|Montreal, September 27, 2003 / No 129|
by Harry Valentine
In recent months, news media reports have left no doubt as to who will become Canada's next prime minister. The mainstream news media have done a spectacular job in attiring the prime minister presumptive in the robes of an omniscient emperor, who after taking office is expected to initiate some spectacular and breathtaking economic strategies in Canada. However, there is also the distinct risk that the emperor's robes could become invisible within a few months of his ascension to power.
If present economic trends continue for the next six months, Paul Martin
may find himself with limited room to manoeuvre in matters pertaining to
the economy. One of the ways in which governments have traditionally influenced
economic developments has been through manipulating interest rates. The
American bank rates are near a 50-year low, while Canada's bank rates are
not too far behind. It is an age-old theory that advises that lowered interest
rates increases commercial borrowing, indirectly stimulating "aggregate
demand" and creating new economic growth.
The low interest rates of the past decade did indeed propel certain sectors in both the American and the Canadian economies into an economic boom, mainly in the high-tech, telecommunications and information processing sectors. The same low interest rates, which were well below the natural market rate of a free market, also propelled both economies into a malinvestment boom that resulted in the high-tech economic bust and general economic slowdown. During previous busts, the central banks allowed interest rates to rise, allowing prices to re-adjust (downward) as the market rectified itself by liquidating the malinvestment of the preceding boom that caused the bust. However, during the recent bust, the US Federal Reserve kept its interest rates artificially low, preventing the price re-adjustment, or "deflation," from occurring.
This action was in response to calls by loyal and politically influential pro-Keynesians in both Canada and the USA sounding the alarm bells concerning deflation. They called on the central banks to lower interest rates as a means by which to combat the threat of deflation, as well as stimulate economic renewal. One very prominent Canadian making this call was Prof. Harold Chorney from Concordia University. While Keynesians believe that lowered interest rates would prevent deflation, their influential call may also have had the effect of postponing the inevitable until after the new prime minister takes office in early 2004.
Keynes' debunked theories
At present, the prime minister presumptive is being idolized by the mainstream news media by having accolades bestowed on him for his perceived acumen in business and in economic matters. When he enters office, Canada's largest trading partner, who buys 85%-90% of Canadian exports, could again be in the midst of yet another economic slowdown. The US Federal Reserve has lowered interest rates to the point where it has literally run itself out of options to lower rates any further. An American economic slowdown will inevitably spill over into Canada and the new prime minister will likely face calls that he initiate new policies to restart the Canadian economy.
It is likely that he may call a meeting of politically well connected economists and seek advice from them, advice likely to come straight from the pages of Keynes' General Theory, despite every theory written in that book having been refuted and debunked long ago. The new prime minister will more than likely hear about the alleged downside of deflation (dropping prices), which will have to be avoided at all costs. He may also hear about the alleged benefits of lowered interest rates as the means by which to not only stave off the threat of deflation, but to simultaneously stimulate economic renewal by raising "aggregate demand," which in turn should restart the economy. He may hear this despite the fact that this very same strategy has been going nowhere in the USA or in Japan.
The central bank could literally lower interest rates to near zero, where no further lowering would be possible. If the bank rates are that low and the economy stagnant as the new prime minister takes office, he could instead find himself facing calls for the government to spend massively as a means to get the economy moving. The government of Japan has spent heavily on public works projects over the past decade, with no sign of real economic recovery on the horizon, the result of their loyalty to the debunked economic doctrines of Lord Keynes. Despite this Japanese precedent, Canada's pro-Keynesian economists may be expected to call upon the new prime minister to spend heavily on public works projects, perhaps even advising him to invest tax revenue into selected private business interests as a means of stimulating the economy.
Canada's economy may either be stagnant or advancing very slowly during the first few months of the new prime minister's tenure in office. He will undoubtedly be expected to do something regarding the state of the nation's economy. The mainstream news media has been elevating his stature on business and economic matters, leaving him little choice but to initiate policy action in the economy. A hands-off approach to economic development may not be an option for Mr. Martin, not in a nation whose hopes and expectations of him have been so built up in the mainstream news media. At that point in time, conditions in the economy may be such that the traditional approaches of stimulating the economy will be quite useless.
If he were to take really effective policy action in support of economic renewal, the future prime minister's challenge would be to break from traditional mainstream Keynesian economic thinking and chart an entirely different course. Such an approach could cost him political support and either make or break his perceived reputation in economic matters.
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