Category: Economics

Canada, Economics, Inequality, Political economy

Bidenomics signals the end of the Third Way in economic policy

Jacqueline Best

Biden’s first 100 days clearly signals the end of the Third Way in economic and social policy. With massive investments proposed in social infrastructure and education, a willingness to take a positive sum approach to budget deficits, and a commitment to fund those investments partly through higher corporate taxes it’s clear that the Third Way is now truly dead.

For those who may not remember (or who have been all too happy to forget) the Third Way was a strategy cooked up by Centre-left parties in the 1990s who hoped to ride the coattails of a highly deregulated economy and booming stock market while also mitigating some of its damage through targeted social spending. It was called the “Third Way” because it sought to distance itself equally from conservatives and from social democrats. This was the policy style that defined Clinton’s “triangulation,” Tony Blair’s “New Labour,” and Jean Chrétien’s deficit-busting mantra.

The cost of these policy failures has become obvious in recent years, as we have witnessed the 2008 global financial crisis, growing inequality, and the rise of populist resentment—not to mention the discovery that cuts to the public health infrastructure may have trimmed a few government budgets over the year but at the cost of thousands upon thousands of lives (and a shuttered economy) today.

Although Joe Biden was a card-carrying member of the Third Way club in his earlier days, given the huge costs of these mistakes, it is little wonder that he has recognized that it is time for a different approach to the economy.

There are at least three key ways in which Biden’s economic policy breaks with the logic of the Third Way, each of which has important implications for Canadian economic policy.

First, Biden has proposed a massive increase in social spending. His Families Plan aims to invest $1.8 trillion over 10 years and includes support for free universal preschool, paid family and parental leave, investment in child care and education. As Adam Tooze has pointed out recently, the theme of investing in families is in fact central to all three of Biden’s major spending initiatives: the $1.9 trillion Rescue Plan, which has already been signed into law, included a significant, but temporary, family allowance system, while the $2.3 trillion Infrastructure and Jobs Plan includes major investments in elder care.

In a few short months, Biden has upended decades of doomed neoliberal efforts to economize on government spending by cutting social spending and offloading on women the cost of what feminist political economists call “social reproduction”—the work of raising children, keeping households going, and caring for the old and the ill—which the formal economy depends on to keep going.

Although women’s double burden helped families to eke out more from stagnant wages, it seriously affected women’s capacity to participate fully in the formal labour market. As Biden, Justin Trudeau and others from the Centre-left have finally recognized, the savings that deficit-busting governments gained from not investing in women and children was therefore always a false economy. As Quebec has made clear, affordable daycare more than pays for itself with the extra tax receipts earned when women are fully active in the workforce.

Second, Biden has finally given up on the Third Way faith in the virtues of balancing budgets and reducing debt. It was always particularly painful to watch Clinton and Obama Democrats, Chrétien Liberals and Blair’s Labour Party cut and cut and cut away all of the programs that they had once helped to create in the belief that this was the only way to get government back on solid fiscal ground. (Of course, Republicans from Reagan onward never believed in balancing their budgets, even as preached the virtues of the “Washington Consensus” on those in the Global South.)

It seems that Biden and his Treasury Secretary, Janet Yellen, like Trudeau and our Finance Minister, Chrystia Freeland, have finally recognized that the zero-sum logic of balanced budgets as an end in themselves is based on a fundamental fallacy. If a country cuts back too much on its spending in the name of austerity, it can create a downward spiral of less consumption, lower investment and increased unemployment, actually slowing the recovery (as we saw in Greece and the UK after the 2008 crisis). On the other hand, the build-up of careful, productively-invested debt can generate decades of growth that not only make a country wealthier but also ensure that the wealth benefits more of its population.

Finally, Biden has proposed that some of the additional spending should be paid for through higher taxes on the wealthy and on corporations. He seeks to double the tax on capital gains and raise corporate tax rates from 21% to 28%. This is a crucial shift after decades in which the Centre-left has gone along with the neoliberal myth that helping out investors and big corporations ultimately trickles down to the rest of us, while raising their taxes only hurts consumers. In fact, as the Tax Policy Centre notes, most corporate taxes in the US are paid for by investors—with 70% paid by the top 5% of income earners.

