Economic analysis

What Canada's COVID-19 economic stimulus plan should look like when it comes

Stewart Elgie: Three lessons for stimulating a smart, post-COVID economic recovery that puts people to work today building the economy of tomorrow

Stewart Elgie is a professor of law and economics at University of Ottawa, and Chair of the Smart Prosperity Institute

In the midst of the COVID-19 pandemic, it is hard to think very far ahead. But when the health crisis begins to lessen, as it will, we will see a massive government investment to stimulate economic recovery—perhaps the largest since World War Two and the great depression. That day is not far off, and we would be wise to start thinking now about the kind of stimulus effort needed to kick start growth and jobs right away, while also building a better future for Canada.

Drawing on experience from other recovery efforts, there are three main lessons for how to design a smart economic stimulus package.

1. Don’t Panic

That is the first lesson for smart economic recovery (and interplanetary hitch-hiking). But it is hard to do in the midst of a major pandemic.

With unemployment skyrocketing, and the economy in freefall, some are (understandably) anxious to get going on measures to stimulate the economy. But now is not the time for that. This is not your usual recession.  We are deliberately slowing down the economy, as part of social distancing. This is stage one of the response to COVID-19, and the top economic priority (aside from fighting the virus) is to provide basic income support, as we are doing, so people and businesses can weather the deliberate slowdown.

READ: Could the coronavirus financial crisis lead to another populist storm?

Stage two will arise once the pandemic wanes and social distancing is relaxed. Governments will then start shifting their focus to stimulating economic recovery, as we are now seeing in China.  That stage may be a month or more away here, with most of the in-person economy still shut down.  The recovery, when it does begin, will occur in stages—you can’t reboot an economy overnight, and we don’t want to trigger a second wave of COVID-19.  It will start slowly, and ramp up for many months, maybe over a year

So there is no need to panic about rolling out major economic recovery measures immediately. But we do need to think ahead and prepare for how to spark the most effective recovery possible: one that will deliver lasting benefits for Canada.

2. Act short-term, think long-term

As governments seek to stimulate economic recovery, they often fall prey to short-term thinking—looking to spur any kind of economic activity and jobs right away.  While this is understandable, it is not the best course.

As government makes a once-in-a-generation investment in the economy, it is vital that it look ahead and invest in building an economy that is ready for tomorrow, instead of spending large amounts of public money on infrastructure and technologies that will be outdated within a decade. We will not have the fiscal capacity for this kind of massive public investment again for years to come, as we pay down the deficits from fighting COVID-19. In effect, we are front-end loading much of the funding that governments would invest in the economy over the next five to 10 years.  So it is vital that we spend our stimulus dollars building the kind of economy, and creating the jobs, that we want to have in five to 10 years.

Let’s put people to work today, building the economy of tomorrow.

Let’s build better, smarter urban transit systems: emission free buses and trains, bike lanes, and next generation highways, designed for driverless vehicles, with express lanes for high occupancy and electric cars (to cut congestion and pollution), and built from low carbon cement—all made in Canada.

Let’s build next generation energy systems: wind and solar power, energy storage, east-west transmission lines (to move clean hydro power across Canada), and smart grids to boost energy efficiency and reduce costs.

READ: What the Canada Emergency Wage Subsidy means for workers hurt by Covid-19

Let’s get to work replanting trees and restoring natural systems, to make our cities more resilient (to floods, drought, and heat events) and improve quality of life.

And let’s take the same approach in supporting the recovery of all sectors—from manufacturing, to resources, to clean technology.  Public dollars should not go to short-term bailouts, with short-lived benefits. They should be targeted to help Canadian businesses rebuild and retool—by investing in smarter, cleaner technologies and systems that will strengthen their future competitiveness, reduce pollution, and grow the next generation of good jobs.

Stimulus investments should meet two tests: will they spur growth and jobs right away, and will they provide longer-term benefits, for the economy, the environment and Canadian society?

This has two implications. First, we should avoid projects that will not generate jobs quickly, even if they make long run economic and environmental sense. If building a new energy transmission line will require years of permitting and consultation, it should be put off, in favour of ones that are ready to go or can be started within months.

Second, we should not invest in economic sectors or activities that are in decline for structural reasons, or that will cause significant adverse social or environmental impacts.  For example, we should not provide public support for carbon-intensive oil production.  Its long-term economic prospects were waning, even before the COVID-19 crisis and OPEC-induced price fall.  Any support for oil and gas should be directed to help it invest in significantly reducing its environmental footprint and costs.  That will give the industry its best chance for continued viability and jobs over the next 10 to 20 years in an increasingly competitive, low carbon global marketplace.

It will also help Canada meet its climate commitments.  The 2009 economic recovery led to a six per cent increase in greenhouse gas emissions in 2010 from all sectors, setting back the global fight against climate change.  Let’s learn from that experience.

We are about to spend billions of taxpayer dollars to stimulate economic recovery.  Let’s make smart investments: ones we will look back on in five to 10 years, when we are paying off the current deficit, and feel good about—because they strengthened Canada’s economic, social and environmental foundations.

3. Do no harm

This lesson, well known to physicians, also applies to economic recovery.

In the urgency to spur economic growth, some will argue for weakening environmental, health and safety laws, to reduce business costs. This is already starting to happen. The US has just rolled back vehicles fuel efficiency standards, along with a host of other environmental rules.  The Manitoba and B.C. governments postponed an increase in their carbon prices. (Ottawa, to its credit, did not.) And Alberta recently suspended most of its environmental reporting requirements.

This is short-sighted thinking at its worst. It reflects a race-to-the-bottom view of competitiveness that has been widely discredited. Sacrificing our environment and health is not the way to rebuild our economy. It would compound our growing economic deficit by adding an ecological deficit.

Plus it would spark the wrong kind of recovery, by promoting outdated, harmful business practices. We want to help firms prepare for the economy of tomorrow—in which the most innovative, efficient, low carbon performers will generate the jobs and wealth.

Doing that requires a carrot and stick approach: stronger (not weaker) environmental and health rules, paired with public support to help businesses invest in smarter, cleaner technologies and practices as they rebuild.  To stimulate new construction, for example, we should combine higher standards with targeted incentives to ensure we are making the high efficiency, greener buildings of tomorrow, while creating jobs and growth today.

A perfect example of what to do, and not do, comes from the U.S.  In the 2009 recovery, the U.S government provided the failing domestic auto industry with $80 billion in support, and tied it to meeting tougher emission standards that required them to build cleaner, more fuel efficient vehicles. These measures were generally successful; they helped the big three automakers not only survive the downturn, but become more profitable and competitive, and lower their emissions.

By contrast, President Trump is now doing the opposite.  His recent decision to weaken vehicle emission standards means the US will be making a less efficient, more polluting fleet of cars and trucks in coming years.  That is bad for the climate, and for the sector’s long-run competitiveness—because it reduces the incentive for US auto manufacturers to invest in making the lower emission vehicles that are the future of the industry globally.  Relaxing standards may reduce costs a bit today, but in hindsight it will look like a poor decision, for the environment and economy.

Let’s learn from experience.  When we turn the corner on the COVID-19 crisis, in the coming weeks and months, Canada will make a once-in-a-generation investment in economic recovery. Let’s make sure we stimulate a smart recovery—one that puts people back to work today, while building a stronger, cleaner economy for a better tomorrow.