[R-G] Economists open letter on the auto crisis

[Anthony Fenton]

A group of economists from across Canada are concerned with the  
federal government's response to the auto crisis by blaming the CAW  
for a crisis it didn't create. They've signed the following open  
letter outlining their concern that government pressure to cut wages  
will increase the risk of deflation and calling for new and focused  
action from the government.

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Government pressure to cut wages will increase the risk of deflation
It is now abundantly clear that Canada and the world is facing its  
worst economic

crisis since the Great Depression. However, a sense of premature  
Hoover-type optimism seems to have settled in to Ottawa's thinking,  
breeding a dangerous complacency that the government has done all that  
is required to combat the recession. The federal government appears to  
be hiding behind the proposition that with strong banks and strong  
fundamentals, the Canadian economy will automatically recover as US  
demand picks up.

The Bank of Canada has lowered its interest rate to a near-zero level  
and has provided banks with billions of dollars of liquid assets to  
counter the recession and potential deflationary expectations. It is  
concerned that deflation, or falling prices, will become generalized  
throughout the economy. And once the cycle becomes entrenched, as it  
did during the 1930s, it will be extremely difficult to reverse.

The federal government’s fiscal stimulus package is beginning to  
inject demand into the economy to counteract the contraction of  
private sector demand, although many economists argue that a federal  
deficit of about 2% of GDP is too little given the powerful headwinds  
the nation faces. Unemployment insurance, though greatly weakened by  
previous governments (most recently the self-financing rule imposed by  
the 2008 Budget) will also help somewhat cushion the fall in demand.

Government is the player responsible for the overall management of the  
economy. At a time like this it is the only player that is capable of  
overriding destructive contractionary impulses of private businesses  
and households.

The federal government is undermining the effectiveness of its own  
stimulus efforts by freezing wages of its own employees and by forcing  
massive auto sector wage concessions (which incidentally will not  
solve the auto crisis) as a condition of providing financial support  
to the industry.

It also sends a contradictory signal to business that somehow this  
“belt-tightening” is good for the economy as a whole. On the contrary,  
it will only make matters worse.

While it may be rational for an individual firm trying to stay afloat,  
to lay off workers, reduce working hours, and/or push for wage  
reductions; if this becomes an economy-wide phenomenon the resulting  
downward wage-price-purchasing power spiral, if unchecked, will deepen  
and prolong the recession.

This is what happened during the Great Depression. The deflationary  
cycle became entrenched. Massive price declines in both the US and  
Canada were matched by a similar drop in average wages. Keynes argued  
for nominal wage anchors to stem the downward spiral.

One of the things Roosevelt did when he came to power in 1933 was to  
support the Wagner Act, which strengthened unions, setting a floor on  
wages and initiating a process of rising wages, prices and production.

The current economic crisis was caused by the meltdown of the bloated  
US financial sector, not by “exorbitant” auto or public service sector  
wages. Forced wage rollbacks will cascade through the economy reducing  
purchasing power and demand, offsetting the very thing the government  
is trying to reverse with its stimulus policies. The collapse of the  
auto sector (just like the collapse of the financial sector) will most  
certainly turn the current recession into a deep depression.

Rather than scapegoating the CAW for a crisis it did not cause, the  
federal government should focus its efforts on combating the pressures  
of wage-driven deflation, maintaining income and employment, and using  
public dollars to buy transformation of the auto industry away from  
gas-guzzlers to the low emission vehicles of the future. Industrial  
policies like this have been an important part of the development of  
the auto industry and are needed once again.

Signatories:

Armine Yalnizyan, Senior Economist, Canadian Centre for Policy  
Alternatives

Arthur Donner PhD, Economic Consultant

Bruce Campbell, Executive Director, Canadian Centre for Policy  
Alternatives.

Charlotte Yates, Labour Studies and Political Science, McMaster  
University

Diane-Gabrielle Tremblay, Télé-université de l'Université du Québec a  
Montreal

Frédéric Hanin, Département des relations industrielles, Université  
Laval

Harold Chorney, Political Economy, Concordia University

Jean-Noël Grenier, Département des relations industrielles, Faculté  
des sciences sociales, Université Laval

Gordon Laxer, Political Economist and Director of the Parkland  
Institute at the University of Alberta

Louis Gill, Department of Economics, Université du Québec à Montréal.

Louis-Philippe Rochon, Department of Economics, Laurentian University

Marc Lavoie, Department of Economics, University of Ottawa

Margie Mendell, School of Community and Public Affairs, Concordia  
University

Mario Seccarreccia, Department of Economics, University of Ottawa

Marjorie Griffin Cohen, Department of Political Science/Women's  
Studies, Simon Fraser University

Mel Watkins, Department of Economics (emeritus), University of Toronto

Myron J. Frankman, Department of Economics, McGill University

Pierre-Antoine Harvey, Économiste, Chercheur à l’Institut de recherche  
et d’informations socio-économiques (IRIS)

Ricardo Grinspun, Department of Economics, York University.

Robert Chernomas, Department of Economics, University of Manitoba

Ruth Rose, Sciences économiques, Université du Québec à Montréal

Sylvie Morel, Département des relations industrielles, Université Laval

Trevor Harrison, Political Economist and Political Sociology,  
University of Lethbridge

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Kerri-Anne Finn
Senior Communications Officer
Canadian Centre for Policy Alternatives
tel: 613-563-1341 x306 cel: 613-266-9491
http://www.policyalternatives.ca
http://twitter.com/ccpa
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