This is the one area where Biden is clearly ahead of the Trudeau Liberals in challenging the myths of the Third Way. There has been no sign of the current Canadian government wanting to reverse the Chrétien Liberals’ sharp reduction in the capital gains tax or to raise corporate taxes (which were also slashed under Chrétien, and then further cut by Harper). It appears that the Trudeau Liberals are not ready to discard their unhealthy relationship with big business and challenge the Third Way myth of corporate trickle-down.  

Although it’s hard to say how much of this ambitious plan Biden will get through Congress, what is clear is that by challenging the damaging myths of the Third Way, Biden has shown that it is possible to imagine a more just economy, not just in the US but around the world.

This blog was originally published on the CIPS Blog, May 31, 2021.

Banking, Canada, Economics, Finance

The Bank of Canada must seize the pandemic’s historic moment and embrace innovation

Jacqueline Best

Peter Dietsch & Jacqueline Best

The Bank of Canada, like central banks around the world, is currently facing enormous upheaval and uncertainty due to the enduring COVID-19 pandemic.

Will its leadership seize the moment as an opportunity to innovate and respond to the challenges ahead, including rising inequality and climate change? Or will it treat the present crisis as a temporary exception, hoping to return to business as usual once the pandemic recedes?

This spring, the bank released the results of its consultations with Canadians as part of its current mandate review. This is a historic opportunity for our central bank and the federal government to make the bank work better for the Canadian people.

As academics specializing respectively in philosophy and economics, and politics, we’d like to highlight two key themes that emerged in the Bank of Canada’s consultations with Canadians.

Wealth inequality, climate action

First, many Canadians are deeply concerned about the increasingly unequal distribution of wealth in this country — particularly by the way it has been driven by skyrocketing house prices. Second, some Canadians would like to see the Bank of Canada take the threat of climate change seriously as it plays its key role in ensuring price and financial stability.

How could the bank do better in tackling these two core problems — the scourge of rising inequality and the future shocks of climate change?

On inequality, there are many useful models around the world. Although Canadians like to think that we’re more progressive than our neighbour to the south, the United States is actually well ahead in rethinking the role of their central bank. Its recent shift towards what’s known as average inflation targeting, a strategy that seeks to balance inflation and growth over the medium term, gives it more flexibility to promote employment.

Such a strategy, potentially combined with a dual mandate of price stability and employment, would allow the Bank of Canada to pay more attention to the needs of all Canadians. The bank’s consultations with Canadians suggest that there is in fact considerable support for such a move.

While this would be a first and important step in modernizing the central bank’s mandate, we need to go further and take a more careful look at some of the unconventional policy tools that the central bank has been using in the last year.

Quantitative easing

Since the COVID-19 crisis took hold, the Bank of Canada joined other central banks in engaging in what’s called quantitative easing, initiating massive purchases of financial assets. As a result, its balance sheet has increased by close to 500 per cent since March 2020.

Such liquidity injections by central banks are clearly necessary. The question is how this liquidity should be injected.

Suppose your doctor prescribes you a drug that is known to have serious side effects. Wouldn’t you want her to look into alternative treatments? The experience with quantitative easing since 2008 shows that it has two serious side effects, both of which speak to some of the core concerns of Canadians.

First, it exacerbates inequality. While the central bank may want to see a good portion of the injected liquidity used to stimulate real economic activity, this is not something it can control. Instead, a lot of the liquidity has ended up in stock markets and housing markets, benefiting wealthy asset owners and helping to push the cost of owning a house beyond the means of many Canadians.

As Mark Carney, then governor of the Bank of England, acknowledged in 2014, “the distributional consequences of the response to the financial crisis have been significant.” The same is true today.

Second, when quantitative easing includes buying corporate bonds, it facilitates access to capital markets for the firms in question. Central banks appeal to the idea of “market neutrality” and claim that an asset purchase that reflects current bond volumes on capital markets does not favour anyone in particular. But in countries like Canada, when you buy a basket of corporate bonds proportional to the outstanding bonds on the market, you inevitably reinforce the status quo with its many companies that have large carbon footprints. That inevitably slows the transition to a more sustainable economy.

