Coronavirus fallout: Policies forged in crisis tend to stick around longer than anticipated
Kevin Carmichael : Everyone agrees the economic shock from COVID-19 will be temporary. The virus’s affect on the economy won’t be
For instance, Canada’s first attempt at unemployment insurance appeared in 1935 as part of R.B. Bennett’s response to the Great Depression. Benefits grew progressively generous, but in 1971 politicians got carried away: an overhaul of the program made it so that a person who worked eight weeks in some regions could qualify for 42 weeks of jobless payments.
“Outlays vastly exceeded forecast costs,” scholars Thomas Courchene and John Allan said in a 2009 article for Policy Options. “The resulting overrun, which was almost certainly attributable to an underestimation of the moral hazard effects of the enrichment, was huge and embarrassing.”
It would take the better part of three decades to correct the mistake. In 1996, and facing a crisis of confidence among bond traders in Canadian debt, Jean Chrétien’s government made it significantly harder to qualify for jobless benefits, part of a strategy to erase a budget deficit that had exploded to five per cent of gross domestic product.
Where might the big-bang response to the coronavirus catastrophe lead? The technocrat’s mantra for using the public’s money for economic rescues is “timely, temporary and targeted.” That’s easier to repeat than execute.Too much emphasis on “targeted” risks delay. Prime Minister Justin Trudeau appeared to get caught in that trap. His government initially offered to cover 10 per cent of the wages of employees furloughed by smaller companies because of COVID-19. It was the right idea, but too miserly to offset panic in executive offices around the country. More than a week later, on March 27, he increased the subsidy to 75 per cent, and then expanded the benefit to include all companies on March 30.
“Temporary” is probably the hardest one to get right. Stephen Harper, the prime minister who confronted the Great Recession, declared victory too soon and set a path to balance the budget before the economy had fully recovered. His decision forced the Bank of Canada to keep interest rates unusually low, shifting the debt burden of the recovery to household balance sheets. Harper balanced the budget in time for the 2015 election, but household credit soared to record levels under his watch.
As for timely, the story of unemployment insurance shows that policies forged in crisis have a tendency to stick and then morph into something bigger than originally intended. That’s the last thing Harper, a rigid fiscal conservative, would have wanted. The Bank of Canada was open to learning from the financial crisis, however. Canada’s central bank got over its fear of the “zero lower bound” and realized from its peers that it could safely create hundreds of billions of dollars to purchase financial assets if economic conditions threatened deflation.
The most extraordinary element of Ottawa’s response to the coronavirus crisis to date isn’t all the money that Trudeau has put on the table, but the startling speed at which the central bank dropped interest rates to the floor and began pumping cash into financial markets. A reaction to economic collapse that was iterative a decade ago is now essentially automatic.
It’s safe to assume that at least some of the emergency measures created to fight the coronavirus recession, described as temporary, will live on. The slippery slopes are many.Supply management of oil is on the table. Alberta Premier Jason Kenney on March 27 said he was exploring the possibility of a “coordinated approach to curtailment of production across North America” as a way to support the oil industry.
Kenney is also becoming more liberal in his approach to state ownership of private assets. Alberta this week invested US$1.1 billion in TC Energy Corp.’s Keystone XL pipeline project. Fifteen years ago, the federal government sold its remaining stake in Petro-Canada, signalling an effective end of the public sector’s dalliance as active players in the oil business. Now, both the federal government, which bought the Trans Mountain pipeline in 2018, and the Alberta government have a direct financial interest in the transportation of oil.
Trudeau’s wage subsidy is supposed to last for only a few months, but could it become a permanent feature of Canada’s approach to unemployment insurance? To be sure, it would be expensive. The benefit is that companies remain intact, ready to take new orders once the crisis passes. Germany has deployed such a system for years. A decade ago, when many of its international rivals were putting themselves back together, German companies were winning market share.
Or policy-makers — and voters, for that matter — might like the results of a scheme that sends $2,000 a month to anyone who loses her or his job because of COVID-19. That initiative has all the features of universal basic income, a policy idea that has been a dream of conservative and progressive wonks alike for decades, but has yet to achieve wide appeal with the masses. Maybe we’re about to learn that it works.
But perhaps the most interesting development is the rebirth of industrial policy.The post-partisan research duo of Robert Asselin, a former Liberal policy adviser, and Sean Speer, who worked in the Harper administration, think the federal government’s efforts to organize Canadian industry to meet supply shortages for medical supplies could be a model for achieving competitiveness in the digital economy and confronting challenges such as climate change.
“Such an industrial strategy represents an ambitious transformation of the current economic policy framework,” they wrote last week in a commentary published by the Public Policy Forum. “But it is proportionate to the unique circumstances Canada faced before the crisis, and even more so now.”
Everyone agrees the economic shock from COVID-19 will be temporary. The virus’s affect on the economy won’t be. Read more: National Post »
Policies like investments in health services perhaps? Judging from PMJTs past, we are in good hands... not worried in the slightest Raising taxes in times of crises reeks of incompetence. Blackface needs to go ASAP Article naive. Industrial policy in Canada will/has failed. We're unproductive /uncompetitive (high taxes, zero innovation). Unlike any other country, keeping resources in ground with regulations/climate change hysteria. Kenney making preemptive strike to counter feds inaction.
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