According to federal officials, the Trudeau government has finished with the emergency response phase to COVID-19 and now is moving onto the “recovery” phase. But the prospects for a healthy recovery are not looking good. The fact is that the coronavirus pandemic has only served as the knockout punch to a weak and feeble system.
In late April, a Reuters poll of 25 top economists predicted that Canada’s economy was set to contract by 37.5 per cent this quarter and 9.8 per cent this year. The parliamentary budget officer assumes an even more pessimistic contraction of 12 per cent. The International Monetary Fund in a report on April 14 foresees this being the worst economic crisis in Canada since 1921. In the words of Jason Kirby of Maclean’s magazine, “Call it the month when the Canadian economy as we knew it died.”
Feet of clay
Acting as the coach of a losing hockey team, the governor of the Bank of Canada, Stephen Poloz, did a virtual speech on April 29 to try to pump the team up. Like a priest called upon to offer spiritual solace to a dying man, Poloz stated: “Just as a healthy, fit individual is more likely to shake off COVID-19, so is the Canadian economy.” Poloz claims that the situation is “more like a natural disaster than a recession.” He therefore draws the conclusion that we can expect “reasonably swift return to growth for significant segments of the economy.”
However, the Canadian economy is far from “healthy” as Poloz claims and it would be wrong to think that all of the problems are the fault of COVID-19. In fact, the fundamentals of the Canadian economy were in a poor state prior to the pandemic. While Canada was the first of the major economies to emerge from the 2008-2009 crisis, the same elements which were previously strengths have now turned into its Achilles’ heel.
In 2008-2009, the Canadian housing bubble was only just developing. In addition, the dizzying ascent of the Chinese economy acted as a cushion for the Canadian economy which sucked up natural resources like oil, driving the price up to more than $100 a barrel. But now these strengths have turned into their opposites.
The Canadian housing market is now one of the most overinflated on the planet. Median two-storey home prices at the end of 2016 stood at $1,586,991 in Greater Vancouver and almost $1 million in the Greater Toronto Area. Rental prices have skyrocketed to $2,100 and $2,300 on average in Vancouver and Toronto respectively. The high oil prices which allowed the Canadian economy to weather the storm of the last crisis are now a distant memory. In 2015 the price of oil collapsed, sending the Albertan economy—once a powerhouse—into a tailspin.
More and more it became obvious that the Canadian economy was running on fumes, or more specifically, debt. Personal debt has increased consistently over the past 30 years to a record 176 per cent of household income in late 2019. The total amount of household debt now stands at a staggering $2.21 trillion or 116% of GDP. As Marx explained, the capitalists can use debt to artificially expand the market beyond its natural limits, but this only delays the inevitable. Already in the fourth quarter of 2019, before the spread of the coronavirus, Canada’s economy sputtered along at a paltry 0.3 per cent.
Even business investment largely ground to a halt, with capitalists preferring to sit on more than $1 trillion in dead money. This was the situation before COVID-19 hit. As Toronto-based economist David Rosenberg explained in a Maclean’s article analyzing the economic effects of the coronavirus: “Canada’s economy was running at stall speed even before this.”
The debt straightjacket
The most pressing issue for the Canadian economy is that of debt. The average Canadian household was already saddled with enormous debt obligations and now this is only getting worse. According to the Canada Mortgage and Housing Corporation (CMHC), debt as a share of disposable income could rise to 230 per cent in the third quarter of this year. In order to stop the immediate bankruptcy of millions of poor workers in Canada, the six biggest banks united together in March to offer six-month deferrals on mortgages to those in need. But this only delays the inevitable as a real reckoning will likely come in the fall, when these payments are due.
But Canadian workers aren’t the only ones in debt. Government debt in Canada has also increased year after year with large deficits. The parliamentary budget officer released a report on April 30 revealing that for the fiscal year of 2019-2020, the federal government’s deficit was $25 billion. The report also predicts a monstrous $252 billion dollar deficit for the 2020-2021 fiscal year. This is nearly five times the previous record of $56 billion set by the Harper government in 2009.
Adding onto this, the Canadian Housing and Mortgage Corporation has committed to purchasing $150 billion in bad mortgages which will add a massive amount to the government debt.
On top of all of this, Canadian provinces have been racking up debt as well, adding hundreds of billions of dollars in debt over the last 10 years. In fact, for the first time ever, the combined debt of municipalities and provinces added up to more than the federal debt in 2015. If we add the municipal provincial and federal debt, the combined government debt in Canada is well over 100% of GDP.
Last but not least, prior to the coronavirus, Canada’s non-banking corporate sector had the third-highest debt-to-GDP level of all G20 nations behind only China and France, over 100% of GDP.
