Ottawa’s ‘dead money’ tirade misses the point

Finance Minister Jim Flaherty is lambasting Canadian business for hoarding cash instead of creating jobs. He should look into a mirror. It’s his government that has created this sorry state of affairs.

The hoarding controversy made headlines last week when Bank of Canada Governor Mark Carney publicly urged Canadian businesses to reinvest the estimated $500 billion in what he called “dead money” they are now sitting on.

Flaherty followed suit a few days later.

“At a certain point, it’s not up to government to stimulate the economy,” he told reporters Monday. “It’s up to the private sector and they have lots of capital.”

At one level, the Carney-Flaherty complaints constitute an admirable, if futile, tag-team effort to persuade corporations to act against their own short-term interests.

But at a more fundamental level, they underscore the inadequacy of Ottawa’s badly flawed response to the economic crisis.

To be fair to the Conservative government, its initial reaction to the slump of 2008 was praiseworthy.

Prime Minister Stephen Harper swallowed his own ideological preferences, accepted the international consensus and deliberately spent government money to stimulate the economy and create jobs.

At the same time, the government backstopped the chartered banks to ensure that they could continue supplying loans to business.

That later earned the government flak from some on the left (who accused the Conservatives of bailing out the banks). But it was the right thing to do.

It also involved, intriguingly enough for a prime minister who has no love for the theories of liberal economist John Maynard Keynes, a classic two-pronged Keynesian strategy.

On the monetary side, the Bank of Canada lowered interest rates in an effort to encourage business investment and jobs. On the fiscal side, the government pumped cash into the economy so as to boost consumer demand for the things that business makes.

For a while, the strategy worked. The Canadian economy began to recover.

And then the government reverted to its old ideological ways. Harper and Flaherty had never been keen to have government spend money. Their Conservative party base was even less so.

Fiscally, Ottawa began to pull back on spending. Instead, it focused on reducing corporate taxes.

The assumption here was that if businesses were allowed to keep more of their profits they would invest them productively.

But in the real world, corporations don’t invest when the economic outlook looks gloomy. Why hire workers if you’re not sure you can sell what they produce?

Instead, corporations took the extra profits provided by government and sat on them — either in the form of cash or short-term cash equivalents.

That leaves Carney in an unenviable position. He is supposed to tackle the economic slowdown on his own. The government expects him to boost job creation through lower interest rates. But with rates already near zero, there’s little more he can do.

What’s more, while low interest rates may encourage homebuyers to borrow excessively, they don’t ensure that business will invest productively. Again, corporations will do that only when they expect economic conditions to improve.

And with all levels of government in retrenchment mode, that’s not going to happen soon.

Hence the hectoring. Flaherty and Carney are trying to convince corporations to act against the short-term interest of their stockholders by investing without the prospect of return. Good luck with that.

In truth, Flaherty’s faith in the private sector is badly misplaced. In some situations, only government can stimulate the economy. At some times, the market doesn’t work.

This remains one of those times.

Original Article
Source: the star
Author: Thomas Walkom