all our missing teachers and hockey players and physicians and restaurant servers with robots and other types of machinery. And the adjustment mechanism can take time to work, during which time labour shortages can exercise a powerful upward pressure on wages and thence inflation.
So self-corrective mechanisms can produce high inflation, high interest rates, and lower growth, especially when poor government policy gets in the way. That would be a destructive combination at the best of times. It would be brutal at a time when relatively fewer workers are striving to produce enough wealth to keep their own standard of living rising while they pay for at least part of the pensions, health care, home care, and a host of other public services for a growing number of retirees. In writing this book I have tried to think about how we, both government and Canadians, might adjust our behaviour so as to improve the chances of good outcomes for all of us in the face of the challenges represented by the aging and retirement of the Boomers.
In any case the classical economists who don’t believe in labour shortages and I are probably not all that far apart. I say that labour shortages will cause Canadians to change their behaviour profoundly over the next fifty years as we struggle to find ways to adjust to a precipitous fall in the numbers of new people entering the workforce. They say that tightening labour markets will produce big changes in the behaviour of Canadian firms and workers as wages rise to reflect the fewer workers that will be available.
Just remember the important point: we agree that profound changes are coming.43 Canadians are entering a decades-long time that will be economically, culturally, and socially as different from the last half century as vinyl records are from MP3s and rotary phones are from Blackberrys.
Reports of Capitalism’s Death Have Been Greatly Exaggerated
Some readers will object that the book’s argument assumes that today’s economic downturn is but a temporary bump in the road, and that in due course we will return to the kind of market-driven economic growth described in later chapters. Moreover, the book assumes that the United States, far from being finished as a global superpower, still has its best days ahead of it.
Our current economic difficulties have certainly unleashed a torrent of commentary to the effect that capitalism’s day is done, that the downturn proves that private business is irretrievably corrupt and cannot be trusted because our woes are entirely the fault of greedy bankers and insurance companies and rating agencies and market manipulators.44 Wise governments will henceforth need to replace this vicious system with disinterested technocratic management. Friedman is dead. Long live Keynes.45
No one can deny that greed led a number of managers to take outrageous risks with the institutions with which they were entrusted, or that they were richly rewarded even after their companies either failed or were bailed out at taxpayer expense. Their misjudgments were compounded by their shameless clinging to bonuses and other entitlements to which they had little moral claim, however much their employment contracts guaranteed them.46
But this constitutes no indictment of liberal capitalism as an economic and political system, nor does it establish that there is some clear, and clearly superior, alternative. Painful as the short-term stalling of the economy is, with all its attendant job losses, plant closures, bankruptcies, and family crises, we cannot lose sight of the tremendous economic benefits our economic system has bestowed on us over the years. More and more of the world has been drawn to this system, especially since the collapse of the Berlin Wall. Previously moribund economies in Eastern Europe, Asia, and Latin America have enjoyed robust growth by becoming more tightly bound into the world economy, and the freer movement of goods, capital, services, and people have dragged more people out of poverty than at any other time in world history.47
Consider the following extraordinary statistics about the performance of the world economy since 1980. World real gross domestic product grew by about 145 per cent from 1980 to 2007, or by an average of roughly 3.4 per cent a year. The so-called capitalist greed that motivated business people and ambitious workers helped hundreds of millions to climb out of grinding poverty. The role of capitalism in creating wealth is seen in the sharp rise in Chinese and Indian incomes after they introduced market-based reforms (China in the late 1970s and India in 1991). Global health, as measured by life expectancy at different ages, has also risen rapidly, especially in lower-income countries. Of course, the performance of capitalism must include this recession and other recessions along with the glory decades. Even if the recession is entirely blamed on capitalism, and it deserves a good share of the blame, the recession-induced losses pale in comparison with the great accomplishments of prior decades.48
In Canada and other Western countries, periodic downturns never wipe out the gains in income and economic well-being realized since the previous downturn, and once the recovery comes, we invariably move on to new economic achievements.
When the downturn is done, we will still want bankers and other financial institutions to be able to move capital from those who have more than they need to those who can only realize new economic opportunities by borrowing the capital of others. The fundamental reasons that make a system of private initiative within the framework of the rule of law superior to the government-dominated alternatives will still apply.49 Even the Chinese, whom one might expect to be readier than most to defect from reliance on markets to power growth, have restated their commitment. According to The Economist magazine, “Chinese leaders have been at particular pains to avoid giving the impression that China is wavering in its commitment to market capitalism (albeit with a heavy admixture of government control).”50 Chinese president Wen Jiabao delights in reminding people that his favourite bedtime reading these days is Adam Smith’s master work, The Theory of the Moral Sentiments.
In any case, Manichean explanations casting the world in a comforting two-dimensional battle between good and evil are rarely much help in understanding a world composed largely of shades of grey. Those who have always opposed capitalism and economic freedom have uncritically leapt to the attractive conclusion that all that has gone wrong can be laid at the doorstep of evil capitalist plutocrats, while years of allegedly savage deregulation have prevented kindly and objective governments from stopping greed and self-interest from wreaking havoc.51
Yet the best book so far on the economic downturn of 2009–10, John B. Taylor’s Getting Off Track, has as its subtitle How Government Actions and Interventions Caused, Prolonged and Worsened the Financial Crisis. In the book Taylor, a prominent economist, Stanford professor and adviser to central banks around the world, tells the story of how government institutions played a key role in the creation of the recession of 2008–09. In particular, he draws our attention to the close relationship between too-loose monetary policy by central banks and the housing price bubble. Had governments followed the so-called Taylor Rule for interest rates (named after John B. Taylor himself, who famously proposed this rule for guiding monetary policy in 1992), the asset price bubble likely would have been avoided, and with it the risky lending practices that have brought so much misery in their wake.
He also points out the extent to which governments directly encouraged these risky practices. Fannie Mae and Freddie Mac, both U.S.-government-sponsored agencies, were pushed by politicians to encourage home ownership, which they did by expanding and buying “mortgage-backed securities, including those formed with the risky subprime mortgages.”52 He might also have mentioned the American Community Reinvestment Act, which forced banks to make risky home loans for political reasons by requiring them to lower their lending standards,53 as well as the 1997 tax law that increased the capital gains exemption for residential home sales, which encouraged the practice of flipping houses for short-term gain.
Taylor also demonstrates convincingly that governments misdiagnosed the causes of the crisis once it had begun and therefore took the wrong policy steps a year into the downturn, making things demonstrably worse, not better. So much for avuncular and trustworthy governments being a safe haven after the excesses of greedy markets and capitalists.
