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The government ignored early signs of bad times

A prudent government would have started building less upbeat projections into its planning far sooner


 

The federal government’s standard line on why they took so long to react to the economy’s plunge into recession, and why they denied until the last possible moment that massive deficits were looming, is that nobody saw the dark clouds gathering.

Ted Menzies, Finance Minster Jim Flaherty’s parliamentary secretary and increasingly the Tories’ main voice on the economy, shot back at the Liberals yesterday, “As much as members of the opposition would like to suggest that they knew what was coming, they knew nothing more about what was coming than anybody did.”

It’s true that there was no consensus forecast, through most of last year, that saw Canada suffering a deep recession in 2009, and a return to staggering deficits in Ottawa. However, it’s false to suggest that danger signals were utterly absent from reputable projections last year.

In fact, the Prime Minister himself (as he boasts when it suits his purposes) explicitly warned of rough economic days ahead in his year-end interviews in the final days of 2007, so much so that we headlined our take on his message “Not-so-happy New Year.”

The following month, Marc Lee of the left-leaning Centre for Policy Alternatives became the first economist I know of to explicitly flag the strong possibility of a return to deficits, in a CCPA report that didn’t get the attention it deserved at the time.

By the time of the February 2008 budget, though, the possibility of a deficit was clear. The consensus view among close observers of the federal fiscal situation was that Flaherty had left himself vulnerable should the economy weaken, which was looking increasingly likely. “The door is wide open to have a budget deficit if things switch from bad to worse,” Clement Gignac, chief economist at National Bank Financial, was quoted as saying by the Globe and Mail.

By spring, I was hearing enough talk of a return to deficits to write this feature on the prospect for Maclean’s, in which I reported that economists expected deficits, but small, temporary ones (ah, for those innocent, optimistic days…). The big issue was how much red ink might damage Conservative political fortunes, a question that was obviously also worrying Tories.

In June the Organization for Economic Cooperation and Development downgraded its outlook for the North American economy, including its growth forecast for Canada. The OECD still didn’t see an outright recession in the offing for Canada but did warn that “the general government fiscal balance may show a small deficit as well, as both tax cuts and the business cycle eat into government revenues.”

Come the fall, of course, the financial meltdown made what had looked pessimistic in the spring seem rosy in retrospect. By the time the election got rolling in September, mainstream media reports, like this CBC piece, “Are deficits in our near future?”, should have left little doubt about the possibility.

Well before Canadians voted on Oct. 14 it was becoming very difficult for Stephen Harper to maintain his campaign stance that Canada was not facing a recession and the government would not run a deficit. More than a week before election day, for example, Scotiabank’s economists forecast recessions for both Canada and the U.S.

Nobody can reasonably expect governments to see the future. What they can expect is for reasonable assumptions, even cautious ones, taking into account accumulating evidence. That’s not what we got last year, which led to the economic policy scramble of early 2009. A prudent government would have started building less upbeat projections into its planning far sooner.


 

The government ignored early signs of bad times

  1. Marc Lee of the left-leaning Centre for Policy Alternatives became the first economist I know of to explicitly flag the strong possibility of a return to deficits, in a CCPA report that didn’t get the attention it deserved at the time.

    One wonders how it was assessed by other economists at the time.

    We need more blaming-and-shaming of those economists who don’t seem all that comfortable with analyses that appear novel. I’m not sure who those are, since I don’t generally pay attention to their quackery anymore.

  2. Anyone who has been reading Calculated Risk for a year or more can only be completely unsurprised at most of the recent economic news. To say that nobody saw it coming is absurd.

  3. Isn’t a sure-sign that the word was out, deficit-wise, when Harper purged himself of another promise and broke the fixed-election date law? Seems to me that he saw Oct as the last chance to maintain that straw-man image of being fiscally responsible, deficit-deflecting uber-robot before the crap hit the fan.
    However, he continues to be given day parole by most of the MsM. Good on Mr Geddes (and make sure to bring this up to Billy Goode, conservative soft-pitch man!) for noticing.

  4. Politicians were debating this in the House over 12 months ago. Just look at the PM from a year ago last Thursday…
    “Let me tell them that the way to manage this economy through difficult global times is not as the Liberal Party would do: to drive us into deficit.” Stephen Harper 05 Feb, 2008.

  5. Mark Lee is a talented guy, but he’s not a Taleb-style prophetic genius. He didn’t predict the severity of the downturn, but he did raise a legitimate red flag that the government should prepare itself for the possibility of a less rosy economic forecast. One of his biggest concerns in the event of an economic downturn was that the Harper would slash programs rather than run a deficit or rescind tax cuts.

    Geddes makes a good case that the gov’t ignored the warning signs to a much greater extent than they are willing to admit. Sadly, this was the case for all G7 countries. I have a feeling that the same scenario will be played out 15 or 20 years from now, because governments in general seem very limited in their ability to learn from past mistakes.

    • I have a feeling that the same scenario will be played out 15 or 20 years from now, because governments in general seem very limited in their ability to learn from past mistakes.

      And Alberta will be leading the way, once whatever oil sands megaprojects, still on the books, are completed. Probably well before 15 yrs however. The front page story on today’s G&M foreshadows what will happen:

      Western Canada hit hardest by decline
      B.C. and Alberta see swifter, sharper downturn than other provinces as housing slumps and bankruptcies soar

      Those that lived through the boom and bust of the 80’s saw this coming. It was only a matter of when – irrational exuberance.

  6. There were a lot of signs that the economic skier was going downhill. Few expected the downhill run to gather such speed, though and it appears Harper was not one of the few.

    Too bad the skier hasn’t reached the bottom yet.

  7. “The federal government’s standard line on why they took so long to react to the economy’s plunge into recession, and why they denied until the last possible moment that massive deficits were looming, is that nobody saw the dark clouds gathering.”

    I assume when Flaherty says that no one saw this coming, he is referring to the mandarins at Finance. Economists have successfully predicted ten of the last four recessions so there will always be some economist saying I saw this coming, you should have listened to me. Everything I have read says economic conditions went south in mid to late Oct and many were caught unawares. I think what’s happening in the US, which does not seem to be recovering even tho they have tried a variety of policies and thrown trillions of dollars at the problems, is what is screwing up predictions up here. Americans don’t have a clue to what is happening, or how to go about fixing it, and that’s leading to problems for governments around the world.

    • jwl, a lot of people still see all this as a normal burst-of-a-bubble business cycle recession event that, if we just hunker down and watch our pennies and maybe blame poor people once in a while , will all go away.

  8. It fits with the Harper style of ‘we don’t believe in science’ schematic, ‘you can’t tell me what i already know’ sensibility. Those mandarins who happen to read the news were likely told to keep it to themselves.
    Whether his name is mud in your book or nostrodamus II, Garth Turner has been talking about his for a long time (two years long), and he wasn’t some lone loon.

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