Yahoo Finance Terence Corcoran: From Stiglitz to Statcan — taking the lockdown path to centrally planned productivity
The top chart below allegedly defines a major Canadian economic problem. Published last week by Statistics Canada, it’s one of numerous similar graphics using various statistics that are said to represent a national productivity crisis requiring major changes in government policy.
As the data line makes clear, the starting point for the GDP-per-capita crash in early 2020 was a direct result of Ottawa’s COVID-19 lockdown policies that “left real GDP per capita seven per cent below its long-term trend, equating to a decline of about $4,200 per person.” The Statcan paper never uses the word lockdown and refers instead to “the COVID-19 pandemic” as a causal factor, thereby implying the virus and its medical impact, rather than lockdown policies, triggered the productivity crash.
The same theme was outlined last month by Bank of Canada Deputy Governor Carolyn Rogers, who said that Canada faces a national productivity emergency and it is time to “break the glass” and fix the problem. The Bank of Canada uses the same analytical lockdown dodge. In her speech Rogers claimed “the pandemic upended economies around the world and sparked the biggest global inflationary episode in decades. This led central banks — including the Bank of Canada — to raise interest rates sharply so that we could get inflation under control.”
That’s not quite what happened. Faced with the medical pandemic, Ottawa ordered unprecedented social and economic closures to “flatten the curve” of contagion. To offset the inevitable economic decline, government spending soared and the Bank of Canada unleashed a major monetary expansion, claiming at the time that it could do so with minimal inflationary disruption. The Bank was wrong.
This public policy alignment of Statcan and the Bank of Canada raises questions. Both institutions claim the pandemic exposed major underlying economic problems that call for a rethink of industrial, competition, immigration, housing and other policies. Policy changes are definitely needed, but is this the role of the country’s official statistics collector — telling governments what policies are needed? Or of a central bank, whose major role is to maintain stable inflation?
The two institutions are not alone, however, in attempting to influence government policy around claims that the pandemic lockdown policies did not cause problems but in reality exposed underlying and previously unidentified weakness in global and national economy structures. One of the leading promoters of that view has been U.S. Nobel economist Joseph Stiglitz. As early as 2020, Stiglitz wrote that the pandemic had “laid bare” the need for “a comprehensive rewriting of the rules of the economy.”
Globally and within nations, said Stiglitz, we have an economy “rife with market power and exploitation.” In a 2022 paper he elaborated on themes mirrored in the reports from Statcan and other Canadian policy wonks. The post-pandemic inflation balloon was not caused by excess demand created by monetary and fiscal policies but rather by failure of the “supply-side” of national economies: low investment, failure to build capacity, inadequate labour laws. “Another important factor,” Stiglitz added, “is the increase in market concentration, which has generated greater market power; the current (pandemic) circumstances have provided a prime opportunity for a greater exercise of that market power.”
Stiglitz called for a tax on “excess” corporate profits, with the revenue used to alleviate some of the supply shortages. He did not mention capital gains tax increases specifically. He also enthusiastically endorsed Joe Biden’s Inflation Reduction Act — and the sort of industrial policy moves Canada is now following — as a “landmark legislative achievement.” Last month, Stiglitz added a new book — The Road To Freedom: Economics and the Good Society — to his massive production of anti-market works. The title is an obvious riff on Nobel economist Friedrich Hayek’s 1944 free-market classic, The Road to Serfdom.
In Road to Freedom, Stiglitz argues that post-pandemic shortages, inflation and unemployment were the product of free-market failure rather than state interventions and bungled monetary policy. When COVID struck, everyone turned to the government to save the economy “and it worked remarkably well.” Therefore, he says, we need more government. “It wasn’t a one-time thing,” he claims. “As the world faces the existential crisis of climate change, there is no alternative but government action.”
As with Stiglitz, Statcan and the Bank side-step the role of monetary and fiscal policy for the post-pandemic inflation and growth problems. They argue, implausibly, that the productivity crash is actually the result of a range of underlying flaws in the market structure of the Canadian economy.
Both the Bank and Statcan highlight the weakness in Canadian investment and competition as major drivers of the productivity crisis. In her speech, Rogers cites Statcan as an authority. “Statistics Canada,” she said, “published a report last month that draws a link between decreasing competition within Canada and declining investment levels.” She also hinted at industrial strategy measures. One way to improve productivity, she said, “is to have the economy focus more on the industries that add greater value than less-productive activities.”
The focus on lack of competition fits in with prevailing views. We are told daily that the food industry, telecommunications and financial markets are uncompetitive sectors and intervention is needed. Statcan and the Bank seem to agree. But another report, this one from the Centre for the Study of Living Standards late last year, raises doubts about the effect of competition. It compared the productivity performance of various Canadian corporate sectors since 2000 and concluded that the industries with “the largest contributions to productivity growth over the period were the finance and insurance sector, the wholesale trade sector, the manufacturing sector, the retail trade sector, and the agriculture, forestry, fishing, and hunting sector.” The presence of Canada’s allegedly uncompetitive financial and retail sectors (hello, Walmart, Loblaws and Amazon!) as generators of productivity improvement flies in the face of the competition theme.
Missing from the latest Statcan and Bank of Canada productivity comments is any reference to interprovincial trade barriers. It’s a confusing issue. Free-trade logic and a number of studies suggest that tearing down trade barriers between provinces would boost growth and productivity.
But that claim is also open to debate, or at least discussion. Consider the lower chart from the Statcan report. Investment per worker declined in Canada after 2015 “and has not recovered.” The decline in Canadian investment, however, is driven mostly by other economic developments. In 2015 the price of crude oil dropped from US$120 to US$50. Other basic commodity prices — the backbone of Canada’s economy — also fell sharply. The consequent hit to investment demand in the resource sector is not surprising.
As Chart #2 reveals, investment per worker began to rise and was heading higher in 2019 until it hit 2020 and the global lockdowns. Investment never had a chance to recover, as it would have, especially with the increase in Canada’s population before and after the pandemic. Where would the investment trend have gone without the lockdowns, as economic players worked to capitalize on the population stream ready to create a new economy?
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The great growth opportunity still remains as millions of new Canadians join an economy already populated by productive individuals and enterprises. What they need is lower taxes, open markets, freer trade, reduced regulation and an end to deficit spending. But the Stiglitz-Statcan-Bank-of-Canada plans seem to favour the opposite. Their focus is to maintain and expand interventionist industrial and regulatory policies based on the false claim that the inflation, slow growth and falling productivity of the past four years was caused by market failure rather than government policies
