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June 23, 2020

In the past weeks, Canada’s economy has begun to reopen. This restart is tentative and faces great uncertainty. Nonetheless, Canada’s governments must now turn to planning for our economic recovery. The recovery plans should focus on laying foundations for Canadian prosperity in decades to come. Well-targeted infrastructure investments should be the centrepiece.

Notwithstanding the risk of a second wave for the pandemic, all indications are for a long, hard recovery rather than any “V-shaped” bounceback. Canada’s economy will likely face a period of weak demand from consumers and for our major exports, as well as depressed capital spending by private business.

Managing the crisis required unprecedented outlays by the federal government to support households and backstop businesses. Safeguarding a resilient recovery will also require exceptional government stimulus.

Governments must pivot from emergency income supports to public investments that rebuild our economy. Facing prolonged slack in many consumption-oriented sectors, fiscal stimulus should target re-employment of labour to construct and maintain those public assets that enhance Canada’s long-term living standards.

Certain commentators have argued against “traditional” fiscal stimulus and also against attempting to engineer a “green recovery.” The argument against traditional fiscal stimulus is that public-health restrictions constrict certain activities and therefore trying to boost aggregate demand is like pushing against a wall. The argument against green stimulus is that carbon pricing should be the policy tool to incentivize investments in energy transition, rather than governments picking winners through subsidies.

These views have some merit, but they lack nuance.

First, activity can safely resume in many sectors, and virus transmission can be mitigated in many workplaces. Because physical distancing still constricts traffic at restaurants and shopping malls does not mean that workers cannot return to construction sites. Regular testing can protect crews, and rigorous protocols can reduce the risk of virus spread.

Second, if certain sectors take years to recover, workers cannot just sit on the sidelines. Yes, it takes time to learn new skills, but at least some of the extensive retraining needed can happen on the job. Waiters can learn to weld. Flight attendants can train to drive backhoes. Former retail staff can manage site logistics.

Third, Canada’s economy faces heavy headwinds beyond just public-health limitations. While household spending has come off its nadir, many households face diminished net worth and a deferral cliff on mortgage payments awaits this fall. Slow recovery of consumption, which represented 56 per cent of precrisis gross domestic product, would drag on overall aggregate demand.

The volatile international setting – particularly continuing turmoil stateside – also threatens recovery of Canadian exports. And a depressed export outlook means that many companies – for example, in Canada’s hard-hit petroleum sector – will shelve outlays on new production capacity.

This points to a sluggish recovery with elevated unemployment – unless government intervenes to stimulate aggregate demand. Commentators are right that this isn’t a normal recession. Indeed, the severity of the overall contraction and the particular wallop to household spending mean that extraordinary fiscal stimulus is necessary.

Nonetheless, any stimulus must not be “digging holes to fill them up” (to paraphrase John Maynard Keynes). Governments should target public investments to boost productivity and make lives better in the long term.

A practical question is whether the dollars can get out the door quickly enough while avoiding the trap of “easy” but low-value spending.

Canada has three good channels to accelerate public investments. First is addressing the backlog of repairs on aging infrastructure. The recent Canadian Infrastructure Report Card found significant shares of roads, bridges and water infrastructure in poor condition nationwide. Provinces and municipalities should have prioritized inventories of deferred maintenance on which to rapidly put crews to work.

Second is telecommunications infrastructure. The crisis underscored the value of digital connectivity, and high-speed broadband can boost rural and remote communities’ economic development.

Third is facilitating decarbonization and adapting to climate change. If confronting climate change is the moonshot of our time, this can be the Apollo program for a generation of engineers and scientists.

Commentators are right that carbon pricing is the economically efficient policy to achieve greenhouse gas reductions. But public investment has a potential role to play in backbone infrastructure to enable the energy transition – such as inter-regional power transmission lines that widen market access for renewable generation. Likewise, public transit systems will not get built without government involvement.

As well, economywide decarbonization will not happen in the laboratory, and governments should help prove out promising, new technologies by investing in demonstration-scale projects – for example, development of small modular nuclear reactors, hydrogen production, grid-scale battery storage and carbon sequestration.

Finally, adapting to climate change will require “public good” investments in flood, drought and wildfire mitigation. Facing increasing likelihood for extreme weather events, Canada must build resilient infrastructure to withstand the literal storms on the horizon.

The pandemic has inflicted a catastrophic human and economic toll. But the recovery affords Canada a unique opportunity to invest and transform our country for the future. We should seize this moment.

Published in the Globe and Mail 

Grant Bishop is an associate director of research at the C.D. Howe Institute.

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