Writing in the Financial Post, MLI senior fellow Philip Cross explains why the naysayers keep getting it wrong on economic growth. For example, losses in employment in Canada since 2009 have been temporary blips, but "Did people learn not to overreact to one month's data? Of course not", writes Cross. In the U.S., many feared economic disaster would result from budget cuts but while "government stimulus was withdrawn in line with the CBO estimates, the fiscal drag was offset by increased consumer spending on housing and autos, leaving overall growth unaffected", Cross points out.
Philip Cross, Special to the Financial Post, 05/11/13
Insecurity is imprinted in human DNA, especially concerning our physical and financial health. We regard our standard of living as mysterious and precarious, since for most of history humans were one bad crop away from famine. This is one reason every transitory dip in the economy is greeted by a chorus of clucking from Chicken Little analysts and journalists.
In Canada, monthly employment has fallen seven times since the recovery began in 2009. The media and many analysts treated each of these episodes as a possible augur that we were sliding back into recession, or even that we had never really put the recession behind us. In every instance, the monthly dip proved to be a transient event, with growth quickly resuming. Did people learn not to overreact to one month's data? Of course not.
South of the border, the tightening of fiscal policy and then the shutdown of the U.S. government were supposed to dampen growth or even push the economy back into recession, according to reputable analysis by the Congressional Budget Office. Instead, growth continued unabated.
Beyond these inevitable short-term gyrations of the economy, there is a belief that the underlying sources of our growth cannot be sustained. Skepticism about the decade-old resource boom unjustifiably has been its constant companion. Recently, for example, University of Ottawa professor Miles Corak wrote "I don't see commodity prices increasing indefinitely and don't see the last 15 years revealing the changes in the underlying structure of the economy." Actually, these structural changes can easily be seen by reading your newspaper.
A series of announcements last week showed that the decade-long boom in commodities continues to radically reshape Canada's economy. Suncor, Shell and Exxon separately announced plans to expand oil sands production by 410,000 barrels a day, which easily could generate over $10-billion of income a year for Canada. To transport this oil, Enbridge announced plans for a $1.6-billion pipeline to carry 480,000 barrels of diluted bitumen from Fort Hills to the oil hub at Hardisty, and a $1.4-billion pipeline to carry diluent from Edmonton to the oil sands. Meanwhile, the ground was broken for the $1.3-billion Brookfield Place tower in Calgary, which Cenovus admitted it needed to build partly to attract workers dazzled by the Bow Tower building.
In my 36 years at Statistics Canada following every twist and turn of the economy, I don't recall a single week where firms committed to so many large projects taking years to build and generating billions of dollars for decades to come. More extraordinary, all these projects are located in one province (while Alberta welcomed this flood of investment, the big news in Quebec last week was that the government formally abandoned its commitment to balance its budget).
The error skeptics usually make about growth is thinking about the economy like an accountant. They reason that if resources are the driving force of growth today, an end to the resource boom would mean little or no growth tomorrow. Even in the unlikely event that resources stopped surging tomorrow, no thought is given to what other industries would supplant resources as the engine of growth. The resource boom was completely unexpected, its growth inevitably leading to a shift from other industries such as manufacturing. The reverse could also happen. Or a completely unexpected surge in another industry could supplant natural resources. Two decades ago, nobody foresaw the Internet. Prudent economists are appropriately modest about their ability to predict the future better than firms, who have their skin in the game.
The same mechanical approach to growth is on display in the U.S. The government had contributed a large part of growth in the recovery. Therefore, following the accounting mentality, removing this stimulus would dampen growth, possibly tipping the economy back into recession. This accounting of growth was set out by the CBO, and its forecast was quoted approvingly by Ben Bernanke, head of the Federal Reserve Board. Instead, although government stimulus was withdrawn in line with the CBO estimates, the fiscal drag was offset by increased consumer spending on housing and autos, leaving overall growth unaffected. Nor was rising household demand for big ticket items a fluke unrelated to shrinking federal debt. Federal debt as a share of GDP fell in 2013 at the third fastest rate in the post-war era. The prospect of a lower fiscal burden to taxpayers in the future encouraged households to spend more now.
The dynamics of economic growth cannot be understood by projecting growth in each sector and then adding them up. Sectors interact with each other, and changes in the fortunes of one often have surprising repercussions on others. Economically, we are not always on the precipice, constantly at risk of falling into the alligator pit of recession. The impulse to grow and expand is the natural state of business and the economy.
Philip Cross, a Senior Fellow at the Macdonald-Laurier Institute, was formerly Chief Economic Analyst at Statistics Canada.
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