The Global Economic Crisis—Part 1

A Canadian Dimension Roundtable

The 2007-08 financial crisis marked a major turning point in the world economy. From your perspective, why was the recovery so weak and why did economic stagnation continue to characterize the core capitalist countries?

Back in July 2009, just ten months after the Lehman Brothers collapse, Bank of Canada Governor Mark Carney officially declared that the recession was over. This verdict was celebrated with a banner headline on the front page of the Globe and Mail. According to the narrow, technical definition used by economists (namely, that the recession is over as soon as real GDP starts to increase again, instead of shrinking), Carney was right. But the same was true in 1934 — and the Depression wasn’t even half over! The so-called recovery has not been a recovery at all; rather, the economy’s been “bouncing along the bottom,” never gaining the true, broadly based momentum that characterizes a genuine recovery. Now, with financial markets and investor confidence roiled by the escalating eurozone crisis, it is very likely that we’re headed back into a true “double dip” (where real GDP begins to actually contract once again). But that, in a way, is almost beside the point: for most Canadians, it never felt like a recovery at all.

Indeed, for working people, it’s been non-stop crisis. The best measure of the state of the labour market during weak times is the employment rate. Unlike the unemployment rate, the employment rate is not distorted by the fact that many discouraged job-seekers just drop out of the labour market altogether. (In contrast, the official unemployment rate “looks better” when discouraged job-seekers give up looking, because then they disappear from the official statistics.) The employment rate fell steeply from autumn 2008 through summer 2009. Then it stabilized, and clawed back about one fifth of the previous decline over the next year. But since summer 2010, the employment rate has stagnated; whatever jobs have been created by anemic growth since then have barely kept up with population growth, and have not been sufficient to repair any more of the damage from the meltdown. Now the labour force statistics indicate that jobs are disappearing rapidly (over 50,000 in October alone), an almost sure sign of another recession.

In retrospect, the growth that occurred in Canada and other recession-wracked countries from mid-2009 to mid-2010 was entirely due to the massive but temporary stimulus measures that were adopted by most governments. Ultra-low interest rates have lost their stimulative power (debt-constrained consumers can’t spend any more anyway, despite low rates), and fiscal stimulus has been converted prematurely into austerity (most dramatically in Europe, but elsewhere, including Canada, too). Government spending is no longer growing in Canada, and in many program areas is being clawed back. With consumers on the sidelines for now, that leaves it up to business capital spending (which is supposed to be, after all, the “engine” of growth in a capitalist economy) to lead growth. But Canadian corporations are sitting on their cash, not reinvesting it, for a whole host of reasons. Corporate cash hoards now exceed a half trillion dollars, and have grown steadily right through the crisis. With no leader, economic growth is going nowhere.

I project that the OECD countries (including Canada) are experiencing the beginning of something like a depression: many years of uncertain, near zero growth, with chronic mass unemployment and resulting fiscal problems. The contractionary balance sheet effect of consumer and mortgage debt issues in the US, now accentuated by similar problems for many governments, will drag down global capitalism for many years to come. Business investment is the one sector with the means to boost spending and lead growth, but in Canada and elsewhere corporations are sitting on their cash rather than spending it.

The financial sector has been remarkably successful in shifting the debt burden into the public sector which also bears much of the cost of “recapitalizing” the banks. But what problems persist in the financial sector?

Contrary to Bay Street mythology, Canada’s banks were indeed “bailed out” during the crisis — with a $200 billion line of credit (called the Extraordinary Financing Framework) advanced by the Federal Government, the Bank of Canada, CMHC, and other federal agencies. Those funds, unavailable to the banks at the time through normal commercial channels, were essential to their survival, and the program exposed Ottawa (and the taxpayers) to enormous risks if the sector had collapsed. Luckily the situation stabilized and the banks were able to repay the loans (including meagre interest payments), so the bailout did not directly contribute to Ottawa’s deficit. (Elsewhere, however, especially in the US, the UK, Ireland and Iceland, the bank rescue did add directly to enormous fiscal burdens.) After stabilizing, Canada’s banks are once again money-making machines (quite literally). Ottawa has greased the wheels even further with continuing corporate tax breaks, which benefit the banks more than any other sector (the banks get $3 billion per year from Harper’s cumulative corporate tax cuts).

