“I think it’s fertile ground for creativity,” former Bank of Canada governor Stephen Poloz said at the end of May, when gross domestic product was contracting at an annual rate of almost 40 per cent.
Leave it to Sunny Stephen to find a bright spot in an epic economic collapse, right? Well, he might have been onto something.
Canadians opened about 52,700 businesses in June, 40 per cent more than the monthly average between January 2015 and February 2020, Statistics Canada reported on Sept. 28.
To be sure, some 56,000 businesses closed at the same time; still, that was the fewest since February. The gap between closures and openings narrowed to about 3,500 in June, compared with more than 20,000 in May, almost 53,000 in April and roughly 25,000 in March.
Canadian entrepreneurs have started filling in the hole left by the COVID-19 recession, and the strength of the recovery will depend to a great extent on whether their numbers continue to grow.
Canada’s economy underwhelmed in the years after the Great Recession, in part because there were too few exporters left standing to take advantage of the global recovery. It was like trying to power a full-sized pickup truck with a small-car engine.
Poloz wasn’t a Pollyanna during his time at the central bank, despite the sunny nickname. Rather, he was exceedingly rational, often going out of his way to offset the reflexively negative reaction to events by the business press and some of Bay Street’s most famous pundits.
Humans have a tendency to see the worst, which might have something to with natural selection, since creatures that run from danger probably stand a greater chance of survival. But humans are also incredibly adaptable.
Poloz liked to remind audiences that creative destruction is a two-part concept, not a euphemism for despair. That’s something to keep in mind as we confront a second wave of COVID-19 cases that has already forced the temporary closure of bars, restaurants and other gathering places in Montreal and Quebec City this week.
No one is underestimating the severity of the situation. “The current economic crisis is the worst in Canada’s modern history,” Deloitte, the global business consultancy, said in a report this week on the country’s long-term prospects.
Deloitte reckons Canada will do well to grow at an annual rate of 1.7 per cent without significant changes. That’s not very good. So, what do we do about it?
The immediate priority must be containing the disease. The next step should be facilitating the economic recovery that will naturally follow a return to something like normal. The V-shaped recovery in retail sales is a hint of what could happen once demand and supply realign.
The second phase of the recovery won’t be so spectacular. The federal government brought about the rebound by replacing lost household income with public funds. That trick probably can’t be repeated, at least on the same scale. The public tolerance for that much debt just isn’t there, never mind what creditors might think.
Prime Minister Justin Trudeau and the premiers need help from the private sector from here on out. But that means implementing a fleet of policies that amplify the creative destruction that is now taking place in the economy in the hopes of bringing about a productivity shock.
A return to the status quo shouldn’t be the goal. Deloitte believes annual growth of about 2.7 per cent through 2030 is possible, provided the country finally gets its act together.
To do that, Canada needs a stronger engine, not the one it had prior to the COVID crisis, and certainly not a smaller one like it ended up with after the Great Recession. “Coaxing more growth out of the economy has gone from a major policy challenge to an absolute necessity,” David Dodge, another former Bank of Canada governor, said in a report for the Public Policy Forum earlier this month.
Dodge, who is also a former deputy minister of finance, would focus policy on digitizing the economy, accelerating the adaptation of resource industries to the imperative of climate change, overhauling employment insurance and training, and making the delivery of government services more efficient.
Coaxing more growth out of the economy has gone from a major policy challenge to an absolute necessityDavid Dodge, Public Policy Forum report
Those stepping stones make for a good way to think about a productivity agenda, which is the only way Canada will sustainably increase economic growth. Public money will be needed, but the big outlays that will be required — a public system of affordable childcare, say, or rural broadband — should more than pay for themselves over time. The federal government can borrow for 30 years at less than two per cent, terms at which even the most mediocre manager should be able to generate a rate of return.
But a productivity agenda needn’t be all about money. There are myriad policy tweaks that governments could do that would help make the recession more creative and less destructive.
Kim de Laat, a postdoctoral fellow at the Rotman School of Management’s Institute for Gender and the Economy, earlier this year proposed that the Canada Revenue Agency make it easier for the tens of thousands of employees suddenly working from home to deduct work-related expenses. It’s a good idea that could be extended to the newly self-employed who, like Poloz, realize that a recession brings opportunity.
Complying with Canada’s tax code is arduous enough for anyone who has to do more than submit a T-4; figuring out how to take full advantage of all the credits and benefits destroys countless productive hours every year. A bold government would make everything simpler for the new generation of entrepreneurs, especially since it so desperately needs the help.
Let’s keep this crisis in perspective. Beating a mysterious virus is the hard part. We know exactly to do when it comes to sorting out the economy.