Many items in the Canadian federal government’s economic stimulus package depend on how individual decisions are made on the market, and how (or if) people will choose to spend the latest tax cuts or take advantage of the home renovation grants. This is mostly guesswork
Another problem with government stimulus packages in Canada is the ingrained tendency for governments across the country to rein in certain kinds of spending during hard times. So, while governments will undoubtedly increase spending on some things considered worthy (construction, specific industries in trouble, tax relief for individuals and corporations), they will avoid spending on other initiatives: mainly the programs they feel will contribute to a “structural” deficit. That is, governments don’t want any new program spending that will last beyond the recession period.
This perspective seems based on a fear of future deficits – something that is certainly at odds with the large current and previous reductions in taxes. Any new programs are considered unsustainable in the future.
It is this thinking about new program spending that I challenge, and I do so with reference to Keynesian insights into economic stability.
What was most significant about Keynesian economics is that it raised, for the first time, the theoretical justification for investing in social infrastructure: this is not only compatible with a modern capitalist economy, but is also crucial for its reasonable functioning. The wisdom of this approach was not immediately apparent during the Great Depression of the 1930s. Increased government spending through large deficit financing was undertaken by some governments -- less so in Canada than in the U,S. – but, for the most part, stimulative spending was not well understood and, in fact, it probably did little to turn the economy around. This does not mean the spending was unimportant: it did make a big difference to groups of people, and it was important for creating long-lasting improvements to the physical infrastructure, cultural development, and the land itself. But the real economic turnaround, as almost everyone now knows, was the extraordinarily massive spending associated with Second World War.
What tends to be much less acknowledged is that the war required much more than an unprecedented injection of money into the economy. It also required planning, and planning on a scale that had never before been seen outside socialist economies. Governments learned how to plan because there was a focus for action – winning a war – and, with a clear objective, it was possible to garner popular support for this planning, even when it meant a great deal more regulation than people were accustomed to experiencing.
The planning focused on many things related to the objective of winning the war, including planning for industrial manufacturing, agricultural production, transportation, and increased resource extraction. But equally significant was planning for “social reproduction” -- a term that refers to how people fit into the economic calculation, particularly with regard to how people and their labour are maintained and reproduced from day to day and from generation to generation. It is not just about incomes, but also about social well-being, social participation, and our responsibilities to future generations.
During the national emergency of a wartime economy, social reproduction issues were considered as vital to national objectives as were other issues that needed planning. This is why government directives initiated widespread social policy that required substantial changes in social and political thinking. These included things like food and energy rationing, child care centres, equal pay, large-scale training for sex-atypical work, and even night-time shopping.
These interventions in issues of social reproduction were justified by two major features of Keynesian analysis. These were the significance of the multiplier effect of government spending, and the recognition that higher savings during an economic crisis would be a drag on the economy. The multiplier effect took the truism that one person’s expenditure is another’s income and elevated it to an economic chain reaction that could allow governments’ initial expenditures to multiply their effects throughout the economy.
Clearly the multiplier effect would be strongest if money was put into the hands of those who would spend it quickly – the people with the lowest incomes. It was realized that the most important signal for business to expand and hire people would be an increase in the power of people to spend. The issue, in a demand-deficient economy, was to find ways to increase spending.
These insights justified the redistribution of incomes and wealth and the initiation of significant new programs associated with social expenditures. Giving money to businesses would certainly help their bottom line, but it would do little to change rational business behaviour. This is where the government’s focus on social reproduction made economic sense. Businesses were not going to expand production and hire more workers if people were too economically depressed to buy what they produced.
This process of re-establishing a healthy economy after the Second World War was integral to the relationship between government action, economic responses, and the needs of people. Related to this was the understanding that the implementation of economic directions could not be left to chance through individual decision-making on the market alone.
The second important change that made the injection of new money work to stabilize the economy was related to institutions. In talking about Keynesian stimulus spending, the focus tends to be on bridges and roads. But the development of social institutions was also essential to the creation of economic stability. In fact, it was probably more the economists we would identify as institutionalists, rather than the strict Keynesians, whose approach mattered most in creating more stable economic systems. Collective spending became recognized as important in order to keep economies from being subjected to the periodic violent swings in economic cycles.
