How NOT to Create A Million Jobs

It was almost too painful to watch: Tim Hudak and top Conservative luminaries kicked off their campaign for the 2014 Ontario election in a Toronto music recording studio.  Problem: that studio (like others in the business) is supported in part by recording and production industry grants from the provincial government — exactly the kind of “corporate welfare” that Mr. Hudak routinely rails against.  Reporters asked about this seeming contradiction, and after a couple of kicks at the can Mr. Hudak abruptly walked off the stage — leaving his confused host (studio owner and former rocker Gil Moore) standing alone at the mike like a deer in the headlights.  Here’s the link to Global’s coverage of every awkward bit of it.  Moore later told reporters (not surprisingly) that he fully supports the government’s music industry subsidies (but endorses Mr. Hudak anyway — aging rock stars are known for many things, but consistency is not one of them).

Quite apart from the incredible contradictions of this botched photo-op, a separate claim that Hudak made during the episode is worthy of more serious consideration by Ontario voters — and anyone else concerned with unemployment during this brutal, austere era.  Hudak summed up his job-creation vision with this succinct quote:

“The biggest thing that we can do to actually create jobs in the province of Ontario is to balance the budget.”

This is actually a surprising statement.  The generic claim that fiscal restraint is ultimately “good” for the economy runs through the whole ideology of austerity, of course.  But rarely does a politician directly equate deficit-reduction with job-creation, and with good reason.  How does attacking a deficit and balancing the budget (something that involves belt-tightening, sacrifice, and cutbacks) actually create any jobs at all?

Every macroeconomics student learns the basic national income accounting identity:

Y = C + I + G + (X – M)

At any point in time, output must equal aggregate demand (apart from inventory adjustments) , which is comprised of four major components: consumer spending, business investment, government spending (on consumption and investment), and net exports.  These are the 4 engines of expenditure that drive economic growth (and Canada’s macroeconomic problem right now is precisely that none of these engines are really in gear).  Balancing the budget in the immediate sense requires either more taxes and/or less government spending.  That means either cutting G directly, or else cutting disposable income (and hence C) through higher taxes.  We know which of these options Mr. Hudak prefers; in fact, since he is advocating tax cuts in this election, the ultimate reduction in government spending required to balance the budget will have to be even bigger.

Ontario’s deficit in 2013-14 was $11.3 billion (or 1.6% of provincial GDP — not large, by the way, relative to international or historical experience).  Reducing provincial spending by 1.6% of provincial GDP will inevitably create a reduction in the demand for labour.  Due to knock-on effects on consumer spending, business activity, and other variables, the final reduction in spending is greater than the direct reduction in government spending.  For example, the federal Department of Finance estimates the multiplier impact on GDP of government spending to be around 1.5 (see, eg., their Table A1 in the Economic Action Plan report).  That suggests (all else being equal) a 2.4% reduction in total GDP (1.6 times 1.5), which in turn should translate into a proportional reduction in employment — since workers are hired only to produce GDP.  (In fact, since government programs are relatively more labour-intensive than other sectors, the decline in employment could be more than proportional).

In other words, simply and aggressively balancing the budget (through spending cuts) would eliminate about 165,000 jobs in Ontario (2.4% of the 2013 employment average).  Those spending cuts might be spread over several years, in which case the job losses will also be spread out over several years — but they will still occur.  (The benefit of doing it gradually, is that the job losses resulting from austerity have a better chance of being offset by job-creation occurring in the meantime in other parts of the economy.  The jobs are still lost, but are less visible in the aggregate net data.)  Balancing the budget through tax increases instead of spending cuts would be somewhat less damaging to employment (since the impact of tax hikes on GDP is somewhat smaller than the impact of spending cuts — especially tax hikes for high-income earners and corporations), but the impact on employment of an $11.3 billion tax increase (with no offsetting change in government spending) would also be obviously and strongly negative.

These direct effects of fiscal austerity are the stuff of Macro 101.  The negative side-effects of deficit-reduction on purchasing power and employment are the main reason why even mainstream bodies (like the IMF and the G20) have argued for caution and balance in current deficit-reduction efforts, instead of endorsing single-minded deficit-reduction as Mr. Hudak is proposing.  In fact, these international agencies do not even identify balancing the budget as a priority at all.  Rather, they endorse a more cautious goal: a “sustainable” fiscal balance (usually indicated by a stable or declining debt-to-GDP ratio, which does not actually require a balanced budget).

To claim that a balanced budget is good for employment, the Conservatives and any economists who support them must invoke various indirect channels and side-effects from eliminating the deficit.  Moreover, those indirect effects must be big enough to more than offset the direct contractionary impact of the initial substantial loss of spending power.  For example, an oft-cited belief of budget-cutters is that business investment will increase, thanks to greater “confidence” about Ontario’s “economic fundamentals.”  This is far-fetched: surveys of business executives (such as those conducted regularly by the Bank of Canada) list many factors hampering business investment spending (despite the super-strong state of corporate balance sheets), but the size of the provincial deficit is never listed among them.  (Business lobbyists tend to support austerity, of course — but because they favour the resulting reductions in government programs, not because it will “allow” them to invest more capital.)  Equally far-fetched is the idea (promoted by fiscal fundamentalists from Ricardo to Barro) that consumer spending will increase after governments cut their own spending: super-rational households are assumed to understand that a long-term reduction in tax burdens is the ultimate and beneficial result of austerity, and hence they pre-emptively jack up their own spending.  This theory of “expansionary austerity” makes as much sense as other oxymorons (ethical investment? military intelligence? Progressive Conservative?).  These and other general equilibrium-type behavioural adjustments are abstract, theoretical, and empirically invisible.  But they are the only basis on which Mr. Hudak and others could claim that eliminating the deficit, in and of itself, will actually create jobs.

