After more than a year in a recessionary swamp, Canadians are looking
for guidance on where we’re headed and what might lie down the road. To
get wise counsel, Canadians have turned to the experts in forecasting
the fiscal future – the economists.
After more than a year in a recessionary swamp, Canadians are looking for guidance on where we’re headed and what might lie down the road. To get wise counsel, Canadians have turned to the experts in forecasting the fiscal future – the economists.
It is a profession that requires years of study and the assistance of high-powered computers utilizing the most sophisticated software and capable of assessing thousands of factors and endless possibilities.
The result: “Economic forecasting is like trying to drive a car blindfolded and following directions given by a person who is looking out the back window,” one economist observed.
John Kenneth Galbraith, the Canadian farm boy who grew to become a Harvard professor and advisor to presidents and prime ministers, said: “We have two classes of forecasters: Those who don’t know and those who don’t know they don’t know.”
Oh, oh.
Even poultry are being dragged into the act down here in Ontario’s rust belt.
Why did the economist cross the road? Because the chicken had been laid off.
And then there is this one. Why do we have economic forecasters? To make weather forecasters look good.
But enough of the jocularity.
The consensus among economists seems to be that the economy is recovering. The GDP is finally moving into the black and the politicians – who are ready to grasp any ray of sunshine – are talking about the worst being over.
The problem is that things aren’t working out the way they did in the last few recessions. In recent recessions the solution was comparatively simple. The Bank of Canada reduces the cost of borrowing by dropping interest rates. The lower interest rates reduce the value of the Canadian dollar versus other currencies. Companies improve their balance sheets by taking advantage of cheaper loans and the lower dollar makes them more competitive with imports and increases their exports. Production picks up, exports pick up, profits rise and jobs are created.
This time that didn’t happen because the United States and most other countries were also in recession and doing the same thing.
So federal and provincial governments dipped deep into their toolbox and pulled out a Keynesian answer. If the private sector wasn’t able to rally the economy, the government was going to do it by plowing money into roads, bridges and recreation centres. The goal was to create jobs, put money in people’s pockets and stimulate demand throughout the economy.
Not a bad idea. The country’s infrastructure needs the work. Many roads and bridges are in poor (or desperately bad) condition. A lot of the arenas and recreation centres were built 40 to 50 years ago and are either inadequate or being held together by expensive short-term repairs. And you don’t even want to talk about the water and sewer systems. But despite the billions of dollars in projects announced by federal and provincial governments (and the billions in borrowing) the economy remains tepid.
Part of the problem, according to some behavioural economists who study how people actually respond to the situation facing them as opposed to how economic models say people should respond, is that many people are worried. In the past year and a half many lost their job, many saw their retirement savings beaten down and only partially recover, and many have (either by choice or necessity) reduced their spending and plan to continue to spend less in the future.
This is more than offsetting government spending. A practical example of this is a factory down the road from where I live. Two years ago, the factory employed 1,000. The average wage was about $1,000 a week. The result was a weekly payroll of $1 million, or $52 million a year.
Today the payroll is zero. Employment Insurance has picked up part of the slack and amounts to a total of about $400,000 a week, but EI benefits begin running out this month.
While there have been a number of fairly significant federal/provincial infrastructure projects announced in the area, they are worth about $10 million, a small fraction of the wages lost with the shutdown of that one plant.
On the good news side there is hope that plant will reopen someday. So while economists and politicians might talk about green shoots and recovery, the picture here at ground level is a bit different.
Perhaps that is because, according to yet another joke, “An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.”
But, perhaps the joke’s on me, because I studied economics (and a few other things) at university. n
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