A serious economic crisis was expected after the Second World War, but, once again, economic planning and particularly the development of a very large social security network acted as automatic stabilizers to keep economic activity buoyant. The new institutions were critical in both redistributing the incomes of the people and preventing the precipitous drops in incomes that exaggerate crises (although, strangely, rarely trigger them). These were formal institutions like Unemployment Insurance, the Canada Pension Plan, Old Age Insurance, Public Health Care, Social Assistance, and the Minimum Wage. But it also included government support of widespread higher education, the expansion of post-secondary institutions, training programs, new and extensive housing initiatives, and new Crown Corporations that invested in areas where the private sector would not.
We also established a new labour relations system that led to the increased organization of labour throughout the country, which in itself was a significant stimulus to the economy.
This kind of progressive thinking, however, no longer seems to have as important a role in government actions to deal with recessions. Even worse, many of the crucial institutions established earlier have suffered in recent years and have been redesigned to meet short-term budget needs. As a result, they provide much less of a buffer during economic downturns than they did in the past. Dealing with how people cope in hard times is something that is now divorced from thinking about stimulus packages. The assumption seems to be that tax cuts or indirect spending will trickle down to people through improved job opportunities.
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Our disconnect between budget decisions and people in part reflects the problems inherent in our federal system, where macro-economic fiscal and monetary policies are dealt with by the federal government while most social issues are confined to provincial and local levels. Of course Canada has always had this geopolitical fact to contend with, but it has been made even more prominent in recent years. This division of responsibilities makes the federal government somewhat immune to the impact of the economic downturns that people experience. Ottawa is therefore less likely to be responsive to the politics of poverty and economic need because, technically, it isn’t the federal government’s responsibility.
Indeed, our politics has largely shifted to provincial levels and, as a result, decision-making is more directly connected in people’s minds to the government that affects their daily lives. This means the chain of actions and consequences is long. So, for example, if people do not qualify for EI, it will be the provinces’ responsibility to ensure that they get social assistance when they have no other way to generate an income. If provinces do not take up this challenge, or reduce eligibility, then the problem for individual economic disaster shifts to the municipalities. This is when the most serious social problems arise.
The Keynesian rationale for stabilizing institutions has been seriously undermined throughout Canada during the past decades. In many provinces, particularly in Ontario, Alberta, and British Columbia, economic downturns have been greeted not with “counter-cyclical” activities, but with “pro-cyclical” ones. This means that, when revenues were falling, governments cut taxes further, and cut stabilizing programs even more. This is an approach to economic downturns that began with the federal government in the late 1980s, but accelerated with the federal budget of 1995. Cuts to transfer payments and a balanced budget mania also established the politics for political success in the provinces, most of which began the long and deep process of cutting back on their social commitments. (Quebec is the exception, of course.)
The biggest such cutbacks in British Columbia occurred in the past decade. Their effects are worth examining at some length, if only to support my argument that government actions to revive a sick economy should be designed to create a rational economic system that meets the needs of people.
Economic Security Project
I am responsible (along with my community partner, Seth Klein) for a large five-year research project under a Community-University Research Alliance grant, funded by the Social Sciences and Humanities Research Council. This project is officially called Re-defining Public Services in British Columbia: Challenges to economic security and alternative possibilities. We call it the Economic Security Project. The purpose of the project, which involves 23 university and 24 community-based researchers, is to understand the implications of the very serious changes to government regulations and budgets that began in the beginning of this century.
First, we wanted to take an inventory of all that happened, but then we wanted to find out what effect these policy changes had on vulnerable people. We suspected that these people would be the hardest hit, and that was our main reasons for initiating the project. We also wanted to come up with solutions that would bring about greater economic security for the most vulnerable in society, who suffer most when government actions during an economic downturn are based solely on economic considerations, at the expense of social programs. The tremendous social dislocations that result have long-term implications that become very difficult to rectify later.
