HOPE I'M WRONG ABOUT THIS

At the beginning of this financial crisis, I was pretty optimistic. Anyone who knew a little economic history could see the parallels between what was happening and the great depression. It seemed clear that the partial collapse of the U.S. financial system had dealt the world economy a blow too severe for normal economic policy to deal with it. But there were other, more hopeful, circumstances.

At the beginning of the depression, the economic theory to deal with it just hadn't been developed. So it was not surprising that governments took inappropriate steps like cutting spending to balance the budget or raising trade barriers.

But at the beginning of this crisis, an understanding of how to deal with it seemed to be widespread. Governments acted to contain the financial collapse and introduced stimulus plans.

It is true that some economists like Paul Krugman, who did the math, said that the U.S. stimulus plan was too small to get the economy back to a point where normal economic policy would work. But other signs were more hopeful.

The chairman of the U.S. federal reserve was (and is) Ben Bernanke, who, as an academic economist, had studied deeply exactly this situation, and seemed to have lots of creative, sensible ideas. China acted very quickly and decisively with a massive stimulus plan (15% of its GDP, while other countries only managed around 2%).

In our highly interconnected world, what happens in other countries is very important for our own economic health.

I did not know what to expect from our own government. But our banks had proved sound and, as long as the rest of the world recovered, I expected their modest stimulus would be enough to get us back on safe ground eventually.

But I am worried now. Some are declaring the crisis over, pointing to the fact that our total gross domestic product is back to where it was before the recession. But that is not enough, because our economy's potential output has grown due to growth of the labour force and advancing technology.

Unemployment is still high because of this. If you think the recession is over, ask someone looking for work what they think.

And this is happening while the Bank of Canada is still doing almost all it can to keep interest rates down. Normally, interest rates this low would create a huge economic boost. But we have not recovered enough for such normal economic policies to work.

The political situation south of the border is also worrisome. People advocating deep government spending cuts seem likely to gain enough control to completely block any attempt at further stimulus spending, which is now clearly required there.

These folks seem bent on creating that double-dip recession everyone talks about.

This would be a tragedy for Americans, but it would also affect us. We are in no shape to take another big decline in our U.S. exports.

I think we need more stimulus in Canada. Two things are clear from history. The first is that a dose of government deficit spending can end this sort of deep recession very fast if it is big enough.

But the second is that, without any such stimulus, or with inadequate stimulus, an economy can remain trapped in a state of high unemployment for years or even decades.

We should know how to avoid such a trap, and we should also know how to get out of it if we fail to avoid it. Both history and theory say that a large, but temporary shot of government deficit spending will do either.

Yes, we already had a little stimulus plan. But it was clearly not enough to blast us out of the recession the way China blasted out, and it is now winding down. It may well prove insufficient to get us out at all.

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