No way to run a recession

If there’s one place the federal government might want to showcase its push to spend billions to stimulate the economy, Vancouver would be it. With the 2010 Winter Olympics coming up fast, the city is about to come under intense international scrutiny. The recession has idled many British Columbia building trades workers who were, until recently, kept busy by a booming West Coast construction sector. Vancouver Mayor Gregor Robertson says he’s ready to put many of them back to work on municipal projects, but hasn’t won approval yet for a single cent of a promised gusher of federal infrastructure spending—funds the Conservatives vowed would flow fast after their budget more than four months ago. “We’d love to put those dollars to work creating jobs and investing in our infrastructure,” Robertson told Maclean’s. “None have arrived yet.”

Gripes like Robertson’s just aren’t fair, say Ottawa’s front-line economic ministers. Transport Minister John Baird, who’s responsible for the federal infrastructure plan, argues that he’s approving projects “10 times faster” than any similar program in history. And that might well be true. But the standard he’s up against isn’t past performance, it’s the benchmark set in Finance Minister Jim Flaherty’s urgently worded Jan. 27 budget. “Measures to support the economy,” the budget declared, “must begin within the next 120 days to be most effective.” Then again, that was the same budget that projected a $33.7-billion deficit, and that figure, as Flaherty admitted in a late-May bombshell, has ballooned in four short months to more than $50 billion. It seems positive measures are taking longer than hoped to materialize, while the bad news is piling up even faster than feared.

Is this any way to run a recession? The psychic shock of the massive new deficit guesstimate, combined with grumbling over the pace of stimulus spending, has set the federal Tories back on their heels. After Prime Minister Stephen Harper cavalierly dismissed the chance of a recession in last fall’s campaign, and Flaherty projected ongoing surpluses in his weirdly rosy economic update soon after, the Tories could hardly afford more self-inflicted blows to their economic credibility.

But inflict them they have. Flaherty protests, not unreasonably, that there was no way he could have known back in January that Ottawa’s share of bailing out General Motors and Chrysler was going to run about $7 billion more than he’d banked on. But what about the other $9 billion or so that his projection was off? That’s mostly a result of bleak economic news, including lower tax revenues and higher Employment Insurance payouts. Given the way the world was spinning into a deep recession by budget time, Flaherty could have played it prudent then, says Simon Fraser University professor Richard Harris. “They would have been better served by offering a wider range [on the deficit],” Harris said, “and stressing that because the global recession was so unusual, the projections were less reliable.”

If the deficit bet was ill-advised, all the government’s aggressive talk about rushing out stimulus spending now seems even more reckless. Not only did Flaherty set that 120-day benchmark, which one bank economist called “a joke,” he stressed the need for spending to come in 2009, not in 2010. “Stimulus for next year is not what we want,” Flaherty declared on Feb. 25. “We need it now, this year.” Yet, most of it will almost certainly come in 2010. Asked about how much of the key $4-billion Infrastructure Stimulus Fund will flow in 2009, Baird answered: “I would say beginning this year at least 40 per cent of it.” Few private sector economists expect the main impact of the budget’s core stimulus package to be felt in 2009. “It’s not going to do what the initial intent was,” said RBC Financial Group chief economist Craig Wright, “which was to stimulate growth this year.”

Still, even economists who think the Conservatives misplayed setting up and selling the plan aren’t pessimistic about its substance. Shocking as the number sounded when Flaherty first uttered it, the new $50-billion forecast isn’t panicking private-sector analysts. It’s a record spill of red ink in absolute terms, but still smaller as a share of the economy than Ottawa’s fiscal shortfalls of the late 1980s and early 1990s, and proportionately less than current U.S. and European deficits. “Yes, $50 billion is a big number,” Wright said. “It’s less worrying when you look at Canadian history and when you look around the globe.”

And Richard Harris says complaints from the likes of Vancouver’s mayor don’t prove the infrastructure scheme has been hopelessly botched. Typically, says Harris, who is currently a visiting scholar at the C.D. Howe Institute, stimulus spending takes six months to a year and a half to make its way into the real economy. Given that this could be a prolonged slump, spending even on that pace will still be more than welcome if it takes well into next year to translate into construction. “Stimulus spending,” he said, “could still turn out to be quite important.”