So contrary to what Poloz claims, no, the Canadian economy was not healthy before the pandemic. Prior to coronavirus, consumer debt, government debt and corporate debt were all more than the Canadian GDP. Based on these figures, it seems as though Canadian capitalism should have entered into crisis a long time ago, but has simply been artificially kept alive through injections of fictitious capital. These astronomical levels of debt act as an immense drag on the economy.
Enter the coronavirus
The shock of the coronavirus has led to unprecedented job losses, wiping out all jobs created since 1986. Over 7 million Canadians were unemployed as of April, with the unemployment rate shooting up to 13.5%—the highest in 70 years. The employment rate has fallen to just 52.1 per cent—the lowest since record keeping began in 1976.
As a stop-gap measure, the Trudeau Liberals have implemented emergency support measures for individuals who have lost their jobs. The most well known is the Canada Emergency Response Benefit (CERB), which is $2,000 per month. There is also the Canada Emergency Student Benefit (CESB) which provides $1,200 per month for students who cannot find work. But for most, these support measures are woefully inadequate.
According to Statistics Canada, Canadians on average earned $4,383 per month at the start of 2019. You don’t have to be a genius to see that this means the average income for most workers has fallen drastically. Stephen Brown of Capital Economics estimates that households have lost 40 per cent of their income since February. Even when taking into account the CERB, Brown estimates the net loss in income at around 21 per cent. And this is only pouring salt in the wound of an already difficult situation.
Already prior to the crisis, a growing portion of Canadian workers were drowning in debt, with many barely making it to the next paycheque. In a 2017 Ipsos poll, 52 per cent of those surveyed said that they were less than $200/month away from financial insolvency. In early May 2019, Credit Canada conducted a survey and found that 66 per cent of respondents would experience, or are already experiencing, a “severe financial crisis” due to a job loss or a cut in income.
Unsurprisingly, on April 1, 2020, a DART & Maru/Blue poll found that 1.3 million Canadians (four per cent of the population) will have to declare bankruptcy within the next three months if the situation doesn’t change for the better. A further 1 in 10 will have to default on their mortgage payments. This is already reflected in reports published by the six major banks, who are predicting record losses from bad loans. This means one thing: people cannot pay their mortgages.
Back to normal?
Faced with this grim outlook, it’s no surprise that governments are moving to jumpstart the economy. Like a boxer who was downed with a Hail Mary punch, capitalism needs to get back on its feet ASAP. With widespread personal and corporate bankruptcies on the horizon, it is no longer a case of prioritizing health or “flattening the curve.” In Quebec, the province which has moved to reopen the economy the quickest, public health director Dr. Horacio Arruda said that he hopes that “not too many people are gonna die.”
According to public health professionals, this will almost certainly lead to a second wave. However, according to Jeremy Kronick of the C.D. Howe Institute: “If there’s a second wave, then we just don’t have the fiscal capacity to shut down the same way we did.” In other words: to be damned with your health and well-being, we need our profits!
But what are the prospects for recovery? While some pray for a V-shaped recovery, this is merely wishful thinking. The world capitalist system is no longer the young robust system it once was. Growth rates since the postwar boom in the 1950s and ’60s have consistently trended downwards. More and more, the boom-and-bust cycle resembled the shortened breaths of a man on his deathbed. The post 2008-2009 “recovery” was the weakest since the Second World War.
A recent survey of 200 U.S. fund managers found that only 10 per cent of them expected a quick bounce back. With the Canadian economy intimately linked to the U.S. economy, it is unlikely that we can expect any miraculous recovery in the short term either. The most optimistic scenario seems to be that of a U-shaped recovery, while some are seriously concerned that we may be headed for an L-shaped collapse. This means that we are likely in for a period of years of economic stagnation or even collapse. With the whole system weighed down by record levels of debt, this seems quite likely. People have likened this current crisis to the Great Depression, but it is never mentioned that the Great Depression started in 1929 but did not end until World War II started in 1939. Even then, the increase in GDP throughout the war years was not a result of wealth production contributing to an improvement in people’s lives, but rather production for the war. In fact, the real economic upswing didn’t actually commence until the war was over in 1945.
The state to the rescue
While Poloz and the Bank of Canada talk about the “health” of the Canadian economy, the proposed government measures belie this statement. In order for this so-called healthy economy to get back on its shaky feet, it seems as though it is going to need regular and sustained support from the state.
Trying to avoid a complete collapse along the lines of the Great Depression, free-market loyalists of all types are now falling over themselves to suck at the teat of the state. Normally a paragon of fiscal prudence and balanced budgets, The Globe and Mail published an editorial in late April with the fantastic conclusion that the government should borrow an unlimited amount of money and “will likely never need to pay down a cent of its debts”.
