Forget the word recession. As the coronavirus health emergency shuts down part of Canada’s economy, experts are dusting off a word that’s been relinquished to the history books for nearly a century: depression.
“This isn’t business as usual, even for a recession,” starts a recent report from CIBC’s economics team, for example.
The paper predicts Canada’s GDP could contract by an annualized 15 to 20 per cent in the April-to-June period in inflation-adjusted terms. The unemployment rate, meanwhile, could shoot up to nine per cent, up from a reading of 5.6 per cent in February.
That isn’t the stuff of your run-of-the-mill recession, the report notes. But “it’s not the start of a lengthy Great Depression” either, the CIBC team reassures readers.
That’s because the collapse in business activity comes from government-mandated requirements of social distancing rather than endemic weakness in the economy.
As steep as the initial plunge may be, if it is also short-lived, Canada will be able to, “with some pains,” ride out the crisis, the report predicts.
But whether the economy will indeed be able to quickly bounce back from the abyss hinges, in large part, on what the government does to help blunt the impact of the pandemic.
And while Ottawa has already announced a slew of extraordinary measures, including $27 billion in direct financial aid to households and businesses, many say Canada needs to do more — much more.
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Paying Canadians more to stay at home
Business advocates and economists alike are urging Ottawa to dramatically ramp up the amount it pays Canadians who’ve been forced off work amid the crisis.
They are drawing on the concept of “freezing the economy,” with policymakers stepping in to keep businesses afloat and households solvent until the worst is over. If you can keep business closures and layoffs temporary, goes the argument, the economic recovery will be that much faster.
Experts, however, disagree on how to get there.
Some business groups are urging Ottawa to pay a significant share of employee wages to stave off mass layoffs, as other countries have done.
Denmark, for example, has said it would pay 75 per cent of employees’ salaries for up $4,700 a month. The U.K. unveiled plans to cover for 80 per cent of pay, capped at around $4,200.
Canada, by contrast, has so far unveiled a wage subsidy of just 10 per cent. Companies would receive a maximum of $1,375 per employee for a total of up to $25,000 per employer for up to three months.
Dan Kelly, president of the Canadian Federation for Independent Business (CFIB), says that’s not enough.
As Kelly sees it, there a gaping hole in the government’s current array of emergency measures to boost unemployment benefits.
The focus, he says, should be on “helping employers prevent unemployment as opposed to making it easier for people to get EI [employment insurance] when they are unemployed.”
Laying off people and re-hiring them is a costly and uncertain process for businesses, Kelly says.
Employers may face severance costs and the risk of litigation, as some non-union employees on temporary layoff may be entitled to wrongful dismissal damages of up to 24 months of pay, according to employment lawyer Howard Levitt.
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Then there’s the question of being able to re-hire the old staff. At Habaneros Mexican Grill in Leduc, Alta., Jim Hamilton worries about what could happen if he had to bring on a new cook should the restaurant be forced to shut down for a few weeks.
“We often see it’ll take a good month after hiring a new worker before they’re really able to execute everything,” he says.
That extra month could be the difference between being able to ramp up business fast enough to pay the bills and not, according to Hamilton.
But does Canada need a massive wage-subsidy program to help Hamilton and other employers facing a similar dilemma?
Asked about whether he is prepared to embrace Denmark-like measures to avoid mass layoffs, Prime Minister Justin Trudeau said his government has not “ruled out anything.”
Others, however, believe there’s no need for Canada to follow Europe’s example quite so closely.
A wage subsidy on steroids would be equivalent to running a generous unemployment insurance benefit through companies’ payroll systems, Corak says. And there’s no need to do that, argues University of Ottawa economist Miles Corak.
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Instead, Ottawa should work with the social safety nets it already has, according to Corak.
The creation of a new Emergency Support Benefit for those who don’t qualify for EI is an important step in the right direction, Corak wrote in a recent open letter to Prime Minister Justin Trudeau. As of 2018, only about 64 per cent of the unemployed were potentially eligible for EI, Corak noted.
But the federal government should also considerably increase how much it pays Canadians through unemployment insurance, Corak argues.
“In normal times, when jobs are to be had, the program’s design certainly does need to keep work incentive effects in mind,” he wrote. That’s why EI covers only 55 per cent of insurance earnings and there’s a waiting period before the first government cheque arrives.
But these are not normal times, Corak continued.
“In some sense we want Canadians to work less while giving them timely and generous income support.”
Corak suggests Ottawa boost unemployment insurance benefits to cover 75 per cent or more of workers’ pay up to at least $75,000, compared to the current cap of around $54,000.
