Will the Liberals live to rue their love-in with Larry Summers?
The former U.S. treasury secretary (under Bill Clinton) and top White House economic adviser (under Barack Obama) has become the go-to guru as Justin Trudeau's Liberals look to craft a crackerjack election platform that can undo the seeming Tory advantage on the economy.
Mr. Summers, who was the keynote speaker at the Liberal Party convention in 2014, was back in Canada this week to offer his theories about why economies in the West have been growing so slowly and what he thinks they need to do about it. He dubbed his talk: The Fierce Urgency of Fixing Economic Inequality Worldwide.
There are good reasons for Liberals to be wary of Mr. Summers's downbeat diagnosis. The main one is that few of the symptoms of stagnation and inequality he describes seem very acute, or even present, in Canada.
According to the Harvard professor, the developed world has entered an era of "secular stagnation," in which post-recession economies will be unable to return to full employment without major fiscal expansion – in other words, without much more government spending. Slow population growth and aging work forces are permanently depressing demand. And today's leading technology businesses, such as Facebook and Apple, are far less capital-intensive than the former drivers of the economy, such as GM and U.S. Steel. The result, Mr. Summers says, is a "chronic excess of saving over investment" causing deflationary pressures everywhere.
This slow-go-it scenario is bad enough. But the benefits of even limited economic growth have been accruing almost entirely to the richest members of society, he asserts; middle-class incomes are stagnating and inequality is rising. This overstretched middle class is a further drag on demand.
Missing from the Summers analysis is that perhaps the biggest source of U.S. income inequality is the banking deregulation he oversaw as treasury secretary in 1999. Never mind, the solution to today's stagnation/inequality dilemma, he says, is for governments to spend massively on infrastructure, substituting public expenditures for weak private investment. Even (or especially) in Canada, where the oil bust has slashed capital spending, "this would not seem the moment to elevate fiscal discipline," Mr. Summers warns.
The Summers road map, which includes boosting minimum wages, raising corporate taxes and empowering labour unions, is laid out in the January report of the Commission on Inclusive Prosperity (CIP), which he co-chaired with Ed Balls, a Labour Party MP and Britain's equivalent of Opposition finance critic. Toronto Liberal MP Chrystia Freeland is also a member, boosting its credibility among the Liberal brain trust.
Whether Mr. Trudeau ever goes beyond slogans – who could be against "inclusive prosperity"? – remains to be seen. But Liberals should ask around before embracing the Summers solution.
Ben Bernanke, for one, doesn't buy Mr. Summers's secular stagnation thesis. One reason, the former head of the U.S. Federal Reserve Board says, is that "the U.S. economy looks to be on the way to full employment today." Even if it wasn't, more public spending might not be the solution because "the government's debt is already very high by historical standards and because public investment too will eventually exhibit diminishing returns."
Still, what little Mr. Trudeau has revealed of the Liberal plan, smacks of the Summers school. Under Prime Minister Stephen Harper, "Canada's economy has stagnated and inequality has increased both among people and provinces," Mr. Trudeau warned last month. The Liberals would "put in place innovative means to fund large infrastructure projects." and "put money …in the pockets of the middle class."
Naturally, the Liberal leader did not elaborate on what he means by "innovative means." He did "applaud" the Quebec government's recent move to have the Caisse de dépôt et placement finance and own public transit projects. But choosing infrastructure projects is always a political exercise and the Caisse is prone to political meddling. Is that what Mr. Trudeau means?
The main problem with the Trudeau argument, however, is that inequality has been declining here every year under Mr. Harper. In 2006, the income share of the top 1 per cent peaked at 12.1 per cent. In 2012, it was down to 10.3 per cent. Interprovincial inequality rose as Alberta got richer. But with economic rebalancing now under way, regional inequality is also set to decline.
What's more, even the CIP report co-signed by Ms. Freeland acknowledges that "some countries, such as Australia and Canada, have experienced continued middle-income growth."
That makes Canada about the last place on Earth you'd want to test Larry Summers's theories.