It's all in your hands, Prime Minister Trudeau
Trudeau must 'dare to be wise' as he prepares 1st budget, writes Louis-Philippe Rochon
The popularity of Bernie Sanders in the U.S. is undeniable. What is astonishing is that he openly calls himself a "Democratic socialist." Only a few years ago, to call oneself a mere liberal in the U.S. was considered political suicide. Yet against all odds, Sanders has single-handedly redefined the political discourse.
Sanders' popularity carries important lessons for Canada and the governing Liberals as they prepare for their first budget, which they're rumoured to be planning to table during the week of March 21.
Recall that Trudeau's fortunes in the recent election turned around only once he started talking openly about the need to stimulate the economy. He even used the D-word — deficit — against the prevailing political wisdom at the time.
So as Trudeau prepares for his first budget, he must dare to be wise once more. In doing so, he must keep in mind not only his own victory, but the amazing reception Sanders is getting in the U.S. while openly talking about deficits, taking on Wall Street and the one-per-centers. Citizens, both in Canada and the U.S., are craving political action on inequality and the abuse of financial power. So let's deliver.
These are important conclusions, especially now. With monetary policy running on empty, we are fast running out of policy options to stimulate our economies. At low interest rates, monetary policy becomes simply ineffective. The Bank of Canada governor may lower rates to zero, but it will only have a negligible effect on the economy — if that. Financial markets are now realizing this and are quickly losing faith in central banks' ability to further stimulate.
We can always wait for exports to turn around, but this may prove to be a long wait. With the slowdown of the world economy, and with the U.S. "teetering on the edge of recession" in 2016, according to former U.S. labour secretary Robert Reich, this option is quickly running out of steam. Our low dollar alone is not a panacea.
A tall order to fill
This leaves only fiscal policy. Trudeau therefore has a rather tall order to fill. Initially, he promised no more than a $10-billion deficit, although recently he has acknowledged this promise won't be met: the deficit will need to be larger. This is proving to be another wise move on his behalf. But it's not enough. The question that needs to be asked is: how much larger should the deficit be?
Before answering this question, simply look around. The U.S. is slowing down, China is slowing down (with record outflows of capital), Europe is an economic mess and its banks are in worse shape, Japan is in a mess, Latin America is in a mess. Negative interest rates are proving to be the policy choice of many central banks, but they are nothing more than an admission of failure, a Hail Mary policy at best.
If we want to see growth again, Trudeau will have to commit to a deficit far higher than the $20 billion that is now being touted by some. Rather, a deficit in the order of at least $50 billion is required. Anything short of that just won't do the trick. (Avery Shenfeld, chief economist of the Canadian Imperial Bank of Commerce, comes closest to this estimate by suggesting a deficit of $30 billion.)
Rather than fearing this, let's embrace it. Let's worry about the economy and jobs first, and how to deal with the deficit later. After all, when your house is on fire, you don't think about how you will redecorate the place: you try to put the fire out first.
And deficits may be needed next year, and the year after that, and the year after that as well. Let's not repeat the mistakes of 2010 by cutting off spending too soon.
Trudeau is wise to talk about deficits and pushing the date to balance the budget beyond 2019. I have been a fierce critic of balanced budgets and of austerity in the past, and am more so now. With our economy so fragile, we must shelve all discussion about balancing the budget. We need to counter the austerity counter-revolution with a deficit revolution.
In fact, Trudeau must now go one step further: he must repeal former prime minister Stephen Harper's Balanced Budget Law, which constrains governments from doing the job they need to do. Conservative critic Rona Ambrose is already blaming the government's "out of control spending," but this only betrays the Conservatives' inability to understand that deficit spending is needed now.
The faith of our economy rests entirely in the hands of Trudeau and his first budget, not just by choice, but by necessity.
Louis-Philippe Rochon is an associate professor at Laurentian University and co-editor of the Review of Keynesian Economics.