The government should also further re-jig its EI Work Sharing program, which allows workers who agree to reduce their normal working hours to access EI benefits.
In times when the priority is to slow down contagion rather than encourage economic activity, Ottawa could drastically cut down the number of shared hours of work required to participate in the program, Corak said.
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Businesses like Habaneros, which may be forced to shut down completely, wouldn’t be eligible for Work Sharing but could still benefit from much more generous unemployment benefits for their employees.
In normal times, a laid-off restaurant cook may quickly find a new job at another diner. But, as Corak likes to repeat, these are not normal times: with whole industries forced into temporary shutdown, companies would likely be able to re-hire their own employees without too much trouble, he argues.
And the advantage of working through already established programs is that cheques would start reaching workers quickly, Corak says.
Canada’s own ‘bazooka’ for the economy
The federal government isn’t the only one that needs to supercharge its arsenal of weapons against COVID-19, according to some economists.
On Monday, the Federal Reserve unveiled what’s been described as a “bazooka” aimed against the economic effects of the virus.
The U.S. central bank said it will lend against student loans, credit card loans, and U.S. government backed-loans to small businesses, and buy bonds of larger employers and make loans to them in what amounts to four years of bridge financing.
A new “Main Street Business Lending Program” that will extend credit to small- and-medium sized businesses will also be announced “soon,” the Fed said.
While the move couldn’t stem a further sell-off on Wall Street, many economists greeted the move as a crucial step in ensuring credit remains available to businesses and households.
“Given the steps taken today, it is only a matter of time until we see something ‘similar’ announced in Canada,” CIBC’s Ian Pollick predicted.
— With files from Reuters
© 2020 Global News, a division of Corus Entertainment Inc.
We're at war and need wartime institutions to keep our economy producing what's necessary | TheHill – The Hill
There can be no question about the nation’s current predicament. We are at war. We are faced with a public health crisis, yes, but the virus now ravaging our communities is a lethal invader taking American lives, threatening our way of life and destroying our productive capacity and economic health.
We’re waging battle on the public health front with thousands of the most heroic and able health professionals on the planet, yet at the same time, it appears that despite Congress’ record $2 trillion relief bill we have no wartime strategy to get needed equipment where it is needed or to save our economy. We have no coordinated plan to mobilize workers, produce needed medical supplies, and distribute these to the facilities that need them.
We’ve faced down war on our people on our own shores before, so why not look to those occasions for clues as to how it is done? Many of the answers we’re looking for to respond to our current crisis and associated production shortfalls can be found in the measures taken by wartime presidents Franklin Roosevelt and, before him, Woodrow Wilson.
The key to keeping wartime production humming has always been public collaboration, with the public firmly in the driver’s seat, with private producers.
The U.S. took such measures when Pearl Harbor was bombed. President Roosevelt established a War Production Board (WPB) to coordinate the repurposing and expansion of factories; the re-routing of existing and opening of new distribution channels, and countless other tasks entailed by the productive and distributive ramp-up necessitated by the war. Before that, President Wilson established a War Industries Board (WIB) to achieve the same ends during the First World War mobilization.
Roosevelt’s WPB worked in tandem with Herbert Hoover’s and his Reconstruction Finance Corporation (RFC), the already-existent financing arm of the New Deal. The RFC had been patterned after Wilson’s War Finance Corporation (WFC) of the preceding era, established to work with the WIB in overseeing and funding U.S. mobilization for the First World War.
The WFC and the RFC directly financed mobilization, using a broad array of financing tools. They made direct grants, provided inexpensive credit or loan guarantees, and in many cases took equity stakes in individual businesses, thereby both recapitalizing them and taking internal governance rights to help guide production flexibly from the inside.
Given the success of this model in our most “existentially” threatening earlier wars, why not update it now as we grapple with another lethal invader?
I have been advocating, in some cases on my own and in some cases with others, a number of possible models for a contemporary RFC for some years now. The idea must be not just to address crises ad hoc after they have emerged, but to treat healthy and ongoing ‘reconstruction’ and national development proactively as an always-necessary, continuous process in need of an effective and democratically accountable coordinator. Think of it as a smart industrial policy tool for managing a permanent policy need in any world, such as ours, in which technical needs and technologies themselves constantly evolving.
A National Investment Authority (NIA), for example, which I first floated with my colleague Professor Omarova early in 2015, would develop, coordinate, and oversee the financing and execution of a coherent strategy of perpetual, across-the-board national development, in collaboration with private sector agents whose industries are implicated by particular projects.
