Three Takes on These Troubling Times

Features
by Sylvain Comeau

Headlines have been supplying no shortage of economic gloom recently, with financial markets whipsawing wildly in response. Some nations teeter on the brink, while others debate the costs of throwing them a lifeline.

We recently spoke to three professors with different perspectives on economic matters, and ask them to explain what’s going on. From the alleged decline of the U.S. to the havoc in Europe, from the fallout of the financial crisis to the environmental impact of economic growth, they offer frank, insightful and sometimes unorthodox views.

Christopher Ragan (Photo: Owen Egan)

Chistopher Ragan is an associate professor of macroeconomics and economic policy. He has served as an advisor to both the Canadian finance minister and to the governor of the Bank of Canada.

Why is the world in such a precarious state?

We had a global financial crisis, which began in 2008 with the collapse of (Wall Street investment bank) Lehman Brothers. It started in the U.S. housing market, but spread to financial markets across the developed world. It led, as financial crises often do, to a massive recession, starting in 2009. 
Today, many economies are into solid recoveries — certainly Canada, with the U.S. a little behind. But in many areas, Europe in particular, the recession led to a great deal of government spending, on top of already high levels of government debt. So now the global financial crisis has morphed into a European sovereign debt crisis. This could lead to another widespread financial crisis, if some of those governments default on their debt, causing problems for banks holding assets such as government bonds.

It seems that today, these kinds of crises cannot stay confined to just one region. They move like a contagion.

The term contagion basically means fear by financial investors. Today, financial capital can flow from one place to another at the press of a button — that was not the case 50 or 100 years ago. So fear can move more quickly than it did in the past.

What are the chief threats that can make things worse?

Right now, Europe’”s policies seem to be based solely on the need for fiscal austerity; as a result, they risk producing two, four, or six years of economic decline or stagnation. They need a policy that stimulates the economy in the short term, while still demonstrating austerity in the long term. One way to do that is to get the European central bank more involved in financing government debt, but the Germans are strongly opposed to that.

Will this situation have a lasting impact on how governments approach their economies in the future, or on how businesses and banks operate?

Particularly in the U.S., banks will not be allowed to do the same kinds of financial speculation that led to the financial crisis. As for governments, I think Europe reminds us of the danger of going increasingly into debt. You don’’t have to balance your books every year, but what you can’’t have is year after year of large deficits and mounting debt. Europe is the poster child for this kind of fiscal bad behaviour.

Don’t we have a big debt and deficit problem in Canada and the U.S.?


The U.S. is not in a crisis yet. It is approaching one, because of a 10 percent annual budget deficit. Canada is in better fiscal shape, and has a much smaller debt than the European countries that are currently in trouble.   
We went through our fiscal austerity measures in the late nineties. We were lucky because, at that time, the rest of the world wasn’’t doing the same thing, and the U.S. economy was booming. Canadian exports to the U.S. made it a lot easier for us. The European countries don’t have that advantage today.

Do you feel that Canada can remain relatively buffered from the international crisis?

No. The Canadian economy is in pretty good shape, but we trade a lot with the U.S., and our financial markets are connected with those of the rest of the world. If there is a slow recovery in the U.S., we will feel it here. If there is another financial crisis in Europe, we will certainly feel that, as well.

Who is emerging as the worlds new economic superpowers, in the wake of Europe and America’s decline?

Who says America is in decline?

It seems to be a trendy sentiment.

It certainly is. America is going through a very bad recession. But it still has the largest economy in the world, although it hasn’t been the fastest growing one for years. China is growing at 8 to 10 percent per year, and America will be growing at 2.5 to 3 percent over the next 20 years. So there’s no question that countries like China, India, Brazil and Russia are closing the gap. But they still have a long way to go, especially in terms of per capita GDP. China is likely to have an economy the same size as America’s in a few years, but they also have four times as many people. So it depends on your measure of economic success. For individuals in a country, what matters is per capita GDP. In that category, it might take them 40 years to catch up.

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Thomas Naylor (Photo: Owen Egan)

Thomas Naylor is a professor in the Department of Economics and the McGill School of Environment. He teaches a class on ecological economics and his most recent book, Crass Struggle: Greed, Glitz and Gluttony in a Wanna-Have World, was published last year.

Why is the world in such a precarious economic state?

The economy is too big for the biosphere to support. The evidence is everywhere: climate chaos, ozone depletion, soil erosion, the potential of peak oil, toxic chemicals dumped in the biosphere… The financial crisis and the overload of debt are symptoms of a bigger problem. Our capacity for economic growth comes from the natural world  — energy, raw materials — and we’ve exploited and destroyed them. That’s what is going to bring the economy to its knees. Economists are obsessed with economic growth and the stability of the financial system. But growth is the problem, and they prescribe it as the cure. The problem is that regenerating economic growth exacerbates the real problems, which are limited sources of energy and raw material, and the ability of the biosphere to neutralize and eventually recycle all the garbage we create. The human economy, as I tell my students in Ecological Economics, is basically a system for turning nature into garbage; that’’s all we do. Basically, think of it as two beakers, one of them full of resources being depleted, and the other full of garbage being filled to overflowing. So the reaction to this debt and financial crisis is to try to accelerate the rate at which we are depleting the first beaker.

