Sean Kilpatrick
Stephen Gordon is a professor of economics at Laval University in Quebec City and a fellow of the Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE). He also maintains the economics blog Worthwhile Canadian Initiative and can be followed on Twitter.
The House of Commons Finance Committee is to meet today to ask questions of the Minister of Finance and the Governor of the Bank of Canada.
I don't know what the MPs will want to talk about, but I have a list of questions that they should probably be reflecting upon, along with some answers.
Is the current turmoil in financial markets a rerun of the 2008 meltdown?
No, it isn't. The distinguishing feature of the 2008 crisis was 'counterparty risk': financial institutions didn't know who might suddenly go bust, so no-one was willing to make even short-term loans. That's not the problem today -- everyone knows who is holding those dodgy sovereign bonds. (See here for a good explanation for why 2011 is not 2008.)
What is the short-term outlook?
We already know that the second quarter numbers will not be good, and GDP may have even contracted. Much of this can be attributed to the explicitly temporary disruptions caused by the Japanese tsunami; the outlook for the second half of the year is for continued growth, albeit at a less-than-robust rate.
Should the fiscal stimulus be renewed?
For now, the answer has to be no. For one thing, there are fairly large 'automatic stabilizers' built into the government's tax and spending structure that are already generating tens of billions of dollars of stimulus. For another, experience has shown -- and the most recent episode is consistent with that experience -- that fiscal policy is a clumsy policy tool whose effectiveness is weakened by difficulties in getting the timing right and in targeting spending where it would be most useful. These problems are complicated by the fact that the process can be all-too-easily manipulated for partisan gain, further blunting its impact. Another round of fiscal stimulus is very much a weapon of last resort, and we're not there yet. For that matter, it's not even clear that we were there in 2009.
What should the Bank of Canada do?
Probably what it intends to do, that is, hold interest rates where they are until the recovery gets back on track. If the recovery falters, the Bank has a margin of 75 basis points available for interest rate reductions.
What about the deficit?
Now is not the time to be worrying overly much about the deficit. The spending reduction announced in the 2011 budget are to take effect in 2012-13, and there's no reason to move those cuts up to the current fiscal year.
What should we do now?
Wait and see how things go. A couple of wild weeks in financial markets are too noisy a signal upon which to base a significant change in the government's policy stance.
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