In April 1928, Canadians had the world’s fastest-growing economy. We were enjoying a love affair with the automobile. Our homes were being electrified. A new invention—consumer credit—had unleashed a shopping revolution, pushing working people heavily into debt to buy washing machines, radios, and vacuum cleaners.
“No longer,” declared Andrew Mellon, the U.S. secretary of the treasury, “[is there] any fear on the part of the banks or the business community that some sudden and temporary business crisis may develop and precipitate a financial panic such as visited the country in former years.”
Eighteen months later, Mellon was scrambling to deal with the crash of 1929. The Depression left almost one in three Canadian workers unemployed and lopped 40 percent off the gross domestic product.
Unrest gave rise to new parties like the Co-operative Commonwealth Federation, the Social Credit Party of Canada, and a powerful Communist movement. The turbulence culminated in battles between police and workers at Vancouver’s Ballantyne Pier and in Regina in 1935, which helped bring down the staunchly anti-Communist government of Prime Minister R. B. “Iron Heel” Bennett.
Meanwhile, in Europe, economic dislocation unleashed Nazism and set the stage for the Second World War.
Now we have the crash of 2008. With the main Canadian and U.S. stock indexes down about 50 percent since their peak in the fall of 2007, we are in the worst market collapse since the 1930s. According to a November 21 story on Bloomberg.com, global equities have lost more than $33 trillion this year. A prominent Russian political analyst, Igor Panarin, said in the Russian newspaper Izvestia on November 24 that the U.S. could even break up into six regions because of the financial crisis, with Alaska reverting back to Russia.
The news has been filled with increasingly panicky headlines about the latest bankruptcy or bailout package. But there has been little attention on the broader picture: what will life be like after the crash? How will society, politics, and the economy change? What can we do to help shape those changes? And what can we learn from past crises about what might happen?
Progressive economists say the current crisis may actually be an opportunity in disguise. They say it will likely spark a huge public outcry for governments to rebuild gutted social programs and restructure the flailing economy in a more environmentally sustainable way.
But such pressure is likely to clash with growing demands from financial interests for spending cuts, as the crisis decimates tax revenues and spawns yawning deficits. Already, Stephen Harper’s throne speech of last week vowed to reduce government grants, public-sector pay, and spending that is not “essential”.
Whichever side gets the upper hand, the seemingly inevitable clash could prove to be a watershed moment that decides the direction of society for generations. In the end, the tipping factor is likely to be just how bad the crisis gets.
“The more severe the crisis becomes, the more people’s minds get concentrated on what we do,” said Chris Armstrong, a retired York University history professor who has studied Canadian market history, speaking by phone from his home in Toronto.
Seth Klein, B.C. director of the Canadian Centre for Policy Alternatives, believes that history is unpredictable. “In a crisis, major changes often happen—the caveat being it could go either way. The ’30s gave birth to the modern welfare state. But in Germany, they led to fascism.”
Even before the market crisis, Klein said, western governments had grown adept at taking advantage of crises to slip in otherwise unpalatable ideas. “In the last 30 years, the neoliberal project has been amazingly effective in seizing on crises to advance its agenda and push policies that were not normally popular. They were able to do that during the disorientation of the crisis,” he said.
There’s no reason, however, that progressives can’t do something similar, according to Simon Fraser University economist Marjorie Griffin Cohen. “A crisis can be a time in which we can shape the foundations for what we want society to look like,” she said from her home in Vancouver.
“The capitalist system has almost self-imploded,” she said. “If we continue with the same structures, we will have the same world. We can set a different path. This is precisely what happened in the Depression.”
Cohen, a past chair of women’s studies at SFU, proposes investing in what she calls “social infrastructure” as a way to rejuvenate the economy and restructure society.
Her prescription is to restore funds to eroded programs like employment insurance and welfare in order to help those hurt most in the crisis and boost the economy. “The poor spend everything they earn. The rich don’t,” she said. “They [governments] have cut social programs that lessened the impacts of recessions. The programs should be redesigned, considering the need there is going to be.”
She said that another way to put more money in the hands of low-income people would be to make the income-tax system more progressive by raising tax rates for the wealthy and lowering them for the poor. This would reverse a long trend since the 1980s of making Canada’s income taxes more regressive.
Cohen isn’t convinced about one commonly proposed idea: reviving the economy by spending on infrastructure like roads and bridges. After all, she said, that would just lead to more cars, which would increase greenhouse-gas emissions. Instead, she calls for spending on “social infrastructure”, such as low-cost housing and a national daycare system, for starters. “We should be treating social infrastructure not as a drain on the economy but a boost,” she says. Case in point: in Quebec, the introduction of subsidized daycare costing $7 a day coincided with a dramatic drop in the portion of single mothers living below the poverty line, from 60 percent to 30 percent since 1997, according to a recent story in Montreal’s La Presse daily.
Vancouver economist Iglika Ivanova agrees with Cohen’s suggestions. “The crisis is likely to bring about a shift in values,” she said by phone from her Vancouver office. “I’m hoping we see individualism discredited and a stronger emphasis on collective solutions.”
Ivanova is a researcher at the Canadian Centre for Policy Alternatives and has direct experience with poorly designed economic policy, having grown up in Bulgaria before leaving to attend school in B.C. at age 17. She fears that an opposite reaction to the crisis is conceivable too. “The other possible response is for everyone to isolate themselves and disregard the collective good,” she said. “My fear is everyone feels they are on their own and the government is not going to help them.”