Do we have the same problem in Canada?

We are the worst offenders in this respect. Compared to most of the world, we have been bequeathed an enormous natural endowment, which we frittered away. Our economic growth and prosperity has been based on the unthinking plunder of nature, for about 400 years.

So you see issues of economic growth and financial stability as a microcosm, while the environment is the macrocosm?

That’s a fair statement. The economy is a small subset of a larger entity — the biosphere in which we live. Economists try to treat the biosphere as simply a source of so-called natural resources. They’’ve got it completely in reverse.

What are the chief threats that can make things worse?

Besides the ecological consequences, there are also the social ones. When you factor in inflation and the cost of living, real incomes for the bulk of the population have been flat or falling for 30 years. If growth is going to slow down because of bio-physical constraints — and it will, whether we like it or not — then what you have is an increasing scramble for a share of a shrinking pie. Obviously, the people who will come out on top are those with the existing power and wealth.

Would you say you have a left wing perspective?

No. Leftists believe that the path to economic growth lies in more government spending, whereas the right wing believes it is through austerity. Both believe that we have to grow the economy to solve our problems — they only disagree on the means to that end. So what’s the difference between them? To me, the entire argument is specious…it’s a fundamental consensus on an unattainable objective.

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Reuven Brenner

Professor Reuven Brenner is the REPAP Chair of Economics in the Desautels Faculty of Management. He regularly writes about economic and financial issues in a monthly column for Forbes.com

Why is the world in such a precarious economic state?

Not every economy is in a precarious state; some are doing pretty well. Europe is one of the “sick patients” at the moment, and the U.S. is having huge problems. China and India are going, in fits and starts, in the right direction. China is decentralizing, and India is trying to diminish its bureaucracy. Russia — who knows? There is so much corruption there; it is very hard to say whether it will become more corrupt or less. Germany is doing pretty well, in spite of everything.

The big difficulty is this: whereas communism fell after 70 years in Russia and 50 years in Eastern Europe, I would say it’s the turn of the welfare states to slowly collapse. They are already starting to decline.

Why do you say that?

Most countries can no longer afford to offer huge social benefits. The welfare system will eventually have to be dismantled. Today we have to compete with places like China, India or even Latin America, which are full of young people who work hard because they know that they don’’t have a social safety net to fall back on.

So its going to be increasingly difficult for Western countries to maintain an elaborate social safety net while competing with the dynamism of a sink or swim culture?

Right. But I would say that Europe will have to dismantle it before we do. Despite the poor spending habits of our governments, we are still very rich. We have a population of 34 million living on almost four million square miles, and we are resource rich — water, forestry, oil, gold, you name it. Many countries cannot raise their taxes in order to pay for social benefits. Countries without many resources have to base their economies on brainpower. What happens when you tax the best and the brightest? They will leave. Today, they are much more mobile than in the past. Decades ago, there were only 12 prosperous countries, and everywhere else was a dictatorship. Latin America was constantly wracked by bloody revolutions. There was nowhere else to go besides Western Europe, the U.S. and Canada. Today if you are taxed too much, you can move to Singapore, Dubai, Australia –  you name it.

The U.S. housing crash triggered the financial crisis, so why is Europe more profoundly affected by its impact today?

Banks play a much smaller role in the U.S. than in Europe. The banking system is nationalized in much of Europe, for political reasons. The moment you decentralize the banking system, the politicians lose power. Europe is also feeling the effects of more long-term issues; for the past 15 years, the birth rate has been declining in Europe. In the future, the populations of Greece, Italy and Spain will drop like a stone, and then who will pay all the debt that these countries have incurred? To save their economies, many countries will have to become more open to immigration.

Can Canada remain buffered and protected from all these problems?

We enjoy huge resources; dig a hole anywhere in this country, and you stumble on oil, gold or diamonds. Of course, this natural wealth covers up a lot of government mistakes. But we are also 30 minutes from the U.S. border. If things don’t go well in the U.S., we will have to scramble to find new markets in China, India or Europe.

Who is emerging as the worlds new superpowers, in the wake of Europe and Americas decline?

I would not say that America is in decline. America has the world’s most diversified economy, and it does not have Europe’’s demographic problems. The U.S. still has the best universities and the best influx of talent — for example, about 70 percent of their PhDs are Indian and Chinese. Of course, if those people started going back to India and China, that would be a huge problem for the U.S.

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6 Responses to “Three Takes on These Troubling Times”
  1. Susan Czarnocki says:

    I agree with Professor Naylor. For me the question is whether democracy can create a pathway for the re-orienting of economic activity. Voting isn’t the likely way that resources will be distributed among the world’s seven billion people. Probably what China wants it will take, and have no care for the costs in life and fate of others. The rich countries will probably react with sending out their warships, etc. Unless the rest of the peoples of the world can find a way to unite and redistribute — but this seems utopian.