In short, though it seems like “common sense” given the dominance of austerity ideology in recent years, Mr. Hudak’s simple-minded claim that the best way to create jobs in Ontario is to balance the budget is devoid of economic content and credibility.

Despite all of this, I agree with Mr. Hudak on one point: job-creation is the most important issue facing Ontarians.  The election campaign should focus on job-creation, and voters should carefully compare all the parties’ positions to see which one offers the more credible employment vision.  (Of course, much of what happens in Ontario’s labour market depends on things no provincial government can control: like interest rates, the exchange rate, global developments, and the national macroeconomic condition.)

Ontario’s employment averaged 6.9 million in 2013 (including part-time, self-employment, and other forms of precarious work).  Creating a million jobs 0ver 8 years (as Mr. Hudak promised) would be an increase of around 15%, or an average annual rate of job growth of near 2%.  This would require a significant acceleration of GDP growth: to get 2% employment growth normally requires annual GDP growth in excess of 3% (once productivity growth is added into the equation).  There are times in the last quarter-century when Ontario employment did grow that fast (in the late 1980s, the late 1990s, and occasionally since the turn of the century: in the years 2003, 2007, and 2011).  But for that rate of growth to occur on a sustained basis is unusual; demographic factors (like slower population growth) are making it even harder to rack up such high rates of job-creation.

Meeting this goal would thus require (in my estimation) sustained expansionary measures by government, combined with powerful measures to stimulate business investment and exports (two of the other key engines of GDP that have been especially stagnant — across Canada, not just in Ontario).  The question is, how could that happen?

Beyond his simplistic belief that eliminating the deficit will itself magically create jobs, Mr. Hudak’s original material (subsequently repeated in the party’s first campaign documents) listed five main employment-boosting policies:

1. reducing taxes
2. reducing the price of energy
3. training more skilled workers
4. expanding trade with Ontario’s neighbours
5. reducing bureaucracy (which stifles job-creation)

So far he is sketchy on details, promising to release more as the campaign unfolds.  But let’s review the list as it stands.  Number 1 can create new demand and hence jobs — but not very efficiently or fairly (and it makes his deficit elimination task all the harder).  The employment effects of Number 2 are ambiguous.  Some energy-intensive businesses would save money, but would they re-spend it?  What would be the impacts on green energy industries (not to mention on the environment) of abandoning alternative energy plans?  Number 3 on its own creates a few new jobs for the educators hired (presumably through extra government spending?) to do the training.  But training itself creates no new work for those being trained; here Mr. Hudak seems to be buying into the now-discredited idea that employment is actually held back by a skills shortage.  Number 4 is partly correct: expanding Ontario’s exports to its neighbours (the U.S. and other provinces) would certainly create jobs (but increasing Ontario’s imports eliminates them).  How to accomplish that is the challenge: signing free trade agreements isn’t working, what is really needed is active strategies to support Ontario’s export industries and reverse deindustrialization.  But that sounds awfully like “corporate welfare,” and will not likely meet with Mr. Hudak’s approval.  Number 5 is a throw-away bone for business lobbyists.  Business constantly complains about “over-regulation,” and governments of all stripes promise to “cut red tape.”  I have heard this jargon for decades, but it never amounts to anything of significance (in either direction) for the macroeconomy and the labour market.  In reality, governments are forced to regulate due to the irresponsibility of business and the demands of the citizenry for protection.  Hence the only visible employment effect of Number 5 would be on the public servants who would lose jobs in any true bureaucracy-cutting exercise.  On balance, the employment effects of Mr. Hudak’s five policies are ambiguous: some might incrementally support job-creation, others will hurt it.

In short, Mr. Hudak’s initial policy agenda is mostly a recycled business wish list: cut taxes, cut regulations, pay for training, cut energy costs, free trade.  Its logic is 100% trickle-down economics: anything that’s good for business, must be good for jobs and for all of society.  There is no powerful stimulative or expansionary impetus coming from any of those 5 proposals (unlike some other policies being debated in this election, like infrastructure investments and transit programs, which have a logical and direct connection to employment).  And whatever positive employment gains were generated by any of those five measures would be massively swamped by the negative side-effects of the severe fiscal contraction required to achieve Mr. Hudak’s “biggest” job-creating goal: namely, simply balancing the budget.

There is a way in which balanced budgets and job-creation are logically connected — but the direction of causation is exactly the opposite of Mr. Hudak’s argument.  Ontario’s deficit today is overwhelmingly due to the downturn in employment that accompanied the 2008-09 financial crash and recession — recovery from which has been painfully slow and inadequate.  (Remember, for several years before the recession hit, Ontario’s budget was balanced.)  Restoring the employment rate to its 2008 level would mean 250,000 more jobs, and generate billions in additional revenues (through personal income taxes, HST revenues, growing spending, and other streams).  The deficit will take care of itself, if and when we put Ontarians back to work.

Mr. Hudak’s comment at the campaign launch, therefore, should be turned precisely on its head: “The biggest thing that we can do to actually balance the budget in the province of Ontario is to create lots of new jobs.”