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Economic Stimulus Is the Wrong Prescription – The New York Times

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Despite several days of intense negotiation, the Senate has so far failed to pass a bill to infuse over a trillion dollars into the ailing U.S. economy. While there can be no doubt that swift action is vital, too many politicians and policymakers seem to think the goal should be to stimulate the economy back into action.

In fact, stimulating the economy is the wrong prescription. To combat the spread of Covid-19, we need a period of less business activity and less consumer demand. Instead of stimulus, the government should provide what economists call liquidity — a financial cushion to allow businesses and individuals adversely affected by an inevitable decline in economic activity to have enough money to survive the shock.

In recent days, commentators have compared the economy to a patient in a medically induced coma. In order to stem the spread of the virus, the strategy is to keep people inside, to encourage them to work from home and reduce large group activities, all of which mean slowing the economy down, not speeding it up. More economic activity will be desired down the road, but right now the most important consideration is ensuring the survival of workers and businesses adversely affected by reduced business activity. That requires that funds be available to provide liquidity.

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The Federal Reserve has already begun to do its part by creating facilities, like the Commercial Paper Lending Facility announced on March 17, which will work to stabilize corporate financial markets that have been are under stress. On Monday, Chairman Jerome Powell made clear the Fed would buy as much government debt as necessary, engage in quantitative easing, aggressively buy up commercial paper (i.e., debt) and make loans where needed to guarantee the smooth functioning of financial markets. These steps are similar to those used in 2008, which demonstrated that the way to end a financial panic is to remove its cause — which is, often, a lack of liquidity.

Now it is Congress’s turn. Whatever legislation comes out of the current round of negotiations, it should be focused on providing short-run support for businesses and individuals during this difficult but temporary period. The most important actions that Congress can take are those that keep business and individuals solvent so that when the crisis period ends, economic structures will be in place to begin a quick recovery. What does that mean? For starters, it means not being overly specific about where the money should be spent.

One lesson of the 2008 financial crisis is that it is difficult to anticipate where future disruptions will occur, and therefore where money will be needed. Instead, Congress needs to authorize funds that can be used by the administration as the need arises. Carte blanche authority is admittedly dangerous; funds can be misused. But the downside of a strictly “targeted” approach is worse. We can identify some of the problem areas right now — for example, airlines — but it is presumptuous to believe that we know which industries will suffer and will need help, even in the near future.

A case in point: In 2008, the Troubled Asset Relief Program, as the name implies, was initially pitched as a program to buy up toxic assets. But it quickly became obvious that financial firms did not want to sell assets that would force them to mark-to-market and reduce the stated value of their portfolios. Nor was there enough money in the TARP to buy up a large enough fraction of outstanding troubled assets. (The White House agency that I headed at the time, the Council of Economic Advisers, estimated that there were over $3 trillion in toxic assets, or almost 10 time the size of the first tranche of the TARP.)

When attempts to buy up toxic assets proved unsuccessful, the TARP had to be repositioned quickly to purchase preferred shares in financial firms. That was the right approach because it gave the financial sector the capital it needed to withstand the shocks that were to come. Fortunately, flexibility written into the TARP legislation allowed that shift to occur.

We’ll need similar flexibility now. In the coming weeks, resources are likely to be needed by large sectors of the economy. Some of this may be a result of the legislation recently passed by the House of Representatives that, among other things, creates a mandate requiring small firms to provide paid sick leave to workers. In return, businesses will be eligible for a refundable tax credit. But even successful small businesses, stressed by declines in activity, might be out of business by the time they collect their tax credits despite the best efforts by Treasury to get the payments out quickly.

This is why a liquidity-based strategy is so important. The Treasury Department or the Fed should be prepared to make loans readily available to efficient businesses that, because of the crisis, may close their doors permanently absent short-run liquidity to buffer the shock. Loans may be difficult to obtain privately if businesses overwhelm capital markets during this crisis.

