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How to save the economy – Maclean's



Since March, governments have released a blizzard of new programs and policies to stabilize the economy. But what comes next? We asked economists for their big ideas about what Ottawa and the provinces should do now.

Clarity creates confidence

(Colin Rowe Photography)

Pedro Antunes, chief economist,
Conference Board of Canada

While social distancing and the halt to non-essential activity were necessary to halt the spread of COVID-19 and avoid straining our health-care system, they carry a large economic cost. Consumer and business confidence has been shattered and governments have responded with a host of programs to cushion the economic fallout. Unquestionably, these policies and programs were required, but the fact that they have not been applied consistently across the country contributed to an already uncertain operating landscape. Restrictions on activity vary from province to province while the information about support programs put in place by federal, provincial, and municipal governments (even some Crown corporations offered relief) is overwhelming and difficult to navigate.

The key to emerging from this recession will be restoring business and consumer confidence so that, as restrictions are eased, they are ready to hire and spend. Governments can support confidence by being transparent with respect to when and how restrictions will be phased out, what health and security requirements specific businesses will need to adhere to, and what they will do in the event of a resurgence of COVID-19 cases. While companies are used to dealing with our multitude of interprovincial barriers and regulations, alignment between Canada’s federal and provincial leaders on the plan to phase out restrictions would reduce uncertainty at a time when we simply have too much of it.

RELATED: The economy may never return to what it once was

A summer of instant infrastructure

Michael Veall, professor of economics, McMaster University (Georgia Kirkos)

(Photo by Georgia Kirkos)

Michael Veall, professor of economics,
McMaster University

While policy adjustments continue, the main bases appear to have been covered for income support. The focus should shift to safe job creation. Normally I am cautious about boutique programs, but it is not the time to be squeamish.

Dust off that old standby, a temporary home renovation tax credit, but with quick payouts and social distancing provisions. Extend that program to small business. Take a bow for the orphan wells cleanup program and look for other ways to create jobs while solving known problems that will have to be dealt with sooner or later. Make it sooner. Encourage provincial governments to do what they can to re-ignite construction and resource industries. Besides the ongoing push on medical supply manufacture, introduce a sharp and short subsidy of immediate internet and telecommunications investment. Use subsidies to ramp up childcare as soon as operationally safe. Ship money to municipalities for anything shovel-ready, including environmental projects, tree-planting being the cliché.

Make it the summer of instant infrastructure. Avoid delays by letting starting-times depend on local conditions. The unifying principle is rapid employment and output creation. Everything should be a limited-time offer: an incentive for action now, not months from now. Finally, while Canada had a reasonable safety net, it wasn’t designed for this kind of crisis. Plan a new one.

The kids aren’t alright

Tammy Schirle, professor of economics, Wilfrid Laurier University (Tomasz Adamski)

(Photo by Tomasz Adamski)

Tammy Schirle, professor of economics,
Wilfrid Laurier University

What are two things that matter most for landing that first great job after graduation? A graduate’s social networks and the state of the economy will largely define their career trajectory. Moving into the labour market in the middle of this pandemic will be devastating. Studies have shown that entering the workforce during a typical recession is associated with a large loss in earnings for new graduates, compared to their potential, and the negative effect takes up to 10 years to fade. We’re looking at graduates with few options to work in the coming months, and the opportunities for those from less advantaged socioeconomic backgrounds are even worse. We will need support for programs that find innovative ways to bring new entrants into the labour market, perhaps with work-from-home internships, targeting those lacking networks, as well as broader income support for those unable to land that first great job.

EI should be kicked to the CERB

David Macdonald, senior economist, Canadian Centre for Policy Alternatives (Courtesy of David Macdonald)

(Courtesy of David Macdonald)

David Macdonald, senior economist,
Canadian Centre for Policy Alternatives

Let’s formally replace our creaking EI system with a modern equivalent based on the Canada Emergency Response Benefit (CERB). Just like the 1970s computers that run it, EI was built for another era of work with regular hours, a formal workplace and decent pay. This crisis has exposed its flaws: it’s bureaucratic, unresponsive to workers’ needs, incredibly slow, and incredibly complicated. Our dated EI system was built out of the crisis of the Great Depression in 1940, and a modern EI system through CERB is being rebuilt to meet a modern-day crisis. We need a system built for and more adapted to our economy, to our times, to our reality, to our fast-paced lives and smartphones.

The COVID-19 crisis finally forced us to throw the antiquated EI system into the trash and build a new one on the spot. Despite being done quickly, the design benefits of the CERB are substantial: it’s built for speed, it covers gig workers, it provides a floor on benefits for low-wage workers, it’s dramatically simpler to administer, and it’s easy to understand what you’ll get. Hopefully these features will be the foundation for a new modern EI system following this crisis, and we can leave our post-war EI system where it belongs: in the bin.

