Louis-Philippe Rochon: Why Canada needs bigger deficits

There have been some contradictory reports lately concerning the performance of our economy, which may have left Canadians confused. One month we are up, the next we are down. But from where I stand, there is no confusion: this is how a struggling economy performs.

In economics, there is this really awful expression called "a dead cat bounce," which refers to an economy's temporary positive performance compared to its overall direction. Imagine throwing a dead cat from a rooftop, and upon hitting the pavement, it bounces. You may be inclined to yell out loud, "It's alive!" Sadly, it isn't.

This applies to economics: one good month of economic data does not a recovery make.

After a recession in the first half of 2015, the economy has been wobbling along. But in the last few months, it has been performing better. In fact, in January, the economy recorded a healthy 0.9 per cent growth rate. On this news, many economists and pundits rushed to announce the economy had turned the corner, and the recovery was well under way.

Yet these statements were at odds with my own understanding of the Canadian economy: a fragile private sector that stubbornly refuses to undertake important investments, an over-indebted working class, and a slowing world economy.  This all begs the question: if the recovery was underway, where would growth come from?

Recently, two rather ominous pieces of the economic puzzle served to throw cold water on reality: the economy is not performing well at all, and January may just prove to be a dead cat bounce.

First, February's growth numbers are not looking as good, and in fact, our economy has contracted, albeit slightly, but contracted nonetheless.

Growth in February was reported by Statistics Canada to be –0.1 per cent, with goods-producing industries leading the way to negative territory. There is now news that manufacturing jobs are on the decline again.

Second, our trade numbers are terrible, and in some ways, have not been this bad since the early 1990s. Despite the low Canadian dollar, Canadian exports have decreased in March by 4.8 per cent.

Our exports to the U.S. have decreased by an astonishing 6.3 per cent in March, further proof of the weakening U.S. economy. We now have the lowest trade surplus with the U.S. since 1993.

Signs of trouble

So what is going on?

It's rather simple. The crisis we are living through is a crisis in aggregate demand: economies grow when demand is strong. Yet, demand arises from only four possible sources: households (consumption), the private sector (private investment), the public sector (government expenditures) and growth in the world economy (the export sector). On all counts, there are signs of trouble.

Consumers are stretched thin: high debt ratios inevitably mean lower growth in the future. The private sector is not investing, the result largely of intense pessimism about the future in a world of uncertainty, as Keynes told us some eight decades ago. And the world economy is showing real signs of slowing down.

Even in terms of government expenditures, things are not as good as we think: despite the Liberals' recent stimulus, government expenditures as a percentage of GDP is far less important today compared to a few decades ago. This means fiscal policy has to double down to have any effect.

So, what does this all mean? Quite simply, we are witnessing another crisis in the making, unless we take the necessary steps now.

And our options are limited: we can't force the rest of the world to buy our goods. We can't force the private sector to invest. We can't force consumers to increase spending by indebting themselves even more. The only source of growth left is government spending, over which we have control.

So unless governments are prepared to inject a lot more money into the economy, we are facing a very long period of slow growth and another possible crisis. This is the emerging consensus among a great number of economists today.

The economic ball, so to speak, is in the government's court. To get the economy moving again, the Liberals will have to double the current spending — at least.

Right now, the deficit is only about 1.5 per cent of GDP, which is minuscule. This means we have considerable room to spend. But will they have the political stomach to do what is so desperately needed?

Louis-Philippe Rochon is a professor at Laurentian University and co-editor of the Review of Keynesian Economics.