'There are no magic bullets or simple formulae for dealing with financial
panics." So concludes Liaquat Ahamed in Lords of Finance, his recently
published analysis of the financial panic and economic collapse that
characterized the Great Depression. It's advice our own parliamentarians
might well heed as they meet next week to consider the federal budget and
stimulus package.

At the outset of the Great Depression, most politicians, economists, business
people and editorialists were gripped by the widely accepted conviction that
strict adherence to the gold standard was the best guarantee of a return to
economic stability and growth, Mr. Ahamed points out. If opinion surveys had
been conducted then, they would have shown a majority of the public
supporting this view - mainly because it was the position most talked about
and favoured by experts and opinion leaders. But this conviction proved to be
completely wrong.

Many of our politicians, economists and editorialists are also in the grip of a widely accepted conviction - the idea that "stimulative deficits" incurred by governments are the magic bullets to slay the recessionary dragon. Public opinion also supports this view, since no other alternatives are talked about or offered.

The stampede toward governmental deficit spending is being reinforced by the left/right division of our politics, which tends to present us with either/or choices.Either rely on government to achieve economic recoveryor rely on freer markets - with conservatives traditionally advocating freer markets and liberals and social democrats advocating greater governmental reliance.

In the 1920s and 1930s, it was John Maynard Keynes - the "premier gadfly of
economic orthodoxy," as Mr. Ahamed describes him - who challenged the old
gold standard orthodoxy. Keynes called for a new paradigm: the idea that
governments should run deficits when the economy is slow and surpluses
when times are good.

Politicians loved the first part of this thesis (while ignoring the second part)
because it provided an intellectual justification for doing what they liked best
- spending other people's money, much of it borrowed, in vast amounts. It

thus became the new conventional wisdom, leading to a vast increase in
government activity, public debt and taxes until eventually challenged by
new economic gadflies - such as Milton Friedman, who argued that excessive
government growth and spending should be constrained, that taxes should
be lowered, that we should look more to markets than governments for
economic growth and stability. Until very recently, this conservative
orthodoxy prevailed over much of the Western world. But with faith badly
shaken by the recent financial meltdown, we are now back to - guess what? -
a revival of faith in stimulative spending as the best answer to our economic
woes.

Do we not need a new and better paradigm for dealing with our economic
downturn? One that moves beyond either/or choices and toward both/and
solutions? Both governmentsa nd markets have enormously important roles
to play. In responding to this downturn, shouldn't the great imperative be to
find the right relationships and balance between them?

The federal budget and stimulus measures to be presented to Parliament will
focus on government initiatives supported by deficit spending. Provincial
budgets presented over the next few months will do the same. But who will
take the lead in proposing and promoting non-governmental, market-based
initiatives, which are even more urgent for economic stability and growth?
These might well include:

Private-sector infrastructure projects - for example, the pipelines,
transmission lines and communications infrastructure needed to support
continental energy security - and public-private infrastructure projects that
lever public dollars spent on conventional infrastructure with dollars and
expertise from the private sector;

Labour agreements (supported in part by employment insurance and
provincial training funds) aimed at retraining, rather than retrenching, so
Canada emerges from the recession with a more productive and competitive
work force;

Private-sector initiatives to use science, technology and innovation more
rigorously to increase Canadian productivity and competitiveness, especially
in shrinking markets;

Advocacy measures to ensure government spending as a temporary relief measure must be accompanied by ironclad plans and commitments to get out of deficit as quickly as possible;