But in doing do, Congress shouldn’t specify which industries get loans. Right now, the most distressed firms are in travel, leisure and hospitality, but shelter-in-place orders, like those in California and New York, coupled with voluntary restrictions by individuals on shopping and work, will strain many other sectors. It is difficult to foresee in which industries future pressure will be most pronounced.

Workers and their families will also suffer liquidity problems as business activity falls. It is essential to keep them viable as well, and a more aggressive policy of short-term sick pay and unemployment benefits will likely be needed soon. These policies should be designed specifically to get people through this difficult period — not to stimulate them to spend more money.

During typical recessions, the federal government provides funding to lengthen the period over which unemployment benefits can be received. Now the need is to raise the weekly benefits unemployed workers receive so that they can pay their bills and buy necessities during the crisis. Additional approaches that work through a firm’s payroll were successful in Germany during the 2008 recession — the government made payments to companies that partially covered worker salaries and kept employees on the payroll during periods of reduced demand. We should do the same thing now.

Payments to specific workers who suffer layoffs or reduced pay is a better approach than providing cash to all Americans. Checks to give them spending money is actually counterproductive to our efforts to fight the pandemic: We should not be encouraging increased economic activity right now. And in any case, such payments are unlikely to provide much stimulus: Distributions made in the spring of 2008 did little to avert the financial crisis and its effects on the real economy.

When the threat of the virus spread has subsided, stimulus could be considered. The more important and immediate approach should emphasize help for those who suffer pay cuts, providing enough support to tide them over during the difficult period.

Washington should be using every tool at its disposal to support American businesses and citizens economically. But how it does so matters. In a normal recession, monetary and fiscal stimulus might be appropriate. Today, though, our economic policies need to work in concert with our efforts to fight the pandemic. There will be a time for stimulus, but for now, what we need is enough liquidity to help weather the months ahead.

Edward P. Lazear is a professor at the Stanford University Graduate School of Business and a Hoover Institution fellow. He served as chairman of the President’s Council of Economic Advisers from 2006 to 2009.

The Times is committed to publishing a diversity of letters to the editor. We’d like to hear what you think about this or any of our articles. Here are some tips. And here’s our email: letters@nytimes.com.

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Economy

Britain's economy went into recession last year, official figures confirm – The Globe and Mail

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Open this photo in gallery:

People walk over London Bridge, in London, on Oct. 25, 2023.SUSANNAH IRELAND/Reuters

Britain’s economy entered a shallow recession last year, official figures confirmed on Thursday, leaving Prime Minister Rishi Sunak with a challenge to reassure voters that the economy is safe with him before an election expected later this year.

Gross domestic product shrank by 0.1 per cent in the third quarter and by 0.3 per cent in the fourth, unchanged from preliminary estimates, the Office for National Statistics (ONS) said on Thursday.

The figures will be disappointing for Mr. Sunak, who has been accused by the opposition Labour Party – far ahead in opinion polls – of overseeing “Rishi’s recession.”

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“The weak starting point for GDP this year means calendar-year growth in 2024 is likely to be limited to less than 1 per cent,” said Martin Beck, chief economic adviser at EY ITEM Club.

“However, an acceleration in momentum this year remains on the cards.”

Britain’s economy has shown signs of starting 2024 on a stronger footing, with monthly GDP growth of 0.2 per cent in January, and unofficial surveys suggesting growth continued in February and March.

Tax cuts announced by finance minister Jeremy Hunt and expectations of interest-rate cuts are likely to help the economy in 2024.

However, Britain remains one of the slowest countries to recover from the effects of the COVID-19 pandemic. At the end of last year, its economy was just 1 per cent bigger than in late 2019, with only Germany faring worse among Group of Seven nations.

The economy grew just 0.1 per cent in all of 2023, its weakest performance since 2009, excluding the peak-pandemic year of 2020.

GDP per person, which has not grown since early 2022, fell by 0.6 per cent in the fourth quarter and 0.7 per cent across 2023.