Taking a clear snapshot of the whole federal infrastructure plan is almost impossible. It’s a $12-billion moving target with several distinct parts run by various departments. It’s rolling out at different speeds in every province, according to unique deals between Ottawa and each provincial government. As Maclean’s went to press this week, Baird said decisions were imminent on applications for 2,700 Ontario projects, which could tap $2 billion in federal money. A big Ontario announcement would make the whole program look more relevant. Still, even Baird isn’t talking mainly about shovels in the ground now, or this summer. “I think come the fall,” he said, “there’s going to be a hell of a lot of construction going on around the country.”

In an interview, Flaherty pointed to quick action on other aspects of his stimulus plan, including the $2-billion fund for college and university projects. Campus construction wish lists have been funded at a much faster pace than municipal projects, partly because they don’t require three levels of government to agree to chip in. Flaherty said he’s been keeping up the pressure to spend. “I’ve been an alarmist within the government in terms of demanding urgency,” he said. “There was some resistance, government being government.” Some bureaucrats, he noted, are worried about misspending being caught two or three years from now.

There’s no question that rushed approval carries a risk of boondoggles. Even as opposition critics slam what they call slow action by the government so far, Baird said 1,200 infrastructure projects worth $3.6 billion were approved between budget day and June 1. There is much more to come, on everything from a half-billion-dollar fund for recreation infrastructure to another half-billion for First Nations public works. “It’s a gargantuan effort,” he said.

Yet it might not be enough. In a recent report, the Organisation for Economic Co-operation and Development said the world economy will contract by 2.7 per cent this year, the worst crisis since the Great Depression. The OECD singled out Canada, along with Germany, as a country that should do more to stimulate its economy, since its government can afford it. And given steep job losses across the 30 rich OECD nations— including about 300,000 shed in Canada since the fall financial crisis struck—Harris said more government spending might turn out to be badly needed. “If we don’t get some signs soon of employment stabilizing in the OECD,” he said, “we’re going to need a bigger stimulus package.”

The prospect of still more deficit spending is a daunting one. Yet, while the Tories struggle to keep up with the still-unfolding recession, some economic policy experts are turning their attention to longer-term implications of this historic downturn. Avrim Lazar, who was a senior federal bureaucrat before becoming president of the Forest Products Association of Canada seven years ago, says nobody was ready for the radical shift in economic decision-making that followed last fall’s plunge into recession. “The whole global economy,” Lazar says, “has made a step from market-driven to government-driven in the last three or four months that really no one had anticipated and no one has really acknowledged.” A key question, he said, is how nimbly governments, including Canada’s, will extricate themselves from roles they’ve stepped into during the crisis.

Lazar contends the recession is an opportunity to spur real reforms to boost Canadian competitiveness, the subject of more talk than action during a long, prosperous stretch going back to the mid-1990s. “First we had the cheap dollar so the economy was doing well that way and government didn’t feel any need to make reform,” he said. “Then we had the petro-dollar and government didn’t feel the need to make any reform.”

As many have noted, Canada went into the recession in an unusually strong position. Yet, deep, lasting damage from the downturn remains a possibility. One of Canada’s long-standing economic weaknesses is low private-sector research and development spending. Now, two of our top six R & D spenders face highly doubtful futures: Nortel because it’s in bankruptcy protection and Atomic Energy Canada Ltd. because the federal government has put it up for sale.

Senior voices inside government are pleading for attention not just to this quarter’s numbers, but to Canada’s prospects beyond the recession. Rob Wright, Flaherty’s top official as deputy finance minister, gives the impression that sort of thinking is a hard sell. “It’s not good enough for us to say, ‘We were better placed going into this, and we’ll coast through on the fumes of that, and we’ll survive it,’ ” Wright told a Public Policy Forum conference in Ottawa this week. “We have to use our advantage to come out even stronger in this new world order. And we should start thinking now of how to do that.”

It’s hard to argue with a pitch for thinking long-term. For now, though, the government seems fully occupied trying to regain control of the message about how it’s managing through tough times.