In this venture, the capitalists find strange bedfellows with “progressive” economists of all types such as Jim Stanford, who echoes this central argument: borrow as much as you need and don’t worry about paying it back. Rosenberg sums up the general approach succinctly: “This might be the new normal, that to save capitalism, capitalism has to go on a long-term sabbatical. The government is taking over the economy by necessity.”
The central plank of the government’s recovery plan is what they have dubbed the Large Employer Emergency Financing Facility (LEEFF). The LEEFF will provide mass amounts of cheap credit (loans start at $60 million) to large companies in order to stave off bankruptcy. Part of this aid comes in the form of the government purchasing shares in floundering companies to keep them afloat. According to the government, they have done this so that when profitability returns, the taxpayers will benefit. In this vein of thought, Trudeau has been emphatic that these are not bailouts but “bridge financing”. However, with dismal prospects moving forward, it is likely that the Canadian taxpayer can wave bye-bye to this money, just as it did the various “loans” that were given to the auto manufacturing sector in the past. While the total price tag is not clear, this will likely cost tens, if not hundreds of billions of dollars.
In addition to this, there is already a huge corporate subsidy in the form of the federal wage subsidy program in which the state pays 75 per cent of wages for almost 2.8 million private sector workers. The budget for this program is $73 billion—the largest federal government program in the history of the country. Originally only planned to last until June, this program has now been extended until August.
The situation we are facing is a weak economy, shackled by debt at all levels, reaching into the netherworld to conjure up even more debt to save itself. Whether or not these Herculean efforts to stabilize capitalism will succeed is yet to be seen. Even then, there is still the question of the debt. Contrary to what partisans of Modern Monetary Theory argue, there is no magic money tree that you can shake without consequences for the future.
The entire argument to the effect that we don’t need to worry about the debt is based on the false assumption that the coming period will be like the immense economic boom which followed World War II. This is in fact precisely the argument of the Globe and Mail in their strange Keynesian conversion editorial.
But the postwar boom was a historical aberration resulting from particular conditions which were explained by Ted Grant at the time. The main driver of that boom was the mass destruction of the productive forces caused by the war. This, among other things which Grant detailed, allowed capitalism to undergo a period of rebirth, temporarily avoiding crisis. The situation caused by the COVID-19 pandemic of course resembles a war in some ways, but a mass destruction of the productive forces on the lines of the Second World War has not occured. It is therefore a simple fantasy with no basis in reality to expect that the coming period will bear any resemblance to the postwar boom. All of the elements forming the basis of the capitalist crisis of overproduction are not only still present, but have been magnified.
Prepare for the class war
The COVID-19 pandemic and ensuing economic meltdown has marked a fundamental shift in consciousness of all layers of society. It has laid bare the ugliness of capitalism and specifically the results of decades of austerity measures, most notably in the health-care sector.
It is not surprising therefore that polls show across all age groups, a large majority of Canadians now expect a “broad transformation of our society” to promote “health and well-being”. Only 26 per cent favour a return to the status quo. In an Angus Reid poll, two-thirds of Canadians favour nationalization of long-term care facilities after disgusting profiteering has led to thousands of deaths. In an Abacus data poll released on May 22, 75 per cent of Canadians support taxing the rich to pay for the economic recovery. All of these polls show that there has been a sharp change in consciousness among broad layers of the population.
However, while there is general recognition by the capitalists that this current unheard-of level of state expenditure is necessary at the current moment, this is only meant to be a temporary measure to prop up the failing system. This is especially the case with measures such as the CERB and the CESB which were only implemented to stop the bottom of the system from falling out.
According to ex-prime minister Stephen Harper, “What has happened in this crisis so far is not an indicator of the future.” Harper’s article in the Wall Street Journal is essentially a declaration of war. The title of this article, “After Coronavirus, Government Will Have to Shrink”, takes aim at “leftists” and argues that governments need to start plans to implement austerity and pay down these monstrous debts now. Harper, who has been freed from the shackles of government since 2015, only represents the more honest wing of the capitalists, not needing to fear for his career.
The economic balancing act of the capitalists may succeed in the short term in restabilizing the economic equilibrium, but only by drowning the government in even larger unheard-of debt levels. This debt will have to be paid, and with interest. The question which has been at the heart of every major revolution, that of “Who pays?”, will make itself felt in an earth-shattering way in the coming period.
While the masses are expecting a “broad transformation” of our society, these aspirations of the working class will run headlong into the barrier of the capitalist system. Therefore, opening up before us is the most revolutionary period in the history of Canada. The only missing piece is the lack of revolutionary leadership which can draw all of the key lessons from the past and provide solid leadership to the working class in the coming battles. It is up to us to build that leadership.