So, you're feeling kind of sluggish today. Actually, when you think about it, it's been going on for a while now. You're waking up tired, going to work tired, getting home tired, going to bed tired, only to wake up – well, tired again.
What do you do A couple options might spring to mind.
One would be to make your life easier, by changing it in such a way that you can get up a bit later, work a bit shorter, or have a less stressful job. In other words, lower your energy costs so that you have more energy to spend.
Another, more difficult approach would be to get in shape. Hit the gym. Eat healthier. Get a better bed. In other words, spend your energy more efficiently, so that (again) you have more energy to spend.
Which brings us, naturally enough, to the subject of the Canadian economy, which has been feeling sluggish for years now. Our policy makers, on both the fiscal and monetary side, are trying to find solutions. One side is trying to help get the economy in better shape. The other side is busy lowering costs to drive demand.
On the fiscal side, we have stimulus from the federal and some provincial governments, largely in the form of a truckload of infrastructure spending, which is supposed to strengthen the backbone of the economy so it can function better. And we're about to spend more on this stuff. In his economic update this week, Finance Minister Bill Morneau vowed to boost the federal infrastructure commitment to an extra $80 billion over the next 11 years. (That's up $20 billion from the budget's $60 billion over 10 years.)
On the monetary side, we have had (hopefully) low low interest rates from the Bank of Canada for the past seven years. This is supposed to make ease the economy's burdens so it can grow, and yet it is still foundering. In last month's Monetary Policy Report, the Bank revised down its estimates for growth in both 2016 and 2017. In response, it is openly contemplating cutting the target overnight rate below the current 50 basis points. At his news conference after the most recent rate decision, governor Stephen Poloz upset the apple cart when he disclosed that the Bank had come very close to easing. That's raised speculation of another cut coming, probably next year.
Here's the problem, though. Monetary stimulus hasn't been working in Canada (or anywhere else, for that matter), and there's little reason to believe that more of it will work better. Meanwhile, fiscal stimulus, in the form of infrastructure spending, is no doubt necessary, but it's not likely sufficient to jump-start the economy.
Like getting healthy, infrastructure takes time – a lot of it – to have an economic impact. The Liberal plan foresees spending on all those schools and hospitals and bridges and broadband networks spread out over a dozen years – long enough for three more elections. The biggest forecast yearly spend, in 2018-2019, is just less than $18 billion, or a fraction under one per cent of GDP. That is not going to set the world on fire.
Of course, there's also the supposed multiplier effect of better infrastructure (more efficient trade, commerce and innovation), but that will take many more years to be measurable.
Like Morneau, we'd all like to see our sons and daughters enjoy a modern, efficient infrastructure base. But we'd also like to see them get jobs – you know, sometime before mid-century. There's not much point in a new subway system when you don't have somewhere to commute to.
On the monetary side of the ledger, would another cut work Well, setting aside the problem that nearer-to-zero rates would throw gasoline on overheated real estate markets and household debt levels, it's not clear that the desired benefits – devaluing the loonie (helping exporters) and spurring business investment – would materialize.
Japan and Europe are experimenting with negative interest rates in the same hopes, but to little – and perhaps opposite – effect. Japan has been heartily trying to devalue its currency, but the message of sub-zero rates (roughly translated as “We're in deep trouble!”) has only spurred investors to buy up bonds, boosting the yen. Meanwhile, negative rates are hurting lenders' bottom line, which tends to make them less willing to lend, which is another drag on growth.
There is a third way to try to get out of the economic doldrums, which none of our policy makers are proposing: aggressive, immediate fiscal stimulus. Kind of like getting up in the morning and downing a sextuple shot of espresso mixed with Red Bull. For Canada, that would mean tax cuts. Business investment has been terrible, so corporate tax reductions would seem to make the most sense. (Just for good measure, I'd throw in a big commitment to eliminating regulatory burdens and unnecessary tariffs.)
But let's face it: That's not going to happen in the current political environment. So what we're left with is a situation. Central bank effectiveness is tapped out. Infrastructure spending won't have enough immediate effect. So the economy stays where it is: tired, slow and looking for a place to lie down.