support is keeping more flexibility for whatever comes next.
WHO NEEDS A BAILOUT?
As Deloitte Canada chief economist Craig Alexander puts it, the federal government’s first round of economic relief was geared largely toward dealing with the “income shock” faced by households. “The second is dealing with the cash-flow problem that businesses are going to have,” he says.
Mr. Trudeau kicked that effort into higher gear on Friday, by announcing that the federal government will follow the lead of other countries, such as Denmark, by paying small businesses a wage subsidy of 75 per cent to retain employees, rather than the 10 per cent Ottawa initially announced.
But even a move that dramatic is unlikely to satisfy calls for assistance from sectors forced by government to cease or reduce operations. Unlike previous recessions, a vast array of businesses have been instantly placed in precarious positions.
The impact varies widely among sectors, and within them. Consider sports and entertainment. It seems likely that whenever the crisis is finally over, professional sports leagues will be able to ramp back up relatively easily.
But many cinemas may struggle to reopen. It’s a comparatively low-margin business, and they won’t have much new content because of long production shutdowns during the crisis.
If offering further help to small and medium-sized businesses, many economists expect that Ottawa will try to keep programs broad-based.
Tony Fell, the former chairman and CEO of RBC Dominion Securities, said in an interview that he favours a prolonged small-business tax holiday – perhaps for as long as 18 months, applied retroactively – as a way to be “as even-handed as possible.”
Matters get more fraught in larger industries where there are just a few dominant players, such as transportation. Bigger companies likely need to be dealt with on a case-by-case basis. But during the financial crisis a decade ago, governments granting loans or taking equity stakes in individual companies proved to be controversial mechanisms.
“I’m not in favour of rushing in and starting to support companies,” says Paul Boothe, a former senior federal and provincial bureaucrat who helped steer the 2009 auto bailout. “You have time.”
Allocating aid among sectors will also be hugely problematic. Many were facing troubled futures even before the coronavirus crisis hit. If an industry was already struggling beforehand, and has only had its decline accelerated, how much should government prop it up?
The pain was already acute in the oil patch. A global price war between Russia and Saudi Arabia had already driven crude prices below US$40 a barrel by early March. This past week, benchmark West Texas Intermediate crude traded near US$20 a barrel.
Already struggling to compete beforehand, Alberta’s industry now may have to contend with low global prices that could well outlast the health crisis. There will also be all kinds of pressure from environmentalists not to slow the decline of high-emissions industries with grim long-term prospects, even amid warnings of catastrophic job losses, not only in the province’s oil sands but in all the sectors that service it.
Bricks-and-mortar retailers have also been slammed by the crisis, and online shopping was taking over anyway. Is it the best use of government dollars to try to reverse the trend?
Mr. Alexander argues that it’s best not to get too caught up in too much elaborate analysis. Businesses that were “financially viable” before the crisis, he says, still deserve consideration after that viability was suddenly taken away, regardless of the overall health of their industries.
HOW MUCH FIREPOWER SHOULD GOVERNMENT RESERVE?
The consensus among economists so far is that, facing an emergency of this magnitude, the federal government needn’t worry much about its bottom line. Governments everywhere are throwing everything they can at health-care needs and the economic fallout from the crisis, and Ottawa entered it in better fiscal shape than most.
If anything, Finance Minister Bill Morneau has been criticized for being too conservative. In an interview shortly before the announcement of the enhanced wage subsidy and other new measures on Friday, RBC chief economist Craig Wright called the federal response “rather timid compared to what we’ve seen around the rest of the world.”
Mr. Wright said he would not see a problem with going beyond $200-billion in emergency spending, and calling on governments to “underwrite the worst-case scenario.”
Still, the longer this crisis goes on, the more that Mr. Trudeau’s government – along with every other administration – may have to give some thought to pacing. That’s especially true if a slow recovery after the worst of the heath crisis has passed leaves many vulnerable households or businesses in need of continued support.
It also helps explain why using support mechanisms that are possible to scale up or down easily comes up so often in conversations.
Nor will it be long before debate turns to how governments will subsequently pay for all the expenses they’re racking up now, without imperilling the recovery. Look for heated discussions about the relative merits of everything from wealth taxes and increased sales taxes to spending cuts well before we’re out of the woods.
WHAT’S THE ROLE OF BANKS?
So far, both government and financial-sector insiders have been fairly bullish on the role that Canada’s big banks can play in getting the country through to the other side.
The banks don’t seem to be in precarious financial shape themselves. And it’s sound basic business to help customers get through what will hopefully be, for most of them, a short-term emergency from which it’s possible to recover.
As Mr. Alexander puts it, “If we look back at past recessions, if a bank ends a line of credit because they’re worried a business is going to fail, I can guarantee that business will never be a client again.”
But Ottawa is counting on financial institutions to do more than be forgiving with existing clients. Ottawa evidently sees some opportunity for new partnerships with the banks.
On Friday, Mr. Morneau announced that banks will be providing interest-free loans of up to $40,000, backed by the federal government. That will help the Business Development Bank of Canada (BDC) and Export Development Canada (EDC) avoid being overwhelmed by requests for help from businesses.
Even so, Ottawa apparently wants banks to go further. It is pressing them to reduce credit-card interest rates – a profit hit the banks seem reluctant to take.
It also remains to be seen whether deferral of mortgage and other payments – which the banks have committed to offering as needed, but not universally – will continually be offered liberally enough to avoid defaults by borrowers. For all the trust that may currently exist between the banks and the government, it may require careful and complex monitoring to gauge whether such flexibility is being provided, or Ottawa needs to intervene further.
Relationships between banks, their customers and government are evolving in unforeseeable ways – and will continue to do so in the months, perhaps even years, ahead. Emerging from the crisis, rebuilding businesses and households could continue to have unusual needs for credit and capital. And the lines of communication between Ottawa and Bay Street, on display this week, may be further tested.
IS THIS THE TIME TO PURSUE PRE-EXISTING ECONOMIC GOALS?
It’s easy to forget that only a month ago, steering Canada toward a more climate-friendly economy – without furthering national-unity rifts with Alberta and Saskatchewan – was Mr. Trudeau’s defining challenge.
It seems inevitable that his government will have to set aside the rollout of some of its climate-related policies. For example, are the Liberals really going to announce details of a new Clean Fuel Standard this spring, as planned? Amid the current emergency, there’s little public appetite for discussing this sort of long-term project at all.
But as recovery draws closer and Ottawa begins formulating more forward-looking stimulus plans, clean growth will likely be a big priority. In fact, a senior government official (interviewed on a not-for-attribution basis because he wasn’t authorized to speak) said this week that cabinet members not taking a lead in the coronavirus response – such as Environment Minister Jonathan Wilkinson – are starting to lay some groundwork.
Most obviously, that could mean big investments in infrastructure, from transportation to building retrofits. It could also involve a concerted push to help Alberta in particular – which stands to emerge from the crisis in especially tough shape because of price-driven devastation to its oil and gas sector – diversify its economy, including through the development and scale-up of clean technology.
One challenge for Ottawa, if it goes down this path, will be to avoid looking as though it’s dancing on the grave of an industry so many Albertans have relied on. The Trudeau government wants to keep the focus on bringing jobs and opportunity back.
That could apply to more than just the possible transition to a clean economy. There may be opportunities for Mr. Trudeau to try to advance other longstanding policy goals, such as reducing income inequality. But government will also need to show that it’s writing a new playbook to deal with the uncertain future ahead, not just reverting to its old one.
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