Monday, May 02, 2011

The NDP and the Economy:: What Is the Truth About the Bob Rae Ontario NDP Government?

Bob Rae, Ontario NDP Leader before elected Premier, September 1990, Toronto Star

Today's election may hinge upon the vote here in Ontario, a province where the mere mention of Bob Rae's NDP government is likely to cause eyerolling to jeering in many circles. Currently, there's talk that the Orange crush of the NDP's meteoric rise in the polls is very analogous to a 1990 Ontario when the provincial NDP came out of nowhere to come to power, with Bob Rae as Premier. Stephen Harper is warning that the NDP will lead to economic ruin, quick to remind Ontario voters of those recession plagued years of the early 1990s. Bill Curry in the Globe and Mail even explored the idea that Rae's legacy is holding NDP numbers down in Ontario.

I think Rae gets a bad rap because much of the Ontario NDP story is ignored. The problem as I see it is that there's little room for discussion on the complexities of economics—boring, right? Maybe, but nevertheless the stuff is important. For example, are all recessions and recoveries the same? The current "recovery" in Canada is a jobless one when one examines the average hours worked—the labour force in aggregate is underemployed, while official unemployment rates show improvements. 

Recessions can have different flavours and policy needs to take this into account. There are key economic differences between Bob Rae's Ontario and Stephen Harper's Canada that can be boiled down to:
  • interest rates
  • policy
The Reality
The Bob Rae government was faced with a big recession, high unemployment, and...sky high interest rates::


Under these conditions, deficits become very expensive and government spending can "crowd out" business investment. Moreover, Bob Rae inherited prior commitments and boondoggles, such as the grossly mismanaged public-private Skydome venture that he rid the province of, but after he paid off the huge debts the project racked up.

What was Rae's eventual response to the economic situation? The NDP had to move away from Keynesian policies. This analysis of the Rae government illuminates the reality of the bleak situation::
"Although this sounded as though economic policy was still informed by a Keynesian perspective, both critics and supporters overestimated the extent to which the NDP government was committed to counter-cyclical budgeting: 'only $640 million of the deficit reflected new expenditures, while the rest could be attributed to decreased revenues and ongoing commitments.'"
So, the rampant Keynesian spending attributed to Rae is a myth—the government was trying to merely maintain services in a toxic economic environment with huge interest payments on existing debt. The government was out of options and moved towards...fiscal conservatism out of economic and political necessity::
"During 1992 it became clear that the government had discovered the attractions of fiscal conservatism. Premier Rae asserted his determination to move close to a balanced budget before the end of his term and public sector wages and social spending were reined in accordingly. The length of the recession seems ultimately to have created a deficit panic and, following a government caucus meeting at Niagara-onthe- Lake in March 1993."
Ironically, much of what is remembered about the Rae NDP government is a fiscally Conservative shift in policy—one that's in alignment with Harper, at least Harper's theoretical economics, as opposed to his political economics. Bob Rae and the NDP were forced into embracing austerity measures and the "social contract", along with unpopular "Rae days" {wage freezes and unpaid leaves} came into effect. Rae didn't totally abandon his ideology in favour of economic conservatism, as he passed the pro-labour Bill 40, which had anti-scab provisions.

Stephen Harper's Canada:: What Harper and Flaherty Are Hiding
The current economic situation is quite different from the 1990s. There are two main issues that need to dealt with. One is common to both Rae and Harper is Canada's productivity trap. The other, in my opinion, isn't talked about or readily understood. The elephant in the living room is what's actually driving Canada's "fragile recovery"—something that that Harper and his Finance Minister, Jim Flaherty, aren't really discussing. What is it? Well, the answer is above on that interest rate chart. The rates are rock bottom and the Canadian "economic recovery" may start to evaporate and even turn into a nightmare once rates start to creep up.
"The country's recent growth has largely been driven by super-low interest rates. With relatively cheap borrowing costs, prices have surged for housing -- nearly doubling in the past ten years nationally -- and for commodities, which make up nearly half of Canadian exports."
The current Conservative policies should be worrisome, since the "big idea" has been to foster bubbles. In the US, the 2000s saw a rampant housing bubble fueled by laxed lending rules, leading to the subprime crisis. Under Obama, the economic policies consciously took a "jobless recovery" approach, opting to prop up markets, calm investors, and fuel a stock market bubble, rather than focus on jobs. In Canada, the Conservatives tried the same thing, but ran into Liberal regulatory policies and now are concerned that their policies might lead to financial instabilities. Case in point: Flaherty had to reverse his mortgage liberalization policies after consumer debt started creeping up, ostensible because people are using credit to augment income in a recession and buy into what may well be bubble assets—real estate.

I have a sense that the Conservatives are making things up as they go along with policies all over the map {e.g., F-35s, Afghanistan, piecemeal projects, blocking of Potash sale, GM bailout, etc.} and are hard to track. Finance Minister Flaherty has been accused by the business community of being exactly that—hard to track. While the Conservative "schizophrenic" policies may seem like politics as usual, by throwing money to appease various constituencies, it becomes hard to reconcile when the political rhetoric is steeped in fiscal prudence. There's seems to be funding for certain things but not others, while there are increasing numbers of people falling through the cracks. I have a sense this is fueling the NDP surge. The Conservatives think that private industry and markets will solve the economic puzzle, but Canada faces the one-two combo. There's the productivity trap and the current policies of idiosyncratic spending that aren't leading to real job growth and a liquidity trap where despite rock-bottom interest rates, there's a reluctance to lend or invest.
  • Productivity trap: Relatively low productivity and levels of innovation, despite low taxes and low government debt.
  • Liquidity trap: Low investment due to uncertainty {unemployment/underemployment; deflation; insufficient aggregate demand for Canadian business}
The Conservatives are trying to sell stability, under the hopes that that neoliberal policies will foster an economic rebounds, in the course of regular business cycles. The problem is that the interest rates are unprecedented and the economy is in uncharted waters. Staying the course could very well result in a trainwreck. The Conservative budget that's tantamount to a Seinfeld episode {about nothing} and doesn't address the structural economic issues of the two traps. Ignatieff was right to bring up how the $11B in future budget cuts need to be scrutinized, given that funding cuts can be used to shape a political agenda under the guise of financial exigency. The stale low tax and corporatist mantra is hopefully wearing thin. The idea of tax giveaways to entice business is akin to a cheap date that puts out or a sugar daddy that offers up inducements to get gold diggers to stay—You're just going to get used. These policies are part of a race to the bottom that's wholly irrelevant, given the real issue in Canada is dealing with the two traps. 

The War of Rhetoric
Perhaps what is interesting in this election is how the NDP embraced a pro-small and medium sized enterprise stance. Strategically, this was a brilliant move that was in-synch with their policies, by encroaching on Conservative territory and embracing a fresh approach to market development that has the ability to address the productivity trap. I think this can be significant, as the Conservatives have been quite successful at painting both the NDP and Liberals as the "tax and spend" parties. Malcolm Fairbrother in this article on the provincial NDP governments in British Columbia and Ontario correctly points out that the mere perceptions of the adverse impact socially democratic policies have can affect business decisions. The Conservatives {and to a certain extent the media} help to promote a folklore wisdom of neoliberal economic orthodoxy—taxes are bad for business and lead to fewer jobs and less real income. In other words, the fear rhetoric primes voters and industry to act according to a script, as opposed to reality.

Twitterversion:: [blog] Bob Rae's Ontario NDP govt. invokes the bogeyman in light of Layton's #NDP surge, but is it all smoke & mirrors?  @Prof_K

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