My National Investment Council (NIC), introduced more recently, would collaborate more with already-existing federal agencies whose mandates are implicated by specific industrial and infrastructural projects, bringing them together as the Financial Stability Oversight Council (FSOC) does our multiple financial regulators. It would accordingly resemble not only the RFC but also the Board for National Investments (BNI) advocated by J.M. Keynes in the 1920s.
Either model would include a direct investment arm, which would act both in primary and in secondary to ensure both public and private sector provision of critical public goods. What makes these models especially relevant today is that they are designed to be platforms of precisely the kind that we need to survive our pandemic.
Right now, they would mobilize a coherent productive response to the COVID crisis. They would inject capital into businesses that need it, take direct equity stakes in them as necessary, and direct resources coherently toward the production of what must be produced both to keep our people healthy and our economy humming.
In recent weeks, my friends James Galbraith and Michael Lind have proposed an ad hoc Health Finance Corporation (HFC) to address the COVID crisis. Like the NIA and NIC, it is inspired by and patterned in part after the RFC. I find much to admire in this proposal, as does presidential candidate Bernie SandersBernie SandersOvernight Energy: Oil giants meet with Trump at White House | Interior extends tenure of controversial land management chief | Oil prices tick up on hopes of Russia-Saudi deal Oil giants meet at White House amid talk of buying strategic reserves The Hill’s Campaign Report: Biden struggles to stay in the spotlight MORE (I-Vt.), who has proposed his own variant of it. I think we’ll do even better, however, to institute something more permanent.
Unless we’re all killed by the present pandemic, there will be others. And just as importantly, reconstruction and development — national self-renewal — are forever.
Robert Hockett is the Edward Cornell professor of law at Cornell University, Visiting Professor of finance at Georgetown’s McDonough School of Business, and consulting counsel at Westwood Capital in New York City. Formerly with the Federal Reserve Bank of New York and the International Monetary Fund, he is a frequent advisor to legislators and regulators in Washington and New York.
Opinion: Reality check: The economic crash is significant but it's not the apocalypse – Calgary Herald
Stock markets have entered bear market territory meaning that they have lost 20 per cent of their value and in short order. Is the stock market’s reaction overstated? From an economic perspective, coronavirus is big. It started with an interruption in China’s output and if that wasn’t mainstream enough, now global travel is being interrupted, events are being cancelled and large social events are being prohibited. Meetings are being moved to virtual ones and extended breaks are being imposed on schools. This is disrupting our lives.
When the sub-prime mortgage fiasco resulted in the global financial crisis, the U.S. stock market collapsed as the Dow Jones Industrial Average index fell from a high of over 14,000 to a low of around 7,000 over a period of 18 months. There was a fear that the globe was entering a period of a global depression much like what had happened in the 1930s. That fear proved unwarranted as the global economy rebounded and the stock market resumed its upward trend. There are many reasons that the global economy was more resilient this century versus in the 1930s and the banking rules have been largely pointed to. I would posit that the degree of globalization, trade, availability of food, preservatives and energy, along with the portion of the population that is not living in abject poverty are all in the mix as to why the 2008 recession did not become a depression.
"Sledgehammer" policies will destroy us; we need open economy says Johns Hopkins professor | – Kitco NEWS
Government-mandated policies of self-isolation will cripple the American economy, and the draconian measures taken to contain the pandemic are not necessary, this according to Steve Hanke, professor of applied economics at Johns Hopkins University.
“With the economy shutting down, the cost is going to be absolutely phenomenal,” Hanke told Kitco News.
Hanke likened the response to the virus from the U.S. and many Western European nations to a “sledgehammer.”
“The sledgehammer approach being used in most European countries and the United States is turning out into a very costly mistake. And what I mean by sledgehammer is they haven’t planned anything, they just have a blanket program where we’re all locked in our condos or houses and can’t move, and the economy shuts down,” he said.
Instead, governments should take the model that Sweden has set, Hanke said.
“If you look at some place like Sweden, Sweden has a very laissez-faire, very targeted approach, and they’re doing very well. The kindergartens are still open, the grade schools are still open, most factories are still open in Sweden. They are not imposing this sledgehammer and essentially wiping out the economy,” he said.
“The places that have done well in controlling and counting properly the victims of this pandemic are countries that have small, efficient governments, and free market economies. You look at Singapore, Hong Kong, they’re right up there,” he said.
Additionally, these nations have all practiced the “five P’s”: prior preparation prevents poor performance, Hanke said.
The U.S. is now the country with the highest number of COVID-19 cases in the world, and the majority of the country has not yet been tested.
“Wherever the five P’s have not been applied, you have a disaster,” he said.
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