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Reckless and Ruinous: Harper's Economics

He ties us to stumbling US, pulls plug on stimulus, rolls dice on tar sands folly.

By Murray Dobbin 11 Oct 2010 | TheTyee.ca

Murray Dobbin's "State of the Nation" column runs every other Monday in The Tyee and on Rabble, and he also publishes articles on his blog.

What are the key issues that progressives need to be fighting to rid the country of Stephen Harper's wrecking crew? One is the tar sands and the Enbridge pipeline, which would see giant oil tankers plying the waters off the B.C. coast. Another key issue is the Harper government's oft-announced plan to begin its so-called budgetary austerity program, starting with the spring 2011 budget. That, combined with the government's inept economic policies, should be the target of a concerted campaign.

Unlike much of the Harper regime's actions, this one is not a surprise shot from the blue. It is well known, it has been announced repeatedly and framed as the next necessary step in dealing the economic crisis.

Of course, it is no such thing. It is Harper and Finance Minister Jim Flaherty taking advantage of the useful crisis they created. Anyone who cares about social programs and a functioning economy should be scared silly about the consequences.

There is almost no resistance yet to this draconian plan to diminish the country, allowing Harper to stay far ahead in the polls as the best economic manager of all the federal leaders. But in fact, Harper is extremely vulnerable on the economy. The Conservatives' only claim to fame is that our financial system did not melt down the way others did. Ironically, the only reason it didn't is our banks remained regulated, so they could not take the kind of risks that their counterparts in the U.S. and EU did. Even here, Harper and Co. played with financial deregulation in the mortgage industry (allowing 40-year, no down-payment mortgages), and created a bubble that has yet to burst.

It's working for the rich

In virtually every other aspect of economic policy, the Harper government can be shown to be incompetent or recklessly irresponsible. Yet there is little coming from the Opposition to make this argument. The only party with a handle on the economy issue is the Bloc. The Liberals have drunk the neoliberal Kool-Aid, so they don't really have an honest argument to make. And the NDP has convinced itself that talking about the economy is a losing proposition for them -- a self-fulfilling prophecy that has been playing out for almost half a century.

Harper and Flaherty have set the country up for its biggest spending cuts since Paul Martin's blitzkrieg through federal social spending in 1995. Martin had the advantage of a huge existing deficit and debt, and years of media-driven deficit hysteria. The Harper government has had to create its own crisis. With his five-year, $60-billion tax cut program launched in 2007, Flaherty has taken tens of billions out of government coffers yearly, at exactly the same time that the opposition parties forced the Conservatives into stimulus spending. They now have the perfect numbers to go on a deficit cutting rampage.

A campaign against the planned austerity budget is not difficult to construct -- but it's tough to imagine anyone leading it. The key to turning back the Conservatives' austerity plan is a call for a return to a sane level of income taxes. We will have cut corporate taxes virtually in half over the past 10 years once Flaherty's program is complete. The super-rich in Canada have enjoyed a decline in their tax rate of eleven percentage points, while 95 per cent of Canadians averaged a decrease of one percentage point. The wealthiest five per cent of Canadians increased their share of the income pie by a staggering 20 per cent between 1992 and 2004.

The case for tax increases, especially a couple of new tax brackets for the rich and super-rich, are clearly justified and not just from a fair tax perspective. Countries with greater income inequality are the countries with the poorest performing economies overall.

As for bringing corporate taxes back in line with the norm in the G8 and OECD countries, there is no credible evidence that lower corporate income taxes have any positive impact on investment decisions -- either domestic or foreign direct investment. If there is no new demand for products and services, there will be no new investment, even if the income tax rate is zero.

The madness of stopping stimulus

As for Harper's economic policies, they are a disaster. If opposition parties -- and civil society organizations -- went after the Harper government on the actual performance of the economy, they could take away the most important advantage it now enjoys. Here are a few examples.

First, of course, is the sheer madness of ending the stimulus program just as we see the recovery faltering with "unexpected" net job losses in two of the past three months -- 6,600 in September.

