An editorial, Time for Debate on the Economy, in the January 26, 2008 Toronto Star reports that David Dodge, the outgoing Bank of Canada Governor, predicted "that the economy will not be hit by a recession, although growth this year will slow to 1.8 percent." However, the editorial continues, "Goldman Sachs, Morgan Stanley, Merrill Lynch and Citigroup are now all predicting a U.S. recession this year, with growth about half of what Dodge is predicting". The forces of recession in the U.S. will certainly spill over into Canada.

I agree that it is time for debate on the economy but even among economists and in academia, there are different opinions on what must be done to curtail or minimize the effects of a recession. It seems that most economists agree that fiscal policy¹ is the most important part of the answer but there is disagreement whether there should be increases in government spending or tax cuts. There is also disagreement on how or where government should increase spending and the same goes for tax cuts.

My own bias leads me to believe that it is the progressive view (my term) which I tend to think is the right way to go. Following is a quick view of some of these ideas.

First, what is the meaning of "recession"? The textbook definition of a recession is two consecutive quarters of negative economic growth, as measured by gross domestic product (GDP). The National Bureau of Economic Research, a leading U.S. economic think-tank, says there are other factors involved. Its definition involves "a significant decline in economic activity," which also takes into account the depth of the decline, monthly indicators and factors other than the real GDP. If a decline be-comes more prolonged and severe, a recession can become a depression. When a recession crosses that line is, again, a matter of judgment. So even on the matter of definition there are differences of opinion.

Many economists agree that with gloomy forecasts for the economy, the government needs to undertake radical tax cuts to avert a recession. However, some say not the tax cuts demanded by the business elite but those that are more focused on the populace. Ordinary people will actually spend most of the money they save from tax cuts while the very wealthy will still buy something that they would have without the tax relief. Ordinary people spending more money on everyday items has a greater multiplier effect² on the entire economy.

For the same reasons as above, these economists will likely believe that the economic downturn calls for a boost in the income of those at the bottom or middle of the pyramid. One way of accomplishing this is to exempt the first $15,000 of earnings from payroll taxes for a year, starting as soon as possible. This may cause the deficit to widen a bit, but if the economy goes bad, the deficit will be far bigger.

Others might say tax cuts to the wealthy individuals will not cause them to spend more money than they would without tax cuts and therefore would not help to prevent a recession. Furthermore, too high taxes on corporations will discourage foreign investment and even drive corporate investors from the country. Recent past events show this is not true as outlined in my article, The Myth of Tax Cuts, in the February 2008 issue of Viewpoint.

It appears that most economists agree that the boost to the economy has to be temporary and timed right. The goal is to increase spending that spurs growth and economic activity. According to John Maynard Keynes, when entrepreneurs are nervous and uncertain, as they are during a recession, it isn't enough to rely on the unpredictable "invisible hand" of supply and demand forces in the market-place. Instead, a strong and highly visible hand is needed. One that is seen to be injecting money di-rectly into the economy, into the pockets of consumers and business owners. In such times it is only the government that can take the steps required to put money, directly or indirectly into consumers' hands. Such steps might include increasing the minimum wage and welfare rates and other social spending.

From the above, it appears that it is the uneven distribution of income that is the largest cause of most of the ills of our economic system. Any steps that reduce the huge gap between the extremely wealthy and the poor will help to cure many of these ills.

Increase in wages is the obvious direct way to reduce the income gap. However, wages have increased little during the last two decades. There is also an indirect way to reduce the gap. Social spending, sometimes known as the "safety net", is one such way, which in the last 15 years or so, has been curtailed by governments.

¹ Fiscal policy: The budgetary decisions of governments, including the collection of taxes and the level of government spending.

² Multiplier effect: The initial spending causes other people who received the money to spend and so on.