Politics comes with the territory

Some will caution that independent central banks should not get involved with such deeply political issues. The answer to this is simply: It’s too late for that. Political decisions come with the territory of central banking today, and we better develop innovative policy instruments to reflect this reality.

Other central banks are adapting already. In December, the Swiss National Bank announced that its asset purchases will exclude all companies primarily active in coal mining.

Perhaps more significantly, since Christine Lagarde has taken over as president of the European Central Bank, the institution has vowed to take a more active stance on climate change.

Unconventional policies can also be used to alleviate — instead of exacerbating — inequality. One idea is to transfer money to citizens through so-called helicopter money, rather than rely on institutional investors to translate quantitative easing measures into economic stimulus. The policy response to COVID-19 actually provides an interesting blueprint for this.

The overall tone of the Bank of Canada’s consultations report seems to suggest that the bank is more comfortable with the status quo than with serious innovation. Although this may sound very Canadian, our central bank actually has a history of being an innovator in monetary policy. It was among the first central banks to adopt monetarism in 1975, and the second to adopt inflation targeting in 1991 when it was still an untested approach. To confront today’s many challenges, the Bank of Canada needs to rediscover that innovative zeal.

This blog was originally published on The Conversation, May 4, 2021.

COVID-19, Economic exceptionalism, Economics, Political economy

When it comes to COVID, our political leaders have been seduced by wishful thinking

Jacqueline Best

When confronted by the very difficult decisions created by the second wave of the COVID-19 pandemic, our political leaders have been seduced time and time again into a dangerous kind of wishful thinking. Instead of acting decisively to save lives, they have wavered and delayed—fiddling around with different colour-coded regional schemes, holding off on requiring masks, or reopening restaurants, bars and gyms in regions in regions where case counts were still rising.  

What is it that political leaders treat as so important that they are willing to run this kind of risk with people’s lives? It’s the economy, of course.

And yet, this concept of “the economy,” which we are told to make so many sacrifices for, is actually a fiction – based on a series of longstanding narratives that must be challenged if we are to tackle the current crisis.

Probably the most pernicious fiction is the idea that the economy is so important that it trumps politics as usual, allowing the suspension of liberal democratic norms in the name of its survival.

This is an assumption that I’ve described elsewhere as a form of economic exceptionalism. We saw it over and over again in the aftermath of the 2008 financial crisis, when all sorts of exceptional measures were justified in the name of the survival of the economy: first bailout packages and then austerity measures were rushed through legislatures, while unelected central banks took on huge new powers—all in the name of responding to the economic emergency.

Decisions about how to respond to a crisis don’t affect everyone equally. Yet it is easier to talk about saving “the economy” than to explain why a government should help some folks (like those who benefited from the bailouts) rather than others (the ones who were asked to do the belt-tightening later).

Yes, major crises like wars, economic crises and pandemics justify some exceptional measures. But we should be very wary when our political leaders tell us that we must suspend our norms and make sacrifices for the sake of “the economy.”

This logic of sacrifice depends on another powerful fiction: the idea that a “sound economy” is some sort of abstraction that can be separated out from the lives of the people who make up that economy.

This is an idea that has risen and fallen in popularity over the centuries. It dominated economic thinking in the laissez faire nineteenth century, when the Global North relied on the gold standard to ensure “sound money” and free trade. Yet even as these politicians did whatever they could to protect the integrity of their own economies, they were also ruthlessly extracting resources from the Global South through colonialism. The term “free trade imperialism” nicely captures this hypocrisy – a term used by the British to justify their use of gunboats to force China to continue the opium trade.

The idea of the economy as an abstract thing began to fall out of favour during the Great Depression, when it became all too clear that efforts to protect a sound economy by imposing austerity only made things worse. After living through that terrible experience, politicians and economists alike recognized there is no such a thing as a “sound economy” apart from the men and women trying to find work to support their families. Their creation of the welfare state and policies like unemployment insurance, public education and health care were all based on their recognition of the importance of treating economic health holistically. 

