The Canadian dollar wobbled after Justin Trudeau was declared prime minister. Traders soon got over it.
International investors in Asia were given the first opportunity to pass judgement on the man and the party that more than 6.9 million Canadians chose to lead them. The loonie fell initially against the U.S. dollar, a knee-jerk response to Trudeau’s pledge to run small deficits in order to spend extra on infrastructure. Those doubters only created a buying opportunity for anyone with a less jaundiced view of government’s role in the economy. By the start of the trading day in Toronto, the Canadian currency had rallied. The Liberal Party’s platform included some of the best contemporary thinking on how best to confront an era of economic stagnation. The majority Trudeau won on Oct. 19 will ensure those ideas become policy without delay.
Polls made the campaign look closer than it was. Prime Minister Stephen Harper continually insulted the intelligence of the men and women he needed to elect him. He rushed the sale of the federal government’s shares in General Motors just so he could record a budget surplus ahead of the campaign. He made a virtue of balanced budgets, ignoring the fact that Canada’s economy had slowed to its weakest pace of growth outside a recession since 1992. He promised incentives for more spending on homes and renovations, even though record household debt is one of the biggest threats to the economy. Harper’s opponents made too much of the small contraction of gross domestic product in the first half of 2015, insisting the Conservative government was to blame for a second “recession.” But the prime minister failed to see that the public deserved a better response to the danger of economic stagnation than policies suited for times of plenty.
Trudeau, in his acceptance speech, called the surge in Liberal support a “movement.” That attempt to create an echo of Barack Obama’s victory in 2008 might be a stretch. As the Liberals took a lead in the polls, they became a magnet for an anti-Harper vote that rivaled Americans’ contempt for George W. Bush at the end of his presidency. An increasingly desperate Conservative campaign gave up trying to expand its vote. Instead, it attempted to buy suburban votes (a renovation tax credit) and preyed on the fears of its most likely supporters (a niqab ban at citizenship ceremonies). For years, the Conservatives have been the best-funded of Canada’s political parties and in possession of the most data. They knew where their voters lived and the messages to which they would respond. Their strategy failed to account for the possibility of inspiring non-Conservatives to rise up against the government. More than 68% of eligible voters cast a ballot, the highest turnout since 1993, according to Elections Canada. The average of Harper’s three victories was 61.5%. There was a movement afoot on Oct. 19, but it was at least as much about deposing Harper as it was an embrace of the Liberals and their untested leader.
Still, Trudeau deserves credit for winning the anti-Harper vote. Tom Mulcair, the New Democratic Party leader, appeared overly worried about deflecting Conservative attack ads. His vigorous defense of balanced budgets and a promise to cut the taxes of small businesses left the NDP looking like Harper-lite, at least on the economy, the issue that all leaders agreed was the most important of the campaign. Trudeau, too, needed time to get over the Canadian political class’s obsession with balanced budgets. He waited until the campaign was well underway before announcing he would run small deficits to help fund a $60-billion infrastructure program. The announcement was the turning point of the campaign, helping the Liberals vault from third place in the polls to first.
There is little reason to worry about Trudeau’s pledge. The federal government’s ratio of debt to GDP is low by international standards, meaning the country can afford to increase its borrowing without fear that investors will demand higher yields. Economists estimate the Liberal program could increase economic growth next year by half a percentage point, taking the pressure off the Bank of Canada to lower interest rates. The combination of stronger economic growth and stable monetary policy should more than offset any worries in financial markets over deficits. If they persist, Trudeau could underline his promise to return to fiscal surpluses by rewriting Harper’s balanced-budget law to match the Liberal government’s intentions. His only other option is to scrap it, which only would give the new Official Opposition a target for early attacks.
Some will attack the efficacy of Trudeau’s spending plan. They will dismiss the ability of fiscal policy to boost economic growth in the short term, and they will point out that infrastructure projects invariably take a long time to ready. Such critiques will miss the point. There is a qualitative difference between Trudeau’s program and the fiscal stimulus Harper implemented during the financial crisis. In 2009, the global economy was in a deep recession. Governments around the world spent heavily and hastily to arrest the decline. They succeeded.
Things are different now. Canada’s economy is growing, but much too slowly. Any spending must aim to bring about “structural change” by making the economy more productive, and thereby increasing its potential to grow faster in the future. That means more public transit and fewer hockey rinks. Project selection will take time and payoff will come years after. But the reason to do it now is that interest rates may never be lower. It is sound economics. If Canada’s new prime minister implements it successfully, then in a few years we may witness real Trudeaumania.
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