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Monday, January 5, 2009

The looming Depression

Posted By on Mon, Jan 5, 2009 at 9:52 AM

Nobel prize winning economist Paul Krugman puts it bluntly this morning:

Let’s not mince words: This looks an awful lot like the beginning of a second Great Depression
The column nicely frames the debate as a contest between Keynesian and Friedmanic ideologies; in terms of the choices facing us now, it's a battle between continued monetary policies (which got us into this mess in the first place) or large deficit spending to stimulate the economy. Krugman says the latter choice is the correct one, but:
Here’s my nightmare scenario: It takes Congress months to pass a stimulus plan, and the legislation that actually emerges is too cautious. As a result, the economy plunges for most of 2009, and when the plan finally starts to kick in, it’s only enough to slow the descent, not stop it. Meanwhile, deflation is setting in, while businesses and consumers start to base their spending plans on the expectation of a permanently depressed economy — well, you can see where this is going.So this is our moment of truth. Will we in fact do what’s necessary to prevent Great Depression II?
Now of course he is discussing the United States and not Canada, but our economies are so intertwined, there's no reason to think Atlantic Canada is immune, especially with our export economy. We, too, are staring Depression right in the face. But our leaders are living in some Pollyanna world, and are frankly delusional:
"I believe that 2009 can be a good year for Nova Scotia, but I believe there are some difficult decisions we are going to have to make to be fiscally responsible."" MacDonald said the odds of Atlantic Canada fending off recession are better than in other parts of the country, but that does not mean Nova Scotia won’t be impacted by the downturn in the global economy.
Macdonald is doing the exact opposite of what he should be doing: he's balancing the budget by cutting salaries and expenses. Now is the time for deficit spending. We should be embarking on large capital projects--- building hospitals and transportation systems, investing in schools and universities, putting people to work.Local governments also have a roll to play. Halifax has the opportunity to begin building a new library, although city council is moving too slowly on that project for it to have an immediate stimulus effect. Still, there are lots of little things that, when they're added up, can do a lot of good: the proverbial pot-hole filling, the sidewalk fixing and other infrastructure projects that have been put off for lack of funding, etc. If nothing else these projects can be front-loaded in existing budgets, but they could also be moved forward through borrowed money and deficit spending.

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