Good government needs fair tax systems

Frances Woolley, professor of economics, Carleton University (Courtesy of Frances Woolley)

(Courtesy of Frances Woolley)

Frances Woolley, professor of economics, Carleton University

A government is, in essence, an insurance company with an army. It can insure against the kinds of risks that private insurance companies cannot, or will not, take on. In Canada, Employment Insurance, the Canada Emergency Response Benefit, and other programs are insuring workers against income and job losses caused by this coronavirus. Canadian firms and investors are being insured through wage subsidies, loans and the Bank of Canada’s actions to provide stability in financial markets. Provincial health insurance systems provide every Canadian with health-care coverage.

Yet for government insurance to be effective in protecting both the economy and the people and businesses who make up the economy, everyone has to opt in and pay insurance premiums. In recent decades, however, many have tried to opt out. For example, firms avoid paying Employment Insurance premiums and other payroll taxes by reclassifying employees as self-employed, independent contractors. There is widespread lobbying for lower tax rates or special tax breaks.

The COVID-19 pandemic is reminding Canadians that governments play a vital role in ensuring economic stability and prosperity. They can play that role most effectively when they are supported by a strong, fair, and efficient tax system. What I hope to see coming out of this crisis is a serious effort to strengthen the revenue foundations of good government. This means regularizing gig economy work, levelling the tax playing field between digital and bricks-and-mortar firms, preventing the tax base erosion, and reducing tax avoidance.

A sales tax holiday for consumers

(Courtesy of CFIB)

Ted Mallett, chief economist, Canadian Federation of Independent Business

The unknowns about COVID-19 with respect to public health are complicating Canada’s efforts to manage the economic policy aspect of the crisis. Short-term measures on incomes, payrolls, credit and rent in a shutdown environment are eventually going to have to transition to support for restart and recovery. For small businesses, that path will be uneven and bumpy. Even if permitted to reopen, businesses will be faced with higher operating expenses before any meaningful revenues return. Credit and wage subsidy measures, therefore, will have to stay in place as that process begins. Consumers too will be shy to reestablish old habits, so they may need nudges from demand-inducing measures like sales tax holidays to help get money circulating again. Boosted infrastructure spending may help a little, but past experience shows its value doesn’t always measure up to its costs.

Longer term, Ottawa and the provinces will need to focus on the fiscal hangover. Attention should be on incentivizing participation in the work force—because we need to earn our way out of this. Education, immigration, childcare and mobility-directed measures to bring in and to keep people working are widely supported by the general public, as are removing barriers to business creation. For other necessary measures, like delaying retirements, some may need more persuasion. There will be difficult choices ahead and limited funds, so we can look forward to a completely new policy-making environment.

This article appears in print in the June 2020 issue of Maclean’s magazine with the headline, “How to save the economy.” Subscribe to the monthly print magazine here.


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Fed officials signal rates may head to ‘restrictive’ levels to stabilize economy – PBS NewsHour



WASHINGTON (AP) — Federal Reserve officials agreed when they met earlier this month that they might have to raise interest rates to levels that would weaken the economy as part of their drive to curb inflation, which has reached a four-decade high.

READ MORE: U.S. prices see smallest rise in eight months, spurring hopes that inflation may be peaking

At the same time, many of the policymakers also agreed that after a rapid series of rate increases in the coming months, they could “assess the effects” of their rate hikes and, depending on the economy’s health, adjust their policies.

After their meeting this month, the policymakers raised their benchmark short-term rate by a half-point — double the usual hike. According to minutes from the May 3-4 meeting released Wednesday, most of the officials agreed that half-point hikes also “would likely be appropriate” at their next two meetings, in June and July. Chair Jerome Powell himself had indicated after this month’s meeting that half-point increases would be “on the table” at the next two meetings.

All the officials believed that the Fed should “expeditiously” raise its key rate to a level at which it neither stimulates or restrains growth, which officials have said is about 2.4 percent. Some policymakers have said they will likely reach that point by the end of this year.

The minutes suggest, though, that there may be a sharp debate among policymakers about how quickly to tighten credit after the June and July meetings. The economy has showed more signs of slowing, and stock markets have dropped sharply, since the Fed meeting.

Government reports have shown, for example, that sales of new and existing homes have slowed sharply since the Fed meetings, and there are signs that factory output is growing more slowly. Gennadiy Goldberg, senior rates strategist at TD Securities, suggested that the minutes released Wednesday might reflect a more “hawkish” Fed — that is, more focused on rate hikes to restrain inflation — than may actually be the case now.

Some officials, particularly Raphael Bostic, president of the Federal Reserve Bank of Atlanta, have indicated since this month’s meeting that the Fed could reconsider its pace of rate hikes in September.

At the meeting, Fed officials agreed to raise their benchmark rate to a range of 0.75 percent to 1 percent, their first increase of that size since 2000. The officials also announced that they would start to shrink their huge $9 trillion balance sheet, which has more than doubled since the pandemic.

The balance sheet swelled as the Fed steadily bought about $4.5 trillion in Treasury and mortgage bonds after the pandemic recession struck to try to hold down longer-term rates. On June 1, the Fed plans to let those securities start to mature, without replacing them. That should also heighten the cost of long-term borrowing.