The Economic Security Project dealt with a great many issues through about 35 projects. So far, we have published over 24 papers on our findings, but for now let’s focus on the crises that arose in two areas because of government policy changes: labour and social assistance.
The results of the 2006 Census on income were published in May 2008 and produced headlines about the enormous wage decline in Canada over the past 25 years. The income gap between rich and poor is widening, immigrants’ incomes are plummeting, and young people entering the labour market are earning less than their parents did a generation ago.
In B.C., the drop in wages was the biggest in the country, and flowed largely from government changes in labour policy. The most dramatic was the mass firing of hospital support staff (8,000 laundry, cleaning, and food service workers), who were disproportionately women of colour, older, and immigrants. The mass firing was related to the privatization of this part of hospital work, which resulted in the loss of thousands of public sector jobs. Also adversely affected were those who found employment in the private firms that took over the work; for them, it brought drastic reductions in wages and a reversal of all the equal pay gains that health support workers had won through the collective bargaining process over 20 years.
Changes in the Employment Standards Act since 2002 can be held directly responsible for the deterioration of working conditions in B.C. The main changes in the Act related to decreased enforcement of the law, removal of whole groups of workers from the law’s protection, and harmful regulatory changes affecting all workers. Enforcement was affected by budget cuts to the Employment Standards Branch that resulted in a one-third reduction in staff, a cut in branch offices throughout the province, and the elimination of routine workplace inspections.
Whole groups of workers are now excluded altogether from most of the protections of Employment Standards legislation. This includes all workers in trade unions, or about 34% of all workers in the province. Most seriously affected are young workers and immigrants. B.C. was the first jurisdiction in the industrialized world to deregulate child labour and allow children as young as 12 to be employed for up to four hours on a school day, to a maximum of 20 hours a week, and during non-school periods for up to 35 hours a week. There are no longer prohibitions on work that is inappropriate for children (such as using power tools, or selling door-to-door).
B.C. also pioneered the “first job” minimum wage of $6 an hour for the first 500 hours of work, giving B.C. the lowest wage for new workers in Canada. Minimum wages have not been increased for nine years.
With a high demand for workers, low unemployment, and an economy that has been rapidly expanding in this century, B.C. should be a good place to work. But it is not. It has a poor record for workers’ wages and working conditions, mainly because of a cynical belief that poor working conditions make the province attractive to employers.
The cuts and other changes to income support for the poor on social assistance were made to reduce government costs of social insurance. The major changes to welfare rules and rates were made in 2002 and were unprecedented in Canada. The objective to reduce costs by $600 million was to be achieved by a combination of cuts to benefits, operational cuts to staff, and office closures, but primarily through policy changes designed to reduce access to social assistance. These changes included a two-year time limit; a two-year independence test; elimination of earnings exemptions and child support; and reductions in benefit levels, primarily for people considered employable (rates for single parents with children over 3 were reduced by $43/month, and as much as $98/month for employable individuals aged 60-64).
The process of seeking income assistance has become so restrictive, and so complicated to navigate, that it is systematically excluding from assistance many of the very people most in need of help. The result is a very rapid spike in homelessness and increased hardship in B.C. Our long-term study with people on social assistance indicated that a large number were denied assistance. To survive, they returned to abusive relationships, or relied on panhandling, illegal activities, or the sex trade. Some are living on virtually no income on the streets.
These findings help to explain the paradox in B.C. of a strong economy and record low unemployment, concurrent with rising homelessness and the highest poverty rates in Canada.
How this relates to Ottawa
Because of the uncertainties and changes that are ahead of us, readjustments will have to be made to plans already laid and a new budget cycle will begin very soon. Flexibility always exists in the ways that budget pronouncements are implemented, and over the next years some preconceived ideas about what works will have to be reassessed. Following are some issues that need to be considered in the implementation of current programs and in the planning for new ones.
Broaden the scope of “infrastructure”: Some provinces and municipalities may take up the federal government’s offer to partner in new physical infrastructure programs. But there is a strong likelihood that the new money needed to match federal contributions for bridges, roads, and buildings will come from other social programs.
