Is infrastructure spending still suited to fight unemployment ?

Many commentators are calling for a public-sector-led infrastructure program as we open up the economies following the COVID-19 shutdowns.

Is infrastructure spending still suited to fight unemployment in the time of Covid-19? 

Not so fast on infrastructure spending to fight this recession

In January, the Canadian economy was at near-full employment and forecast to grow modestly. One bleak spot was the oil and gas sector and one major risk was that trade squabbles would become trade wars. Then COVID-19 arrived.

To prevent the person-to-person transmission of the coronavirus, governments imposed increasingly strict emergency measures to enforce physical distancing. These distancing measures created a three-sector economy: the necessary services (NS) sector, the work-from-home (WH) sector; and the shut-down (SD) sector. In effect, government told workers: some of you must continue to work, some should work from home, and some simply cannot work. The governments of all our trading partners did the same, causing further problems for a trade-dependent country like Canada.

The unemployment we have now is unemployment like no other: it was caused by public health policy. But the entire economy was not shut down. Nor is it on life support or in a medically induced coma, as some have said. Even with 20 per cent unemployment, 80 per cent of the labour force is working. Some industries are going flat-out and others are quite busy.

After the distancing measures, governments immediately introduced a range of emergency programs: income support for workers; wage subsidies for firms and non-profits, to help them retain their workers and remain viable; and bond-buying to ensure the liquidity of the financial system.

So, given that our hospitals are not overwhelmed by COVID-19 and as the number of new cases declines slightly, what lies ahead and what is to be done?

The first thing to note is that, just as the recession was caused by distancing measures, the opening-up will occur as these distancing measures are gradually relaxed, with governments keeping close watch to make sure new cases do not spike again. How the opening-up goes will be governed by whether each industry and each job site can manage to relax physical distancing safely. Everyone will be wary: workers coming to their jobs, shoppers coming into stores; parents taking their children to school, or patrons going to their favourite theatre. We need a microeconomic/public health playbook, but unfortunately none exists. The pace of recovery will also depend upon what happens with our trading partners and with the price of oil.

The unemployment problem will continue, especially for those who worked in the SD sector. Many small businesses and non-profits will not be there to hire them back. To fight unemployment, we’ll need industry-by-industry programs to help startups and re-hires. Emergency income support will have to be continued, though re-calibrated to reduce work disincentives and encourage retraining.

Is there a role for a public-sector-led infrastructure program? Unlikely. Back in January, the construction/infrastructure sector was booming (except in the oil and gas industries). In fact, it was often constrained only by labour shortages. Much construction/infrastructure activity has continued in the NS sector and as distancing is relaxed it can start up relatively easily, though now with a backlog of projects to carry out. In any event, even if we stimulated this sector, the type of workers who used to work in the SD sector, such as female retail and service workers, cannot easily move into construction.

This is not to argue that Canada doesn’t need more capital spending on public transit, hospitals, affordable housing and alternative energy infrastructure. We do. But such capital spending is unsuited to fighting today’s unemployment. To get such public capital, we are going to have to wait for a stronger economy and then have an honest conversation about the proper balance of taxes, borrowing and user changes to pay for it.

Opinion piece by George Fallis who is professor emeritus of economics and social science at York University it was first published on the Financial Post