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It is now abundantly clear that Canada
and the world is facing its worst
economic crisis since the Great
Depression. However, a sense of
premature Hoover-type optimism seems
to have settled in to Ottawa’s thinking,
breeding a dangerous complacency
that the government has done all that is
required to combat the recession. The
federal government appears to be hiding
behind the proposition that with strong
banks and strong fundamentals, the
Canadian economy will automatically
recover as US demand picks up.
The Bank of Canada has lowered
its interest rate to a near-zero level,
and has provided banks with billions of
dollars of liquid assets to counter the
recession and potential deflationary
expectations. It is concerned that
deflation, or falling prices, will become
generalized throughout the economy.
And once the cycle becomes
entrenched, as it did during the 1930s,
it will be extremely difficult to reverse.
The federal government’s fiscal stimulus
package is beginning to inject demand
into the economy to counteract the
contraction of private sector demand,
although many economists argue that a
federal deficit of about 2% of GDP is too
little given the powerful headwinds the
nation faces. Unemployment insurance,
though greatly weakened by previous
governments (most recently the self-
financing rule imposed by the 2008
Budget) will also help to cushion
somewhat the fall in demand.
While it may be rational for an individual
firm trying to stay afloat to lay off workers,
reduce working hours, and/or push
for wage reductions, if this becomes
an economy-wide phenomenon the
resulting downward wage-price-
purchasing-power spiral, if unchecked,
will deepen and prolong the recession.
This is what happened during the
Great Depression. The deflationary
cycle became entrenched. Massive
price declines in both the US and
Canada were matched by a similar
drop in average wages; Keynes argued
for nominal wage anchors to stem the
downward spiral.
One of the things Roosevelt did when he
came to power in 1933 was to support
the Wagner Act, which strengthened
unions; setting a floor on wages and
initiating a process of rising wages,
prices, and production.
Government is the player responsible
for the overall management of the
economy. At a time like this it is the
only player that is capable of overriding
destructive counter-actionary impulses
of private businesses and households.
The federal government is undermining
the effectiveness of its own stimulus
efforts by freezing the wages of its
own employees and by forcing massive
auto sector wage concessions (which
incidentally will not solve the auto crisis)
as a condition of providing financial
support to the industry.
It also sends a contradictory signal
to business that somehow this belt-
tightening is good for the economy as
a whole. On the contrary, it will only
make matters worse— prolonging the
recession and delaying the recovery.
The current economic crisis was caused
by the meltdown of the bloated US
financial sector, not by exorbitant auto
or public service sector wages. Forced
wage rollbacks will cascade through the
economy reducing purchasing power
and demand, offsetting the very thing
the government is trying to reverse with
its stimulus policies. The collapse of
the auto sector (just like the collapse of
the financial sector) will most certainly
turn the current recession into a deep
depression.
Rather than scapegoating the Canadian
Auto Workers union for a crisis it did
not cause, the federal government
should focus its efforts on combating
the pressures of wage driven deflation,
maintaining income and employment,
and using public dollars to buy
transformation of the auto industry away
from gas-guzzlers to the low emission
vehicles of the future. Industrial policies
like this have been an important part of
the development of the auto industry
and are needed once again.
Bruce Campbell is the Executive Director
of the Canadian Centre for Policy
Alternatives,www.policyalternatives.ca