In B.C., the government has just rescinded its promise never to have a deficit. But it says the deficit it will propose will last for only two years. As it faces increasing financial difficulties through escalating costs of existing building projects, huge increases in Olympic-related liabilities, and serious decreases in its expected revenues, it will need to cut somewhere if it initiates new infrastructure partnerships with the federal government. The fear is that it will be the very people who bore the brunt of the costs in the last economic downturn – the poor and near poor – who will feel the belt-tightening pains again.
Expanding what counts as “infrastructure” will obviate the necessity to put downward pressure on investment in people, as will federal government contributions that do not require large municipal or provincial commitments.
Expanding the concept of “infrastructure” will also have the added economic stimulus of keeping money local. If, for example, increasing child care spaces were considered infrastructure, the multiplier effect would be much higher than would the same spending on roads and bridges. Of the current government-sponsored large construction projects in B.C., all are undertaken by foreign firms, with Canadian firms participating in only minor ways. Many import temporary foreign workers.
Of the nine largest projects, only one has a Canadian company as a major player.
My recommendation is that all of the institutions related to social reproduction be considered as significant additions to infrastructure, the same as are the additions to physical capital. Canada’s economy is very different from that of the U.S., and any infrastructure on physical capital will not have the same kind of stimulus effect here that it could have in the U.S. This is because our economy is much more porous that that of the U.S. We spend more on imported goods than they do. This is why is makes very good economic sense to focus on building an infrastructure that supports those most needing it now:
• Supporting those in need means granting greater access to EI in the coming months. During the past year, all new jobs created were part-time jobs, and it is part-time workers who have the most difficulty accessing EI. As they lose their jobs, they need to be supported.
• In a similar vein, we need to plan for the devastating effects this economic crisis has had on pension plans. The Canada Pension Plan will need to revise its benefit structure to avoid having, once again, a nation of poor people who live in poverty.
• Much greater attention needs to be paid to the problem of housing insecurity. Re-establishing a strong and effective Crown Corporation that focuses on eliminating homelessness would not only have a strong effect on social economic security, but also, fairly rapidly, a strong multiplier effect across the country.
• Providing social supports directly through government programs will avoid NAFTA-related problems of having to buy goods or services irrespective of the origin of the company. Government procurement is exempt from NAFTA and so will enable a greater multiplier effect through local and regional development.
Planning for the Future: The federal government sets the tone for the rest of the country. A great deal of effort went into convincing people that governments should never have deficits. But recently we have witnessed an extraordinary turnaround in public opinion about debt/deficits. Until just a few months ago, no politician dared advocate deficit spending, but most are now advocating it.
The priorities now in all governments’ spending in Canada focus on getting our economy more or less back to where it was before the recession. Since we are spending a great deal of money in ways we never imagined a few months ago, more focus is needed on where the most pressing problems exist in Canada, as structural features of our society.
These are the things I see as problematic and needing attention so that we are stronger after the recession than we are now:
• We are over-reliant on trade, and that is with one trading partner.
• We have growing inequality throughout the nation.
• We rely heavily on economic activities that are lethal to our environment.
• Our social programs no longer fit the needs of people, particularly our treatment of children, the disabled, immigrants, the poor, native peoples, and old people.
• Our economic structures encourage more and more production that is unrelated to real human needs.
The question is: should our objective be to preserve the status quo? This is where constructive planning involving all sectors of our society needs to occur. I realize that this sounds very utopian. In the short term, we need to be pragmatic, but we also need to plan for new institutions that do not allow market forces to direct our society in ways that are harmful to all of us.
This economic recession may be the catalyst Canada needs to bring our economic system in line with our social and environmental needs. The world’s nations have constructed a global system in which more and more production that is unrelated to real human needs drives our economies. Even the simplest needs are met through very-long-distance trade. This is dreadful for the environment and for people. Clearly, we as a nation need to engage in serious planning so that our economy is both more rational and more stable in the future.
(Marjorie Griffin Cohen is a professor of political science and women’s studies at Simon Fraser University in Vancouver and a CCPA-BC research associate. This article was adapted from a speech she delivered recently in Ottawa at a meeting of the Canadian Federation for the Humanities and Social Sciences.)