The road to recovery

The US and Canadian employment data for April, due out tomorrow morning (May 8) are certain to be ghastly. However,  states and provinces are starting to think about easing their economic lockdowns, and some tentative steps in that direction have now been taken, so it's time to think about how a return to a more "normal" world can be achieved. It's apparent that the lessons that should have been learned from the Great Depression, or more recently from the insane austerity policies implemented in some countries (notably the UK) after the 2008 financial crisis, have been forgotten.

Look at the comments section of any media outlet that still has one and you will find people fretting about the spending cuts and tax hikes that will be imposed in order to pay off the debts that are being run up to keep economies afloat as we deal with the pandemic.  Latest estimates of Canada's federal fiscal deficit for fiscal 2020 (April-March) stand at  C$252 billion. That amounts to 20 percent of 2019 nominal GDP, which stood at C$1.74 trillion. Recouping that through higher taxes or reduced spending would be a scary prospect -- and would also be exactly the wrong thing to do.

To understand why, consider this story, which broke today in the Canadian media. A company associated with deep-pocketed Google has pulled out of a high-profile regeneration scheme for the Toronto waterfront, saying that unprecedented economic uncertainty has made it impossible to deliver a viable project.  There will be other such cancellations in the coming days and weeks. Whole sectors of the economy (airlines and hotels being obvious example) will take years even to approach the scale they had achieved a few short months ago.

Now imagine that governments, confronting a painfully slow recovery in the private sector, jump in with wholesale spending cuts of their own, accompanied by steep tax hikes. You just have to look back at the UK's post-2008 austerity experience under the hapless/hopeless David Cameron and George Osborne to know what will happen. The economy will never recover, and you will never succeed in reducing the deficit, far less paying off the accumulated debt.  That's a recipe for turning recession into depression.  Cast your mind back to the Great Depression: what finally allowed the US to turn the corner in the 1930s was FDR's widely-opposed spending initiative, theNew Deal.

If the private sector can't or won't spend, the only way to avoid depression is for governments to step in.  You can debate whether this is time for a Green New Deal or just a New Deal that tries to restore the status quo ante, but you can't really debate the need for deficit spending to continue after the worst of the coronavirus is behind us.  It is, paradoxically, the only thing that will eventually allow the deficits and debt to come down.

Deficit spending is not without risks, the most obvious one being a spike in inflation. That's a prospect to induce queasy feelings in those of us old enough to recall the "stagflation" era in the 1970s and 1980s, but from where we now all stand, in a place we never expected to find ourselves, it's a risk we will have to take.

UPDATE, May 9: Someone agrees with me.