Thursday, February 26, 2009

On Bailouts and Stimulus

For what it's worth, I'm not sure New Deal-style infrastructure spending and corporate bail-outs are the answer to this recession.
In the past decade, trade patterns have been skewed against domestic manufacturers while small and medium-sized businesses, especially in retail, have been crushed. This recession actually started about four years ago in small-town America and Canada, especially in the US northeast, and has spread to the cities.
We can't afford to reward and backstop failure and greed. Yet Obama and Bush's bailouts have done precisely that. They have allowed bankers to ignore the consequences of their actions, have rewarded investors who bought high-risk garbage paper instead of investing in productive assets, and have done nothing to restore the flow of credit for capital investments. As well, letters of credit, essential for world trade, have become very hard to get. That's had the same effect as the tariffs of the 1930s: killing the movement of goods and destroying industry.
In Canada, it's unlikely that much stimulus money will be spent this summer on infrastructure projects. It's February, municipal and provincial budgets are already set, and it takes months to come up with projects, engineer and design them, put them out to tender, and start building. I wonder if governments can move fast enough to get these things going by the summer of 2010?
I believe infrastructure spending is long overdue. Still, is pumping money into the wallets of construction workers and contractors the only way to revive the economy? This is not 1931. No one who's lost a job at GM is going to be handed a shovel and put to work improving the Trans Canada Highway.
We need money for innovation and for stimulating manufacturing. That means pumping more cash into high tech research in Waterloo and Ottawa (where the National Research Council just cut jobs).
We also need to finally address the issues of one-resource and one-industry communities. Alberta has blown two big chances to use oil boom money to diversify. Northern and western communities are on the ropes.
And, I think, we need to look past this recession. What kind of economy will come out of it? If there are fewer jobs, how do we make them pay better? How can we generate enough wealth to reverse the erosion of wages, which have, in real terms, been driven so low that it takes two people working in a family to support a typical household. Forty years ago, one wage-earner could do it.
And what will we do with our cities, which have yet to feel the worst of this, but will certainly be suffering this time next year? Where will the jobs come from?
This is not just a question for government. Flinging borrowed money around -- as Congress is doing -- won't make much difference.
Business has to re-think the way it works. Perhaps more companies need to be taken private to end the focus on quarterly results. Certainly, more profits need to be plowed back into research and debt repayment.
But what we really need is a renewal of real capitalism: investment in productive assets, not paper; proper profit and compensation for real risk; salaries and wages that reflect real productivity.

2 comments:

KL said...

Very well put.

Our focus should be on establishing real ownership of big industry and small business alike. However, I'm not sure any Western government wants to take the steps necessary to make this happen.

Anonymous said...

According to Niall Ferguson, when you remove the mortgage debt-industry, actual US economic growth in the Bush years was 1%. In line with what you say regarding the recession starting 4 years ago in small towns.