Finance Minister Bill Morneau had only been speaking for a few minutes on Wednesday morning before he lost me. The $27-billion package of measures announced by Ottawa to address this coronavirus-induced downturn is as dizzyingly complicated as it is inadequate.
It might also be a bureaucratic nightmare waiting to happen. Government assistance programs are subject to administrative backlogs and errors at the best of times. But there is no room for error if we are to prevent the economic crisis we are entering from turning into a depression.
Taken individually, each one of the measures unveiled by the Finance Minister on Wednesday has merit. Since most of them fall under existing programs, they can be rolled out relatively quickly. But they also involve eligibility requirements that might be confusing for individuals and businesses to understand and could become bogged down in red tape. Mr. Morneau will need to come up with better ideas – and fast – to prevent worst-case scenarios from materializing.
There is no policy playbook for dealing with a recession caused by a global pandemic, much less one that strikes when central banks are almost out of conventional ammunition. Following the approach in the United States, where the White House and Congress are negotiating a US$1-trillion stimulus package that could involve sending US$1,000 cheques to every adult American, cannot be excluded here. Bailing out distressed industries cannot be ruled out either.
Any suggestion that governments here should take advantage of the crisis to ramp up infrastructure spending to achieve abstract goals such as greening Canada’s economy should be dismissed outright. “Because such spending takes significant time to plan and execute, by the time the spending actually occurs, the recession is usually over. This was the experience in 2009 in Canada,” warned Fraser Institute president Niels Veldhuis.
Still, under any comprehensive stimulus, the federal deficit would explode. A stimulus package on the scale of that being contemplated south of the border would involve at least $100-billion in direct new spending and hundreds of billions in indirect measures such as loan guarantees and tax deferrals. Ottawa would need to do almost all of the heavy lifting because the provinces will be overwhelmed by an explosion in health-care costs and plunging tax revenues.
The recession that in all likelihood has already begun will be unlike any other the modern world has experienced. “There are many aspects [of the current situation] that are unprecedented here,” said former Bank of Canada deputy governor Jean Boivin, who now heads up London-based BlackRock Investment Institute. “The remedy [to tackle the coronavirus pandemic] is to actually hurt the economy in the short term. Policy needs to provide a bridge from this period of hurting the economy to ensure that we’re not creating permanent damage.”
Mr. Boivin last year co-authored a BlackRock report that warned that policy-makers would need to “go direct” – or get money directly into the hands of individuals and businesses – during a future recession because indirect policies (such as lowering already low interest rates) would not be sufficient. Indeed, in the past two weeks, most central banks have lowered interest rates to near zero. But instead of reassuring financial markets, the moves mostly backfired by reminding investors of how little ammunition remained in central bankers’ arsenals.
Central bankers and finance ministers typically work independently of each other. That kind of separation may no longer be possible if policies are to be effective and if investors are to be persuaded that fiscal and monetary authorities aren’t working at cross-purposes. But policy co-ordination also carries the risk of blurring the lines between elected governments and unelected central banks.
The idea of central banks distributing “helicopter money” – as if dropping cash from helicopters – to individuals has been increasingly discussed since the last recession. As has a similar proposal, known as Modern Monetary Theory, that would see central banks print unlimited sums of money that they could lend to governments to spend. MMT is based on the belief that countries with their own currency don’t need to worry about deficits. That premise is rejected by most economists, however, since it could lead to uncontrollable inflation.
Mr. Boivin thinks “radical” solutions such as MMT can still be avoided; others aren’t so sure. On Wednesday, economist David Rosenberg tweeted that U.S. Treasury Secretary Steven Mnuchin may need to triple a proposed stimulus package to as much as US$3-trillion “to put a floor under this recession. MMT coming soon; and gold will surely surge on the back of it.”
Either way, get ready for deficits you never imagined possible.
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