On Tuesday the CIBC economics research shop
issued a paper
by Royce Mendes describing Canada’s economy as “leaking” fiscal stimulus dollars to other countries during the pandemic. The paper is likely to be a hot topic of discussion over the next week or so, but I can’t say I would regard it as making an airtight case for its hypothesis.
On the other hand, who would have given the matter the slightest thought if a banker hadn’t written about it? At a minimum, Mendes’s discussion makes you wonder whether, and exactly how, the character of Canada’s small open economy has entered into government fiscal planning — which, like everything else pandemic-related, is subject to the dominion’s national hatred of transparency.
Mendes’s idea is that sending dollars out of the country to pay for imports is of little consequence in a healthy economy, but in pandemic conditions it is creating a special problem (one that monetary policy, in an environment of near-zero interest rates, cannot help). COVID-19 has hit the service part of the economy, creating joblessness and insolvency, and has, if anything, increased our spending on consumer goods for final use.
This means money is going out and stuff made in other countries — that new guitar you’d had your eye on, or $100 worth of time-killing Amazon books — is coming in. The imports have the value of the dollars going out, but your guitar purchase won’t stimulate anything in the Canadian economy, except perhaps your guitar ability and, let’s face it, probably not even that.
Hence, the problem of leakage: when you switched your spending away from baristas or personal trainers or symphony musicians, you inadvertently reduced the “multiplier” effect of the money the government is spending on businesses and individual transfers to keep us all afloat. Mendes suggests that some of the enormous Canadian fiscal stimulus — higher, relative to the national gross domestic product than in any other G20 country — may have been wasted because of this, providing a little extra net stimulus to the rest of the world. Or perhaps our country is just arranged so that we have to go deeper into the hole to get the same stimulus effect from the same amount of dollars, and there’s not a whole lot we can do about it.
This is not perfectly well-established by the paper, which offers zero discussion of what would seem to be half of the leakage equation: are other countries leaking to us? Mendes establishes that Canadian purchases of imported consumer goods have increased dramatically, but the numbers also show that Canadian imports of motor vehicles and parts, energy and aircraft have declined by about the same magnitude.
I don’t know what the net effect of the changes in the various categories might be, and there is no discussion at all of exports. Mendes also claims a “clear correlation,” on the basis of a scatter plot with 10 data points, between the import dependence of various national economies and the size of their fiscal stimulus. I’m not a banker, but that chart and that adjective might tempt me to switch my mortgage away from CIBC on principle if I were a customer.
Even if the data weren’t fishy, weren’t our stimulus measures mostly demand-driven and improvised? Our government never consciously intended to lead the G20 in handouts. When the novel coronavirus reared its head, we mostly just happened to have a government that already adored them.
The exact degree of economic leakage and the disproportionate effects of the pandemic on various sectors are really separate issues that were combined for the purposes of this paper. Mendes makes the point, and it is valid whatever you make of the leakage issue, that the Government of Canada has not yet made any use of the GST as a rebalancing instrument. There is a moment of throat-clearing when he says that “lowering virus counts and making Canadians feel safe” in hard-hit settings like retail would have been ideal targets for early pandemic spending. (Rapid virus testing would have carried an especially large fiscal multiplier!)
With that horse well out of the barn and stomping senior citizens to death, the GST, altered selectively to boost businesses like retail and entertainment, remains as a potential lever for the long winter to come. These industries, Mendes estimates, only account for about a sixth of all GST revenue, and targeted tax relief would have offsetting buoyant effects on other sources of government income.
If the leakage story is right, direct handouts being spent on consumer imports are bound to be less effective and more self-limiting (although some will be human-capital-enhancing; even that guitar might be). The B.C. Liberals, before meeting their Waterloo in last month’s general election, proposed a complete year-long holiday from provincial sales taxes. Maybe they’ll end up losing the vote and winning the argument.
Copyright Postmedia Network Inc., 2020
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Through late summer and early fall, Tim Ball spent as much time as possible underwater in his dive gear, scouring the seabed off the Burin Peninsula for scallops.
It’s an ocean-to-table operation that sees his hand-harvested scallops quickly making their way to dinner plates in the downtown of St. John’s.
“I try to keep it all local,” said Ball about his business philosophy.
With a provincial economy that’s in dire straits and in need of reversing its course, Ball thinks every little bit can help— especially if the focus is keeping as many of those little bits as possible in the province.
For Ball, that means, among other things, using locally made bags and boxes for packing his scallops and using a Burin Peninsula cab company for sending his catch into St. John’s.
“Because this is a primary industry … we are in, and we are getting the actual resources from the bottom, this is creating new money for the economy,” Ball said. “If the money is staying in Newfoundland, then great.”
Terre Restaurant in St. John’s is one of the destinations for Ball’s scallops. Before the season ended last month they could be found listed on the menu as “Seared Diver Scallops.”
“They’re amazing,” said head chef Matthew Swift.
“Anywhere else in the world … the idea of marketing day boat scallops is sort of a pipe dream. If I were to tell friends in other places that Tim gets out of the water, and I get the scallops in as long as it takes to drive in from Burin? It’s insane,” he said.
On top of the quality, it’s Ball’s business recipe that also interests Swift.
“Just in terms of having a diverse and smaller economy, where we can support people on a more individual level,” he said.
This way of thinking is something that also strikes a chord with John Schouten — Memorial University’s Canada Research Chair in Social Enterprise.
Schouten says Ball’s operation means more than just local spending on his supply chain. There’s also a spillover effect which would also see Ball spend money at local businesses in and around Garnish, where he fishes from.
“So every hundred dollars that passes from me, to you, to somebody else here locally, that $100 is working the whole time in our favour here in the province,” said Schouten in an interview last month.
Patch the bucket
It may be a small example, but there’s a bigger lesson in it for the provincial government, said Schouten. He thinks the government should treat the economy like a leaky bucket, where money comes in and goes out.
“If the government could, using that metaphor, start patching the bucket to keep the money in the province longer, working harder for local businesses, local people, people who are making a living wage — that would do wonders for the stability of the economy here,” he said.
Speaking of helping the economy, Ball thinks what he’s doing is scalable. In addition to scallops, Ball also hand harvests sea urchin, but he thinks there’s more that can be harvested as well — including kelp, sea cucumbers and periwinkles.
For that to happen, there would have to be consistent licensing periods from the federal government and more divers with commercial dive training.
Eventually Ball would like to see a special school that trains up to a dozen divers a year for this type of work.
If a community had a handful of divers, Ball said, the economic spin-off is easy to see — you need people shucking scallops and spotting the divers, gear needs repairing, supplies need to be bought.
“I think it’s just a win-win situation for small communities,” he said. “It could be a good economic boon.”
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