Economic Recovery from the Pandemic: Let Them Eat Cake — with Green Icing

After the shock Canadians have experienced in 2020, an economic recovery that focuses on jobs, incomes and business growth is much more important than whether it is “green” or some other colour. However, in Canadian politics these days it is clear that green symbolizes good. Yet the reality is that “green” policies do not always deliver positive environmental outcomes, and a heavily “green” recovery strategy runs the risk of producing few economic benefits — in part because the green sector itself is so small. For policymakers, the implication is that a preoccupation with everything green may result in a poor allocation of scarce public dollars and do little to help the individuals and businesses that have been most affected by the COVID-19 disruption.

Canada, like other jurisdictions, has racked up massive COVID-19 related government deficits, heralding much higher levels of accumulated debt and less maneuvering room for fiscal policy in the future. Meanwhile, economic activity as measured by gross domestic product (GDP) contracted by almost 40% at an annualized rate between April and June 2020, the steepest decline on record. The overall decrease in GDP for 2020 as a whole is expected to be in the vicinity of 6-8%, also a shocking number. And while many sectors and workers felt the short-term jolt of government mandated business closures in the spring, the national economy has yet to experience the full consequences of the pandemic because governments have deployed hundreds of billions of dollars to support households, individuals and businesses, blunting the initial damage. A dialing back of these support programs, coupled with escalating business insolvencies and an expected wave of layoffs, will leave many Canadians reeling.

In this setting, policymakers need to look for ways to restore jobs, kick-start job creation, and support business investment. Getting people back to work as soon as possible is the first priority. The colour of the job is irrelevant, especially since a large body of research confirms that long-term joblessness brings a whole host of negative consequences — including lower earnings potential, skills deterioration, more people dropping of the workforce, and increased risks of mental and physical illness.[1] We also know that “green” tinged government stimulus is unlikely to address the re-employment needs of people in industry sectors hit hard by the pandemic and the measures taken to contain the virus. In fact, given the kinds of jobs that have been lost in Canada, we see no reason to expect sizable short-run employment gains from a “green” recovery — in part because the skill sets of displaced workers are not well matched to “green” aspirations.[2]

It is also worth noting that most of the jobs that Statistics Canada treats as part of the broadly defined environmental and clean sector already exist and represent about 2% of total employment across all occupations. They include workers in utilities (including renewable energy); professional, scientific, and technical services; engineering construction; waste management and remediation services; clean technology development and production; and related administrative positions. As well, the “green” sector, as defined by Statistics Canada,[3] accounted for about 3% of national GDP in 2018.[4] Promoting faster growth in the clean technology and other environmental industries is a fine idea, but it won’t make much difference to Canada’s recovery from the COVID-19 crisis either in the short-run or over the next several years.

Table 1

Further, the changes associated with developing more renewable energy, expanding public transit, reorienting the economy towards greater local production, and accelerating habitat and ecosystem restoration will take decades to unfold, if they are achievable at all. From what we know today, most of the items on the wish list of the federal government have little to do with fast-tracking the economic and job recovery the country needs. Given the magnitude of the COVID-19 shock, it makes no sense to focus so much policy attention on the small slice of the economy represented by the “green/clean” sector. Canada needs more jobs, faster business growth, and stepped-up innovation across the economy. The green/clean economy can be part of this, but in quantitative terms it is incapable of driving a broader, sustained economic recovery and expansion.

In the end, more stimulus may be needed but colouring it green will dilute its effectiveness. We cannot afford to set up artificial barriers that make it harder to do business in Canada. The more important components for successful stimulus[5] are government actions that:

  • are based on proven policy and existing comparative advantage. Let’s do more of what we are good at;
  • target and use technologies that are ready for wide deployment, now;
  • tackle structural barriers to business success and encourage investment in things that make us more productive, including machinery, technology, intellectual property, and skills training; and,
  • ensure rigorous oversight.

This is not a call for Canada to ignore the environment or abandon efforts to move to a lower carbon future. It is just that virtue, in the end, does not and will not pay the bills.

[1] https://bcbc.com/insights-and-opinions/the-clock-is-ticking-for-canadas-labour-market.

[2] https://institute.smartprosperity.ca/sites/default/files/greenfiscalpushworkerpaper.pdf.

[3] The Environmental and Clean Technology Products Economic Account measures the economic contribution of environmental and clean technology products in terms of output, gross domestic product (GDP), employment (number of jobs) and other economic variables. Estimates are directly comparable with national results for the Canadian economy.

[4] https://www150.statcan.gc.ca/n1/daily-quotidien/200313/dq200313b-eng.htm?indid=17081-1&indgeo=0 “In nominal terms, the value of the total ECT products sector in Canada was $66.3 billion in 2018, accounting for 3.2% of Canadian GDP.”

[5] https://www.iea.org/articles/green-stimulus-after-the-2008-crisis.