Harper vs. Trudeau: This election will be a confidence vote on Liberal-style crisis fighting

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Justin Trudeau was hardly the first prime minister to force an election in the midst of a crisis. Stephen Harper, who also was leading a minority government, did the same thing in the autumn of 2008 as the Great Recession was gathering momentum. Harper asked Governor General Michaëlle Jean to dissolve Parliament on Sept. 7. Legendary Wall Street investment bank Lehman Brothers Holdings Inc. dissolved eight days later. You know what came next: an economic calamity that we’d still be talking about if not for the pandemic. Harper led a greater number of Conservatives to victory in 2008, but not enough to win a majority. He would govern as if he had one, though, and a disenchanted opposition was in no position to get in his way. Harper ran up a big deficit to finance short-term stimulus that helped bring about a recovery and he was rewarded with a majority in 2011.

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The Sept. 20 election will be a confidence vote on Trudeau’s handling of the COVID-19 crisis. Comparisons with the Great Recession are imperfect. The global financial system froze in 2008 and some of the world’s biggest banks collapsed. This time, the banking system was a firewall when governments shut much of the global economy in 2020 because financial institutions had been ordered a decade ago to keep enough cash on hand to absorb extreme shocks. Another difference is the death toll. The COVID recession was caused by the rapid spread of a virus that so far has killed some 4.4 million people. The Great Recession left death in its wake, but not at the scale of the coronavirus, and not in real time.

Harper and Trudeau approached their respective recessions in much the same way, albeit with different degrees of enthusiasm. Harper’s budget deficits peaked at about $56.4 billion in the fiscal year that ended in March 2010, while Trudeau ran up a $314-billion shortfall in the 2020-21 fiscal year.

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The Conservative approach meant sacrificing a vigorous recovery to preserve fiscal stability. As the chart above shows, it took three years to get total hours worked back to where they were on the eve of the Great Recession. The COVID-19 crisis wiped out those and subsequent gains in a matter of weeks. But the economy should be back to where it was before the pandemic by the end of the year, if not sooner, assuming vaccinations blunt the fourth wave of coronavirus infections. Trudeau will have reversed his recession faster, but at the cost of more debt that could impede the economy in the future. Harper accepted a slower recovery in order to ease the strain on public finances, a decision that made balancing the budget in 2015 possible, but at the expense of shifting the burden of the recovery onto businesses and households.

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Most (but not all) economists tend to prefer Trudeau’s approach to crisis fighting. A rapid recovery could avoid the sort of long-time economic and societal scars that were caused by the weak recovery from the Great Recession. Now voters are about to have their say. Their decision will influence how the Canadian political class confronts the next recession.

Financial Post

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