This follows on a constant stream of bad economic news, including a sharp drop in the Conference Board of Canada's consumer confidence index in September to 78.1, a fall of 18.5 points below where it stood in January. It was the fourth straight monthly decline. The growth rate is falling and July saw the first monthly decline in GDP in a year.

None of this fazes Harper, the ideological warrior: "If you ask me today, there is nothing... that would indicate to me that we should look at another, quote, stimulus package."

Household debt has been rising in Canada for two decades, but the Harper government bears special responsibility for pushing the housing market to explode beyond reason and helping drive personal debt to a record $41,740 for every Canadian, 2.5 times greater than in 1989. The housing bubble is just waiting on an interest rate rise of only two percentage points to really whack the economy. That's when "mid-income to mid-to-high income families may have to cut about 10 per cent from other expenditures" to maintain their mortgage payments, according to a study by an accountants' association.

Approximately half a million Canadian holding mortgages would be in trouble if rates went to 5.25 per cent.

The Canadian economy is running on empty, a faux consumer-led recovery based on unsustainable debt. This will be Flaherty's legacy. So far he has just been bloody lucky.

The coming tar sands debacle

Another policy that makes a consumer-led recovery almost impossible is the underlying reason for all the personal debt: policies of "labour flexibility" first established by the Chretien-Martin government in the 1990s, pursued with equal determination by Harper. Shredding the social safety net (EI and the Canada Assistance Plan) meant workers stayed at jobs they might otherwise have left -- and accepted low pay and even roll-backs. The policy's direct result: Canada has the dubious honour of having the second highest percentage of low-paying jobs in the OECD, better only than the U.S.   

The Harper government's absolute dedication to the rapid development of the tar sands threatens the Canadian economy perhaps more than any other single policy. Harper keeps talking about Canada being an "energy superpower," but what kind of superpower pursues a policy that could see the Canadian dollar reach the equivalent of US$1.15 within the next 18 to 24 months? Such a development would virtually double unemployment in Ontario and Quebec and decimate the country's manufacturing sector.

Recovering from such a catastrophe could take a generation. Canada could be approaching third world status with our exports consisting of oil and gas, raw logs, minerals -- and skilled workers.

Competing with the tar sands expansion for the most destructive economic policy is Harper's dogged ideological commitment to a complete laissez-faire approach to the economy as a whole. In essence, their policy is to have no policy. This has been the predominant approach of both business parties in the post-free trade era -- relying exclusively on trade with the U.S. The economy boomed so long as the U.S. economy boomed first, and the Canadian dollar stayed low. The problem was that we totally ignored the rest of the global economy -- the robust BRIC countries: Brazil, Russia, India and China -- so now with the U.S. an economic basket case we need to play catch-up, a process that will take at least 10 years.

Where we should be going

Are there policies that would rescue Canada from its bleak future under current policies? Of course. More on this in a later column, but for starters we just need to think of what it actually takes to be internationally competitive. First, we need robust social programs that not only improve the quality of life of Canadians, but provide a competitive advantage to Canadian companies. Medicare is the best example. Real investors look at infrastructure, energy, research and development, and support for skilled workers and their families (like child care, pharmacare and first class education) before they get around to taxes. In short, what Canada needs is more public investment, and that takes more revenue.

Secondly, Canada needs to rapidly return to activist government involvement in guiding the economy through a strategic industrial policy. We can't expect Stephen Harper to take lessons from China, but Canada could. In 2002, China did not have a single super-computer. Now it is third in computing power, surpassing Japan and behind only the U.S. and the EU.  

How did it accomplish this? By strategic alliances between its universities, industries and the state. It will soon outpace the U.S. in R&D. The Chinese state is able to act with incredible speed and focus. Last year China blew past competitors in Denmark, Germany, Spain and the United States to take the number one spot in the manufacture of wind turbines -- matching its position reached earlier as the world's largest maker of solar panels.

And Canada under Stephen Harper? We are sending virtually unprocessed bitumen from the tar sands in pipelines to the U.S. to be refined. If this man can't be deposed as the country's best "economic manager," something is desperately wrong.  [Tyee]

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