Yet, in the 1980s, as Margaret Thatcher told us that “there is no such thing as society,” we began to forget many of those lessons, and to treat the economy as a separate entity with the principle of “sound money” once again trumping employment as the dominant objective.

The final fiction that we’ve heard in the last months is the ill-fated idea that it’s possible to take a “balanced approach” to the pandemic response, as Alberta Premier Jason Kenny and Ontario Premier Doug Ford have both argued. Mr. Ford outlined his government’s version of this approach in a recent statement, in which he noted, “the number one priority is health and safety, and right beside that is the economy.”

At the core of this strategy is a false opposition between “health and safety” and “the economy” – as if it were possible to balance so many dollars in an economy on one side of the equation, and so many illnesses (and needless deaths) on the other.

Of course, as even the Ford and Kenney governments have finally begun to recognize with their latest U-turns, there is no trade-off between health and safety and the economy – particularly in the medium to long term. It is only by giving up on economic wishful thinking and taking decisive action to restrain the spread of the virus that we can ensure that we have a healthy population capable of rebuilding the economy in the months and years to come.

The economy is not a separate thing. Nor is it a god that must be placated through our sacrifices. It is us. Only us. And we must be healthy, safe, and supported by a capable government if we are to continue to thrive together.

A shorter version of this blog appeared in The Globe and Mail, November 29, 2020.

Accountability, Banking, Economics, Measurement, Political economy, Uncategorized, Uncertainty

Why we need better central bank accountability

Jacqueline Best

As pundits debate whether the US Federal Reserve will raise interest rates again this summer or fall, we are reminded of just how much of the economy’s direction hinges on central bankers’ decisions.

Since the 2008 financial crisis, the power of central banks has grown, as they have used unorthodox tools to stimulate the economy, taken a greater role in financial regulation, and put themselves in more politically sensitive positions, including the tough debt negotiations with Greece.

In spite of this powerful role, central bankers are remarkably insulated from democratic oversight. As a recent “Buttonwood” column notes in The Economist, “Janet Yellen and Mario Draghi are very important players in the world economy, arguably more important than the US President or the German chancellor. And yet they are not elected; if voters do not like the job they are doing, they cannot get rid of them.”

There is a great deal at stake in decisions about monetary policy, as I suggest in a recently published article in Ethics & International Affairs. Central banks not only define the broad direction of the economy but also create winners and losers. Consider, for instance, the disparate reactions of a prospective first-time home buyer and a retired couple living on their savings to the prospect of yet another drop (or increase) in the interest rate.

Central bank independence in its current form is relatively recent. Elected leaders exercised considerable influence over monetary policy in the post-war era, seeking to achieve the right “trade-off” between full employment and inflation. It was only in the 1980s that policymakers moved away from this kind of Keynesianism and embraced the ideas of Milton Friedman, who advocated the creation of an independent monetary authority.

Friedman and other economists believed that if governments were given any discretion over monetary policy they would adopt inflationary policies because these were more likely to be popular with the electorate. They argued that the only way to ensure price stability was to radically limit the government’s influence over monetary policy by making central banks autonomous and requiring them to stick to a simple rule, such as an inflation target. By the late 1990s, central banks in over thirty countries had gone down this path and were using some form of inflation targeting.

The current model of central bank governance does provide for a certain kind of accountability—but only a very narrow one. Ensuring accountability generally involves three elements: broadly-agreed upon standards, information on whether they are met, and sanctions if they are not. Because the principle of central bank independence involves a very limited set of standards—specifically, the achievement of an inflation target—and very few opportunities for sanction, the main mechanism for accountability is provided by publishing information about the bank’s activities. Hence we have seen the rapid expansion of central banks’ commitment to providing more and better information about their models and decisions in recent years.

Unfortunately, while this informational form of accountability may have worked during the stable years of the “Great Moderation” (from the mid-1980s to the 2008 crisis), it is no longer up to the task in the volatile post-crisis era.