Sterling was little changed against the dollar and the euro after the data release.

The Bank of England (BOE) has said inflation is moving toward the point where it can start cutting rates. It expects the economy to grow by just 0.25 per cent this year, although official budget forecasters expect a 0.8-per-cent expansion.

BOE policy maker Jonathan Haskel said in an interview reported in Thursday’s Financial Times that rate cuts were “a long way off,” despite dropping his advocacy of a rise at last week’s meeting.

Thursday’s figures from the ONS also showed 0.7 per cent growth in households’ real disposable income, flat in the previous quarter.

Thomas Pugh, an economist at consulting firm RSM, said the increase could prompt consumers to increase their spending and support the economy.

“Consumer confidence has been improving gradually over the last year … as the impact of rising real wages filters through into people’s pockets, even though consumers remain cautious overall,” Mr. Pugh said.

Britain’s current account deficit totalled £21.18-billion ($36.21-billion) in the fourth quarter, slightly narrower than a forecast of £21.4-billion ($36.6-billion) shortfall in a Reuters poll of economists, and equivalent to 3.1 per cent of GDP, up from 2.7 per cent in the third quarter.

The underlying current account deficit, which strips out volatile trade in precious metals, expanded to 3.9 per cent of GDP.

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How will a shrinking population affect the global economy? – Al Jazeera English

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Falling fertility rates could bring about a transformational demographic shift over the next 25 years.

It has been described as a demographic catastrophe.

The Lancet medical journal warns that a majority of countries do not have a high enough fertility rate to sustain their population size by the end of the century.

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The rate of the decline is uneven, with some developing nations seeing a baby boom.

The shift could have far-reaching social and economic impacts.

Enormous population growth since the industrial revolution has put enormous pressure on the planet’s limited resources.

So, how does the drop in births affect the economy?

And regulators in the United States and the European Union crack down on tech monopolies.

The gender gap in tech narrows.

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John Ivison: Canada's economy desperately needs shock treatment after this Liberal government – National Post

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Lack of business investment is the main culprit. Canadians are digging holes with shovels while our competitors are buying excavators

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It speaks to the seriousness of the situation that the Bank of Canada is not so much taking the gloves off as slipping lead into them.

Senior deputy governor, Carolyn Rogers, came as close to wading into the political arena as any senior deputy governor of the central bank probably should in her speech in Halifax this week.

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But she was right to sound the alarm about a subject — Canada’s waning productivity — on which the federal government’s performance has been lacklustre at best.

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Productivity has fallen in six consecutive quarters and is now on a par with where it was seven years ago.

Lack of business investment is the main culprit.

In essence, Canadians are digging holes with shovels while many of our competitors are buying excavators.

“You’ve seen those signs that say, ‘in emergency, break glass.’ Well, it’s time to break the glass,” Rogers said.

She was explicit that government policy is partly to blame, pointing out that businesses need more certainty to invest with confidence. Government incentives and regulatory approaches that change year to year do not inspire confidence, she said.

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The government’s most recent contribution to the competitiveness file — Bill C-56, which made a number of competition-related changes — is a case in point. It was aimed at cracking down on “abusive practices” in the grocery industry that no one, including the bank in its own study, has been able to substantiate. Rather than encouraging investment, it added a political actor — the minister of industry — to the market review process. The Business Council of Canada called the move “capricious,” which was Rogers’s point.

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While blatant price-fixing is rare, the lack of investment is a product of the paucity of competition in many sectors, where Canadian companies protected from foreign competition are sitting on fat profit margins and don’t feel compelled to invest to make their operations more efficient. “Competition can make the whole economy more productive,” said Rogers.

The Conservatives now look set to make this an election issue. Ontario MP Ryan Williams has just released a slick 13-minute video that makes clear his party intends to act in this area.