Globally, the financial sector is still precarious because of the risk of major write-downs from “bad” loans — now including sovereign debt, not just sub-prime mortgages. Remember, of course, that European banks were happy to lend willy-nilly to Greece and the other peripheral economies in the immediate post-euro period, when interest rates were falling and hence bond prices soaring. As with the sub-prime bubble in America, the private credit machine kicked into gear to create (out of thin air) funds that were loaned to governments, not to mention used to speculate on debt-related derivatives. Once bond prices start heading in the other direction, however, the speculators rushed to the exits. And since the Europeans have handed over power to set national interest rates to the so-called “markets” (a euphemistic term that actually refers to financial investors and banks), that rush to the exits produces soaring interest costs that alone can wreak havoc on national budgets. The current rescue effort in Europe, however, is hardly motivated by concern for Greece or Italy. It is motivated by a desperate effort to save European banks from collapsing. With loan losses eating away at their capital base, it won’t be long before the speculators turn on the weaker banks, as viciously as they have already turned on weak countries.

The private credit system is inherently fragile, since it is based on the creation of leveraged money out of thin air, in a context of private competition. None of the half-hearted reforms proposed by the G20 will fundamentally alter this dangerous reality.

There has been extensive discussion of how the crisis also marks a fundamental decline in US (and European) power and the emergence of China and the other BRICS countries as new centres of the world market. How do you assess this phase of global capitalism?

The Chinese economy has reinforced its emerging global leadership through this crisis, in interesting and complex ways. Their state-regulated, largely state-owned financial system avoided the fragility of the private credit system in the US and Europe. Their fiscal and monetary stimulus in the immediate wake of the crisis (moving quickly to offset the lost demand resulting from slowing exports) was immense and effective. For example, state-owned regional banks created enormous amounts of credit to finance a huge boost in public infrastructure spending. (What a good idea!) The economy’s reliance on exports has been reduced, and it is more dependent on domestic spending power than before the crisis — although China continues to accumulate massive trade surpluses that are clearly hampering world recovery. Meanwhile, the Chinese government is more aggressive in projecting its economic power globally — including through purchases of Canadian resource properties.

The dynamic of profit-led capital accumulation is very vibrant in (state-directed) China, much more so than in the OECD countries which are supposed to epitomize capitalism. Does this mean that leadership of global capitalism is shifting? I suspect it does.

This year, for the first time ever, the combined GDP of the OECD countries will account for less than half of world output. Of course, corporations can profit from investment and expansion anywhere. So to some extent they may be indifferent about the rise of the BRICs (and China, in particular, which is so individually important it shouldn’t be lumped in with the others) — although in political-economic-strategic terms, I think the decline of US power will ultimately have important ramifications.

The Harper government has persistently celebrated Canada’s economic strength in the midst of the crisis. From your perspective, what does the crisis tell us about the shape of Canada’s economy and Canada’s place in the global economy?

Ottawa’s claims that Canada survived the recession better than any other major economy are blatantly and empirically false. Canada survived better than the US, the UK and other countries where bank failures created a full-on credit freeze that devastated demand and employment. In the broader world context, however, Canada’s performance was ho-hum at best. Dozens of countries recorded stronger recovery, and better labour market performance, than Canada — especially after adjusting for Canada’s relatively fast (in the developed world) population growth.

Canadian profits, exports, and capital spending have to some extent been supported by the continuing petroleum bandwagon in Alberta. But that boom, powerful as it is, cannot offset the weakness of the whole national economy. After all, less than 1 percent of Canadians work in the petroleum industry, and Canada’s international balance of payments (called the “current account”) is still deep in deficit despite record energy exports.

The Harper government has embraced Canada’s structural regression (into a “hewer of wood and scraper of tar”). It has made token efforts to address the structural danger posed by our heavy reliance on exports to a US economy that will be depressed for many years to come; but their dominant strategy in this regard (namely, sign free trade agreements with other regions — incredibly including Europe) does more harm than good. Persistent weakness in Canadian business investment, innovation, and global competitiveness (for anything other than raw resources) has been acknowledged even by mainstream observers.