Powell has said the Fed is determined to raise rates high enough to restrain inflation, leading many economists to expect the sharpest pace of rate hikes in three decades this year. Powell says the central bank is aiming for a “soft landing,” in which higher interest rates cool borrowing and spending enough to slow the economy and inflation. But most economists are skeptical that the Fed can achieve such a narrow outcome without causing an economic downturn.

WATCH: Inequality persists as the U.S. economy recovers from the pandemic

Stock prices have plunged on fears that the Fed’s rate hikes will send the economy into recession. The S&P 500 has fallen for seven straight weeks, the longest such stretch since the aftermath of the dot-com bubble in 2001. The stock index nearly fell into bear-market territory last week — defined as a 20 percent drop from its peak — but rallied Wednesday.

The minutes also showed that some policymakers decided it was appropriate to consider selling some of its holdings of mortgage-backed securities, rather than simply letting them mature. Sales would make it easier for the Fed to transition to a portfolio composed mainly of Treasurys, the minutes said. The Fed did not mention any timing of such sales but said they would be “announced well in advance.”

The Fed has said that by September it would allow up to $30 billion of mortgage-backed securities to mature each month, along with $60 billion in Treasurys. Many analysts doubt that the cap will be reached for mortgage-backed bonds, because mortgage rates having jumped more than 2 percentage points since the start of the year. That means that fewer homeowners will refinance their mortgages because their current loan rates are lower than what is now available in the mortgage market.

Fewer refinancings would force the Fed to sell mortgage-backed securities to maintain its plans to reduce its balance sheet.

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P.E.I. business group sets goals to boost economy — but first it needs workers –



High-speed internet for all communities on P.E.I., increased wages and support for entrepreneurs — particularly women, Indigenous people and newcomers — were part of a new ​​five-year plan announced Wednesday to boost P.E.I.’s economy.

The Partnership for Growth formed in 2019, and over the last few years received input from more than 200 businesses.

The group has created a plan for economic growth that sets specific goals it wants to see met by 2026, such as increasing the Island’s GDP, improving wages and making P.E.I. a bigger player on the global market. 

“It’s now more important than ever to take the long term view, we’re coming out of COVID-19 our focus has been very short term, now we need to look at what are our priorities to make sure that we got back on track,” said Rory Francis, interim chair for Partnership for Growth.

But first, there are short-term issues that need to be addressed, including a shortage of workers in many industries.

Premier Dennis King said it’s important to work with businesses to help attract and maintain those workers.

‘Good blueprint’

“We also have to be a leader in making sure we have the housing for those that we’re going to need to do here, the skills training, there’s just so many components to this where government can be a leader but also a follower, a supporter as well,” he said.

“Government does best when we take our leadership from others and to have a group that has come together like this across so many sectors of the economy I think this gives us a good blueprint for that.” 

The province will continue to focus on immigration and creating business incentives to improve wages, King said.

The partnership has formed a committee that will help businesses figure out how to achieve their goals.

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German economy dodges recession as war, pandemic weigh – Financial Post



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BERLIN — The German economy grew slightly in the first quarter from the previous one, data showed, with higher investments offset by the twin impacts of war in Ukraine and COVID-19 that experts predicted would weigh more heavily in the three months to June.

Europe’s largest economy grew an adjusted 0.2% quarter on quarter and 3.8% on the year, the Federal Statistics Office said on Wednesday. A Reuters poll had forecast 0.2% and 3.7%, respectively.

The reading meant that Germany skirted a recession, often defined as two quarters in a row of quarter-on-quarter contraction, after gross domestic product (GDP) fell by 0.3% at the end of 2021.

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While household and government spending remained mostly at the same level as in the previous quarter and exports were down at the start of the year, investments grew.

Construction investments, boosted by mild weather, were up 4.6% from the previous quarter, despite price increases, and machinery and equipment investments rose 2.5%.

German business morale rose unexpectedly in May as its economy showed resilience, according to an Ifo institute survey published this week that found no observable signs of a recession.

However, there is no upswing in sight either, and Sebastian Dullien, director of the Macroeconomic Policy Institute (IMK), predicted the effect of the war and pandemic-linked restrictions in China – Germany’s biggest trading partner last year, according to official data – would be much greater in the second quarter.

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ING economist Carsten Brzeski said he was sticking with his baseline scenario of a slight GDP contraction in the second quarter after Wednesday’s reading.

“The build-up of inventories and weak consumption in the first quarter, as well as very weak consumer confidence, clearly dampen the optimism that traditional leading indicators are currently conveying,” he said.

A consumer sentiment index by the GfK institute inched up slightly heading into June from an all-time low in May, with household spending burdened by inflation.

The government forecasts economic growth of 2.2% in 2022. (Reporting by Miranda Murray and Rene Wagner; Editing by Paul Carrel and John Stonestreet)

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