Bank of Canada Governor Stephen Poloz and US Federal Reserve Chair Janet Yellen have both suggested that growing economic uncertainty has reduced the effectiveness of simple models and rules. What these bank governors have not acknowledged (unsurprisingly) is the challenges that this growing uncertainty poses for existing forms of accountability.

If uncertainty limits the effectiveness of rule-based policy, then it ultimately requires greater discretion on the part of policymakers. This is not a problem in itself (here I would disagree with those Republican lawmakers who would bind the Fed even further with more stringent rules). More discretion does, however, require a more robust form of accountability.

There are three basic principles that should underpin any such reforms.

1) Fostering more deliberation and dissent

While the informational model of accountability obligates decision-makers to explain their actions, it reduces this process to a simple publication of data. What is missing is the back and forth of question and answer—the process of genuine debate and deliberation. By the mid-2000s, central bankers were being treated like oracles, with Alan Greenspan as the most revered among them. There must be more room for dissent—both among those with the power to set monetary policy and in the wider society that is affected by those policies.

2) Ensuring that central banks are answerable to the wider public

Because financial issues are complex and their impacts are often diffuse, monetary policy questions rarely become salient enough to mobilize public action. In this context, the power of sanction actually shifts away from the two groups to whom central bankers should be accountable—the government and the public—and toward financial actors, who can impose very serious sanctions on central banks if they disagree with their policies. Without overly politicizing monetary policy, we need to find creative ways of ensuring that central banks are more accountable to the wider public.

3) Broadening the objectives against which their actions are judged

One way of ensuring that monetary policymakers are accountable to the public is to ensure that the issues that affect citizens are reflected in the standards that guide bank policy. At present, most of these issues are not officially on the agenda, which is constrained by the goal of achieving a very low level of inflation.

A number of commentators have recognized this dilemma and have suggested that today’s inflation targets may no longer be appropriate. A recent Federal Reserve working paper suggests that increasing the current inflation target and supplementing it with a nominal GDP target makes economic sense. Such moves to broaden the objectives used to guide central bank decisions would also go some way toward increasing their accountability.

As central banks take on an increasingly powerful role in our political and economic lives, it is time to find new ways of ensuring that they are more fully accountable.

This blog first appeared on the Carnegie Council’s Ethics & International Affairs website.

Banking, Economics, Exception, Finance, Political economy, Risk, Uncertainty

Central banks are facing a credibility trap

Jacqueline Best

Quite a few commentators have noted that central bankers have become rather less boring of late. Since the 2008 financial crisis, central banks have taken on new roles and responsibilities. They have experimented with a whole range of unconventional monetary policies. And, in the process, they have gained considerably in power and influence.

There has been less attention to a key paradox underlying central bankers’ new roles on the world stage: they are being forced to govern through exceptions in an era in which rule-following (particularly the holy grail of the 2% inflation target) has become the ultimate source of policy credibility. Where central bankers are supposed to stick to the rules, they have found themselves endlessly making exceptions, promising that one day things will return to normal.

This paradox poses real challenges for efforts to foster a sustained global economic recovery. Governing through exceptional policies is always a politically-fraught undertaking, particularly over the long-term, but it is even more difficult in a context in which the dominant convention is one of strict rule-following.

Since the early experiments with monetarism in the late 1970s and early 1980s, most central banks have moved towards an increasingly rule-based approach to monetary policy, with inflation targeting becoming the norm in many countries in recent years.

Yet today we are faced with a situation in which the rules no longer apply but are still being invoked as if they did.

A recent Buttonwood column notes that the Bank of England has missed its inflation target “almost exactly half the time” since 2008. The European Central Bank (ECB) has effectively expanded its narrow mandate, which formally requires it to make price stability its top priority, by arguing that employment and other issues are crucial to achieving it. Yet the ECB and the Bank of England continue to act as if the old rules still apply.

If we look beyond the narrow rules that are supposed to be governing central bank actions and examine the wider changes in their recent policies, we find similar patterns. Scratch an unconventional monetary policy and you will find a kind of economic exceptionalism: an argument that the crisis that we face is extreme enough that it requires a radical but temporary suspension of economic rules and norms.