Using the Monopoly board game as a prop, Williams, the party’s critic for pan-Canadian trade and competition, claims that in every sector, monopolies and oligopolies reign supreme, resulting in lower investment, lower productivity, higher prices, worse service, lower wages and more wealth inequality.

(As an aside, it was a marked improvement on last year’s “Justinflation” rap video.)

Williams said that Canadians pay among the highest cell phone prices in the world and that Rogers, Telus and Bell are the priciest carriers, bar none. The claim has some foundation: in a recent Cable.co.uk global league table that compared the average price of one gigabyte, Canada was ranked 216th of 237 countries at US$5.37 (noticeably, the U.S. was ranked even more expensive at US$6).

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Williams noted that two airlines control 80 per cent of the market, even though Air Canada was ranked dead last of all North American airlines for timeliness.

He pointed out that six banks control 87 per cent of Canada’s mortgage market, while five grocery stores — Sobeys, Metro, Loblaw, Walmart and Costco — command a similar dominance of the grocery market.

“Competition is dying in Canada,” Williams said. “The federal government has made things worse by over-regulating airlines, banks and telecoms to actually protect monopolies and keep new players out.”

So far, so good.

The Conservatives will “bring back home a capitalist economy” — a market that does not protect monopolies and creates more competition, in the form of Canadian companies that will provide new supply and better prices.

That sounds great. But at the same time, the Conservative formula for fixing things appears to involve more government intervention, not less.

Williams pointed out the Conservatives opposed RBC buying HSBC’s Canadian operations, WestJet buying Sunwing and Rogers buying Shaw. The party would oppose monopolies from buying up the competition, he said.

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The real solution is to let the market do its work to bring prices down. But that is a more complicated process than Williams lets on.

Back in 2007, when Research in Motion was Canada’s most valuable company, the Harper government appointed a panel of experts, led by former Nortel chair Lynton “Red” Wilson, to address concerns that the corporate sector was being “hollowed out” by foreign takeovers, following the sale of giants Alcan, Dofasco and Inco.

The “Compete to Win” report that came out in June 2008 found that the number of foreign-owned firms had remained relatively unchanged, but recommended 65 changes to make Canada more competitive.

The Harper government acted on the least-contentious suggestions: lowering corporate taxes, harmonizing sales taxes with a number of provinces and making immigration more responsive to labour markets.

But it did not end up liberalizing the banking, broadcasting, aviation or telecom markets, as the report suggested (ironically, it was a Liberal transport minister, Marc Garneau, who raised foreign ownership levels of air carriers to 49 per cent from 25 per cent in 2018).

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The point is, Canada has a competition problem but solving it requires taking on vested interests. Conservative Leader Pierre Poilievre has indicated he is willing to do that, calling corporate lobbyists “utterly useless” and saying he will focus on Canadian workers, not corporate interests.

“My daily obsession will be about what is good for the working-class people in this country,” he said in Vancouver earlier this month.

Even opening up sectors to foreign competition is no guarantee that investors will come. There are no foreign ownership restrictions in the grocery market (in addition to the five supermarkets listed above, there is Amazon-owned Whole Foods). When the Competition Bureau concluded last year that there was a “modest but meaningful” increase in food prices, it recommended Ottawa encourage a foreign-owned player to enter the Canadian market. It was a recommendation adopted by Industry Minister Francois-Philippe Champagne, to no avail thus far.

But it is clear from the Bank’s warning that the Canadian economy requires some shock treatment.

Robert Scrivener, the chairman of Bell and Northern Telecom in the 1970s, called Canada a nation of overprotected underachievers. That is even more true now than it was back then.

It’s time to break the glass.

jivison@criffel.ca

Get even more deep-dive National Post political coverage and analysis in your inbox with the Political Hack newsletter, where Ottawa bureau chief Stuart Thomson and political analyst Tasha Kheiriddin get at what’s really going on behind the scenes on Parliament Hill every Wednesday and Friday, exclusively for subscribers. Sign up here.

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