The good news, Ivanova said, is that Canada is unlikely to face Depression-era heights of unemployment because of the social safety net that the Dirty Thirties inspired. But she said that safety net isn’t in good shape anymore. Recent years have seen the B.C. government tighten eligibility rules for welfare, while Ottawa did the same with employment insurance and lowered payments. Meanwhile, B.C. hasn’t increased its minimum wage since 2001.
“Because we’ve enjoyed a boom, we haven’t seen the gaping holes in the social safety net,” Ivanova said. “This recession will be a test and will expose the gaping holes.
“If we create programs quickly, it will significantly shorten the length of the recession. It [the crisis] will open people’s eyes to the need for a strengthened public sector.”
Cohen and Ivanova both see this as a good time to rethink the B.C. economy’s heavy focus on commodity exports and to promote a shift to green jobs. Commodities have taken an especially big hit in the market disaster. Lumber prices have been tumbling for months, which has sent much of the province’s forestry industry reeling.
The Claymore/Clear Global Timber Index ETF, which tracks lumber prices worldwide, has dropped 65 percent since its high in December 2007. And with U.S. house prices still descending—and now those in B.C. and the rest of Canada starting to follow suit—the falling demand for lumber shows no signs of slowing down.
“I think the impact on B.C. economically could be very profound,” Klein said.
Cohen agreed: “We could have massive layoffs in B.C. Virtually nothing is being done beyond selling more raw logs. There’s just a craziness in our economy. If we’re going to pour money into the economy, why not spend it on something different?”
Ivanova, for her part, calls for a Roosevelt-style New Deal adapted to the 21st century, which she refers to as a “New Green Deal”. “I think there is an opportunity for investment in new green technology,” she said. “Take workers from forestry and other industries that are suffering, retrain them, and create new green jobs. It’s an ingenious way of turning the crisis into something positive that will solve the economic and ecological problems.”
Much is likely to depend on how the financial crisis plays out and how bad it gets. That may not be clear until U.S. house prices stop falling and authorities decide whether or not to bail out ailing sectors like the auto industry.
The Big Three U.S. carmakers are pleading with Congress for $25 billion in emergency aid, claiming that three million American direct and indirect jobs are at stake if the companies collapse. General Motors last week announced that it may not be able to meet the terms of its debt by the end of the year. The news sent GM shares plummeting to their lowest level since 1946. By last Thursday, the company’s stock had lost 93 percent since its high in October 2007.
“There is going to have to be a serious restructuring of the U.S. economy,” said former York University prof Armstrong, who describes himself as a Keynesian. (British economist John Maynard Keynes pioneered the idea of government intervention in the economy to smooth out busts and booms.)
“The auto industry probably has to be bankrupted. That’s probably necessary if it is to be truly reorganized. It’s not a happy thing to say, but the longer it takes, the more painful it will be for everybody. They have spent the last 20 years resisting raising their fuel economy,” Armstrong said.
Ironically, he said, if the U.S. does bail out its auto industry, that could be devastating for Canada. That’s because the automakers will be obliged to use government money to bail out operations in that country. Canadian plants would be out in the cold. “The Canadian operations would be the first to go,” Armstrong said. “We’re going to be stuck with all the problems here. The bailout is going to be especially terrible for the province of Ontario.”
What’s more, Armstrong said, the automakers are just the most high-profile of many industries undergoing the same cash crunch.
And those problems may get a whole lot worse if past market crises are a guide. Russell Napier studied the four major market crises of the 20th century in his 2005 book Anatomy of the Bear: Lessons From Wall Street’s Four Great Bottoms.
The four down cycles lasted an average of 14 years from when the market peaked to when it hit bottom. In a phone interview from his office in Midlothian, Scotland, Napier said he believes that the market’s last peak actually happened when the dot-com bubble burst in 2000. He considers the period since then to be a long unwinding of the speculative excess of the 1990s, only temporarily interrupted by the 2003-07 market rally.
If Napier is right, the correction so far has lasted only eight years. He believes the final bottom won’t happen until around 2014.
Even the crash of this autumn has not taken market valuations down anywhere near where they fell in the past crises, Napier said. The S & P 500 stock index’s price-to-earnings ratio is now 14, down from 43 at its peak in 2000 but still well above the low in past market crises, between eight and 10. “We still have a long way to come down,” Napier said.
The good news, he said, is that he doesn’t expect that final slide to happen for a few more years. He believes that it will be triggered by the imminent retirement of the baby boomers, which he says will reduce government tax revenue while increasing demands on health-care and pension spending, all leading to big deficits and, in turn, a sharp spike in interest rates.
“There is no denying we could be facing a global depression,” said Philippa Dunne, a researcher at the New York City–based Liscio Report on the Economy, which tracks U.S. state tax receipts to make economic forecasts. “If one of the Detroit automakers goes under, it could push this into an actual depression.”
Dunne said from her office that patterns in state tax flows suggest a market bottom may not happen for another three years. Like Cohen and Ivanova, Dunne hopes an auto-industry bailout will come with strings attached that will mandate environmental benefits. “My hope is this will shift the whole thing to a greener economy.”
And Dunne already sees an inkling of a new consensus emerging: that neoliberal economic policies should be ditched. “Even pretty conservative people out there are sounding pretty Keynesian,” she said. “People will get their old theory books out and support government spending.
“Money will have to be spent one way or another. At least if it’s on something for the future, that’s where we have a shot.”