Most of the unconventional monetary policies that have been tried to date, and just about all of those that have been proposed as future possibilities if we face a renewed global recession, break quite radically with existing norms. Negative interest rates weren’t even supposed to be economically possible (until they were tried), while quantitative easing (a central bank’s buying up bonds by massively increasing the size of its balance sheet) still carries a whiff of irresponsibility linked to its past as a way for governments to avoid fiscal retrenchment by “printing money.”

More recent proposals include helicoptering money into the government’s or the public’s accounts, abolishing cash to make low interest rates effective, and even introducing a reverse incomes policy—a government-enforced increase in wages (as opposed to the wage controls of the 1970s) to try to get inflation going.

All of these existing and potential policies break with current economic norms, and all are being pitched as temporary, exceptional measures that are (or may be) necessary in the face of an extreme crisis.

Ironically, rule-following was designed precisely to avoid this problem. It came into its own as an influential approach to monetary policy in the wake of the destabilizing 1970s, with their stop-go economic policies and rampant inflation. Mainstream economists came to love rule-based monetary policy as did politicians—not just neoconservatives like Margaret Thatcher and Ronald Reagan who first championed the approach, but eventually the more centrist politicians who followed like Tony Blair and Bill Clinton, as well as today’s mixed lot.

A rule-governed approach to policy was designed to be both politically and economically stabilizing—to do away with the problem and even the possibility of exceptions by removing not only governments’ but even central bankers’ discretion: just stick to the rule, and everything will work out. A tidy, efficient, depoliticized (although certainly not apolitical) approach to monetary policy.

Yet rules only seem great until they don’t apply anymore. A rule that pretends it can always apply (or at least, as Colin Hay puts it in his introductory blog, in the 99.9% of times that seem relevant) inevitably runs serious problems when an exception becomes necessary.

Of course, as Alan Greenspan has noted, the victory of rules over discretion was never entirely true in practice. But it was an extremely powerful narrative—one that promised that central banks’ (and governments’) commitments to low inflation and economic stability was credible because they were constrained to follow the rules.

It was also a very effective narrative that has convinced markets that anything other that rule-following is likely to be destabilizing. As central banks begin to face the limits of those rules, their earlier persuasiveness has come back to haunt them: a recent paper from some Federal Reserve staff notes that although a higher inflation target would make sense in the United States, increasing it could well backfire if market actors believed that it would be too inflationary.

This fixation on rule-following has thus put central bankers into a credibility trap. If bankers admit that the rules no longer apply, then they risk losing their credibility as market actors have come to believe the mantra that rules—particularly low inflation targets—are the only way to ensure sound monetary policy. On the other hand if they don’t admit the limits of the rules, and continue lurching from exception to exception, they will eventually lose credibility as the gap between rhetoric and reality widens.

Central banks are damned if they do admit the limits of rules and damned if they don’t.

Of course, the most viable solution to this trap is for governments to stop relying so heavily on central banks in the first place and start taking some responsibility for economic recovery through concerted fiscal action (something that the Canadian government has at least started to do). Yet for that kind of fiscal action to work, governments have to convince the markets that they believe in it enough to stick to their guns and follow through—a rather unlikely scenario in today’s austerity-driven times.

As the potential for renewed economic crisis continues to grow, this credibility gap will only widen—as central bankers and governments find themselves lurching from exception to exception, refusing to question the neoliberal rules that no longer seem to apply.

This blog was first posted on the Sheffield Political Economy Research Institute’s website.

Canada, Economics, Inequality, Political economy, Theory

Rebuilding the middle class: The Liberals have a chance to rectify their past economic mistakes

Jacqueline Best

As the new Liberal government starts to put its economic plan into action, its commitment to paying attention to the evidence (unlike its Conservative predecessors) should provide them with both comforting and cautionary tales.

On the one hand, there is ample evidence to support the Trudeau government’s plan to allow for short-term deficits in order to reinvest in infrastructure and rebuild the middle class. On the other, the data also points to a rather more inconvenient truth: the trend towards growing inequality actually started on the Chrétien Liberal government’s watch.

