On Christmas Eve

On Christmas Eve, it’s well to think of how severe this recent recession has been. Here in Canada, employment levels are still well below the pre-recession numbers, and although some recovery in employment has occurred, one is left to wonder when and if we will ever get back to pre-recession levels.

As the graph above shows, the adjusted unemployment rate in Canada is beginning to rise again. This is a worrisome sign, the more so since the federal goverment has been promoting a policy of fiscal austerity which is supposed to eventually result in economic expansion and growth.

The current infatuation with “expansionary austerity” is likely to have a dampening effect on any economic recovery which may be taking place. Lessened spending is antithetical to what is needed to stimulate greater aggregate demand and growth. Contractionary economic policies are just that – contractionary – and any attempt to “spin” them as otherwise goes against all macroeconomic logic.

In the face of depressed demand, firms are likely to maintain an ultra-cautious approach to investment and spending. The latest Canadian GDP numbers for October show a flatlined economy, reversing four previous months of moderate expansion. Since the Canadian economy is now heavily resource-based, it is more susceptible to lower aggregate demand for resource-based commodities.

Sound macro requires us to adopt a stimulative approach to the current situation. Anything that will help the marginal propensity to consume should be undertaken. Investments in infrastructure and education that will pay back in the future should be made. Debt reduction can be undertaken in the future once the economy is back on track and unemployment levels reduced.

Firms should not get too comfortable if they are showing good profit levels, as many are. Many firms have ehnaced their profitability in this recession due to cost-cutting and downsizing. This hardly leaves such firms well-positioned for the future when demand begins to return. These firms will be faced with competing in a changed environment which will require new thinking, new offerings, and new capabilities. Extrapolating what worked in the past into a new environment is not a good strategy for building competitive advantage.


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