William Watson: the oilpatch slowdown—Alberta’s Austrian challenge

Reading his recent speech, “Life after Liftoff: Divergence and U.S. Monetary Policy,” you might think Bank of Canada Governor Stephen Poloz had gone on a Christmas ski vacation to Austria. His analysis of the Canadian economy’s current slowdown has a decidedly Austrian flavour. Granted, it’s hard for a central bank governor to be too Austrian. Many Austrian economists don’t favour having central banks or therefore central bank governors. But given the disadvantage of his holding the job he does, Governor Poloz’s reading of the situation would probably satisfy many Austrians.

What’s happened in Canada in the last year is a terms-of-trade shock. What we’re selling to the world has gone down in price compared to what we’re buying from it, largely because of a fall in the price of one of our main exports—energy. That’s a real loss, the result of a real change in price (even a real change in a real price, if you will). And there’s no way (really!) to make up for that real loss by somehow juicing other parts of the economy where, so far, economic activity has not been greatly affected.

If people want less of our energy and that tendency persists, what has to happen, and will happen so long as we don’t try to prevent it, is that capital, labour and entrepreneurship will move out of energy and into other activities, often in other parts of the country or the world. As the governor said in his speech, “The forces that have been set in motion simply must work themselves out. The economy’s adjustment process can be difficult and painful for individuals, and there are policies that can help buffer those effects, but the adjustments must eventually happen.”

We can do palliative things. But we can’t offset the initial loss. Trying to stimulate other sectors of the economy so their increased output will balance off the loss in energy will simply build in future problems of maladjustment in these industries. Eventually, they may well expand, as resources move to them from the energy sector. But giving Quebecers and Ontarians more hockey arenas or social housing because energy workers in Alberta have lost their jobs is a policy non sequitur.

That type of thinking is all very Austrian. Microeconomic problems—misfortunes that hit one sector—can’t be fixed by inducing unsustainable investment elsewhere in the economy. Are all apparently macroeconomic problems actually microeconomic problems of this sort? True Austrians would probably say they are but I’m not so sure. The governor’s speech distinguishes the economic divergence we’re seeing now—divergence in the sense that crashing energy prices are bad for energy exporters like Canada but good for net importers of energy, like the United States—from the situation in 2008, when all countries were shaken by the fear that swept across the globe during the U.S. financial crisis.

My own view is that 2008 was a true macroeconomic problem—or at least a microeconomic trauma that hit all sectors at once—and that if governments could allay fears by pledging to do “whatever it took” (in the language of a famous G7 communiqué of the day), including incurring discretionary deficits of two per cent of GDP, that was probably worth doing. Many Fraser Institute fans probably believe that almost nothing could be scarier than governments promising to do whatever it takes. And as Fraser Institute ideas continue to spread, perhaps the next time the whole world has a severe fright, governments will understand that promising not to act will be the most reassuring thing they can do. But, alas, I don’t think the world is yet at that point. So concerted fiscal action probably was the best thing to do in 2008.

Actually, on second thought, the very best thing to do would have been to promise to spend the extra money but then, after that promise had helped calm things down and defuse the panic, renege. That would have produced the very best of both worlds: no panic but also no debt overhang from the promised spending, which we’re still suffering from today.

But sensible economics usually cautions against governments lying too egregiously. And the next time we had a panic, reassurances wouldn’t be believed at all. So colour me Austrian at least in regard to governments telling the truth. Honesty, as the fellow in the New Yorker cartoon said, is one of the better policies.