A recent report by TD Economics notes that while the top 20% of income earners have gained 30% since 1976 (most of that since 1994), the middle 20% have only seen an increase of about 5% in that time. More tellingly, the report suggests that it was only in the mid-to-late 1990s that the level of inequality in Canada began to take off “when governments stopped leaning against income inequality.”

During the campaign, Justin Trudeau demonstrated his willingness to take on board new economic thinking and break with the old Liberal Party’s obsession with paying down the debt at any cost. Although the Trudeau Liberals’ willingness to run a small fiscal deficit in the short-term was ridiculed by the Conservatives and challenged by the NDP during the election campaign, it is actually entirely consistent with much mainstream economic policy thinking today.

A recent discussion note by economists at the International Monetary Fund (not exactly known as a bastion of left-wing thinking) warned governments like Canada against imposing austerity measures in order to pay down their debts more quickly. The authors note: “While debt may be bad for growth, it does not follow that it should be paid down as quickly as possible.” In fact, “If fiscal space remains ample, policies to deliberately pay down debt are normally undesirable.”

Or, to borrow former NDP leader, Jack Layton’s, well-known phrase (as noted in a column by Andrew Coyne last March) there is little point in paying down your mortgage faster when your house is falling down from badly-needed repairs.

This reminder of Layton’s common-sense wisdom should tell us two things. First, and most obviously, the NDP lost its way in its efforts to seem economically credible enough to govern. While there is no question that the party had far less political leeway than the Liberals to challenge what has become a Canadian obsession with balanced budgets and debt-reduction, by setting aside the more hopeful ambitions of Layton’s NDP, Mulcair and his advisors ended up in the odd position of being more conservative than the IMF (not to mention Andrew Coyne).

Second, we need to remember that it was the Chrétien and Martin Liberals, not the Conservatives, who made debt reduction a centrepiece of their economic policy in the 1990s and early 2000s.

The first cuts made in the 1990s were designed to reduce what had become a genuinely unsustainable deficit. Back then, Canada faced a milder version of Greece’s recent dilemma, with bond markets increasingly suspicious of the government’s credit-worthiness.

Yet what started as a strategic response to external pressures soon became an end in itself: the running of surpluses to pay down the debt became a mantra—part of the brand of the Liberal Party itself.

As we now know, that policy had its own very serious human costs.

I remember well the moment when the Liberal government stopped leaning against inequality and started to dismantle the same social policies that Pierre Trudeau’s government had built. I was a parliamentary intern in the House of Commons from the Fall of 1994 to the Spring of 1995 (in fact, one of my fellow interns was Arif Virani, who has just been elected as a Liberal MP for Parkdale-High Park). I watched a Liberal party that had campaigned on the left move sharply right. I watched smart, progressive politicians like Lloyd Axworthy overseeing the erosion of our social infrastructure, and I tried to understand why.

That experience shaped the rest of my career. I decided to go back to university and become a professor of international political economy in order to try to understand why countries like Canada could believe that they had to destroy their social fabric in order to survive economically—and how we could prevent this happening again.

In the twenty-plus years since I first sought to understand how Canadians can foster a caring and just society in a competitive and often unstable global economy, I have not come up with any easy answers.

But I do know that a Liberal government that is genuinely open to learning from the evidence, and committed to paying attention to inconvenient truths, will not reproduce the same mistakes that it once made.

Rising inequality hurts all of us. Recent research has shown that more unequal societies don’t grow as quickly, as many members of society find themselves unable to invest in their education and training, decreasingly overall productivity.

As the TD Economics report notes, the factors that allowed us to avoid the more radical hollowing out of the middle class seen the United States in recent years can no longer be counted on, as the commodity boom comes to an end and the hot housing market starts looking increasingly like a bubble about to burst (or at best deflate). Without creative government action, we are at risk of falling into a vicious cycle of lower growth, cuts to programs, further inequality and even lower growth.

While some might argue that the Bank of Canada’s recent downgrades to the economic outlook should push the Liberals back into their old austerity mode, that zero-sum game no longer holds water. As middle-class jobs come under even more pressure, leaning against inequality can help us all.

This was originally posted on the CIPS Blog.