  2. Leon Fattal says:

    Another way of looking at what Professor Naylor says is that there are too many people on this planet. I believe that as the over all population grows, it becomes more likely that there will be a huge collapse due to pandemic, war, famine, or some other ecological disaster. Human nature being what it is, behavior will not change to accommodate a sound, sustainable resource consumption policy because that would imply a cessation of growth. Evidence the climate change deniers whose denial is based on their abhorrence at the thought of reduced consumption. Unfortunately, it must all result sadly in an unpleasant, sticky end. The real question is when? Could be one year or one hundred years…

  3. Paul Chénard, B.Sc.76, M.Sc.80 says:

    Interesting contrast in perspectives. Ragan and Brenner gaze inwards as if the economy is an entity unto itself. Naylor looks at a bigger picture where the economy is an adjunct of a greater natural reality. Ragan and Brenner seem more proccupied with the arrangement of the deck chairs on the Titanic, while Naylor is focusing on the iceberg just beyond. The latter’s perspective deserves more attention than it is getting. We all seem so caught up in the day to day workings of a system that we created from scratch. As far as we can tell, our species is the only one whose destiny is so closely tied to the workings of an invention of its own: an economy. Its principal symbol, money, is exclusive to homo sapiens. This is one of the two fundamental underpinnings of the virtual reality we have created for ourselves. The other one is religion.

  4. Patrick Malard,B.Sc.Arch.79,B.Arch.80 says:

    After reading these 3 articles on 3 different ways of looking at the same problems it looks like there are 2 major ways out of this crisis. The first and easiest one is let the markets regulate themselves and hope for the survival of the fittest and smartest what ever the consequences including wars in case of major clashes on ways of seeing things.. while the not so easy way out is to rethink on how the various nations of this world can enjoy sustained growth without too much hardship to their citizens while still allowing competitiveness between nations, always striving at better doing things. This path includes search for new and clean energy sources easily accessible to all nations. We might just be at the beginning of a new way of living all together on this earth of ours. Learning on how sharing talents as well as natural resources among our various nations. Certainly the advances offered by the internet and the information technologies provide us with easy access to goods and services thru a click of a mouse but the next best thing for any business is to reduce distances to its markets. As a young student in architecture I came accross data on how men have built their cities thru times. One ot the main features of old cities was the market place that brought together goods of all kind to a constant flow of buyers. In our modern ages markets have evolved and are now called shopping centers. Now that the human population numbers in the billions it is perhaps time to rethink on how to build supersized cities to allow quick and easy access to goods and services while leaving large portions of the land on earth as natural parks to the exception of mining and manufacturing areas. The development of cleaner energy sources, space technologies and robotics might well allow us one day to mine natural resources on other planets starting with our own moon and to create cleaner automated manufacturing plants allowing more people to enjoy this planet of ours.

  5. Ashish Fernandez, B.Eng '08 says:

    I all honesty, I think Prof. Naylor has missed the point of this conversation completely. It started out on the right path and then took a completely generic tangent. While what he is saying is a potential problem, the point of this article was to talk about ‘recent economic gloom’ and ‘ whipsawing financial markets’. (Written literally in the first line of this article.) I think the key word here is ‘recent’ and what Naylor has outlined is a fairly generic opinion and out of context for this discussion; provides no real insight to this topic.

    I believe Brenner has hit the nail right on the head for this topic and outlines a really interesting and compelling view on this current problem.

  6. Patrick Malard says:

    I also believe as you just said that Brenner just hit the nail on the head for this topic and when he mentions about the fact that the United States of America has one of the most diversified economy on the planet he is right and this might be the problem now in the United States of America. Why? Because it is no secret at all that America is seen by other Nations as the one economy that has the power and the means of bringing every nations out of this crisis, so people buy American dollars and waits for better times.. this in turn keeps the value of the American dollar higher than it should which doesn’ t help its exports…
    To give breathing room to the American economy one or perhaps two other currencies should get investors attention if just for the time required to allow the American deficit to sponge out… Perhaps to get out of this global recession we should turn to small enterprises whose administraive costs and leaner structures allow for more flexibility when it comes time to employ people to run them and turn a healthy profit…
    A big part of any company costs is fix costs that cannot be trimmed so easily. Chinese companies and those in India must probably have the lowest fix costs of the G20 ? Mostly because of lower wages paid in those countries. But till when will this be a reality…
    Perhaps it is time to start thinking again that small and regional economies can be beautiful without going back to protectionism and that till we haven’t figured out or mastered how to work out a new global economy … we should keep this planet of ours clean and enjoyable to all? Didn’t some great guys didn’t have their greatess ideas just relaxing under an apple tree or taking a bath..?
    Have a nice day!