The supply side logic says that all good things flow from Rome. And Rome would be the investment rates of private enterprises (aka capitalist firms). Corporate and small business tax cuts are justified on this logic, so too is deregulation and the litany. Problem is the logic is faulty. Faulty in the sense of Fawlty Towers.
The problem is of course Employment. Unemployed citizens do not consume, nor do they produce; they are, economically speaking, a wasted resource. We all know this intuitively: the unemployed get by; they do not consume much and by definition they are not producing. If they were to be gainfully employed they would consume more because they would be producing. The existence of unemployed workers is thus a loss to society as whole: if they were working more, they could be consuming more and more would be being produced. Not to mention the employed pay taxes rather than drain down tax revenue.
Unemployment is thus a scourge on both the private and public sectors. In the supply side story the solution to unemployment is a basket of prescriptions: lower corporate taxes, reduced labour market rigidities, smaller government, yada yada fish paste.
In this case the war is the fact that employment leads investment. This not a controversial fact as all stripes of economists from liberal (conservative) to Keynesian (progressive) to Marxists (radical) agree on this fact. Anticipated demand for the output of enterprises is what drives enterprises to invest. The level of employment is one of the best barometers of demand because all things being equal the higher the employment ratio the higher is aggregate consumption which = anticipated demand.
Here then is a paradox. If at the aggregate level demand drives investment but at the micro level investment drives employment how can employment at the macro level drive investment?
In absence of government intervention which directly stimulates demand the economy will remain in a low employment equilibrium. The only other sources of exogenous demand growth are domestic credit and export growth. What we know about domestic credit growth is that Canadian families are already running very high debt to income ratios. So forget about domestic consumer credit growth driving demand. What we also should know is that Canada is running a rather large current account deficit. In fact the last time the current account looked so bad was the 1980s which just happened to be a decade of dismal employment.
Thus Rosy’s declaration of mission accomplished looks exceedingly optimistic. It is quite sad that there is a collective blog dedicated to the Canadian economy in which none attempt to connect the dots of the implications their individual analyses.
Collegiality at the expense of truth: not the first car crash I have seen.