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The Economic Crisis Six Months Later and the Role of Leadership

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Alex Carrick

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Alex Carrick is Chief Economist for CanaData, Reed Construction Data’s Canadian economic forecasting and statistical service.

Economists

Is President Obama taking on too much? Yes, but this is a complex issue with nuanced levels of significance. Never mind foreign trouble spots like Afghanistan, North Korea and the Israeli-Palestinian conflict. And set aside the issue of expanding health care for the moment. Let’s just look at the economy.

Is President Obama taking on too much? Yes, but this is a complex issue with nuanced levels of significance. Never mind foreign trouble spots like Afghanistan, North Korea and the Israeli-Palestinian conflict. And set aside the issue of expanding health care for the moment. Let/'s just look at the economy.

The current world recession that began in the United States had several epicentres – the collapse of Bear Stearns, the peak in commodity prices last July, the bankruptcy of Lehman Brothers and the steep slide in stock markets in late September. The latter was the latest of these events and it occurred six months ago.

What is most important in an economic crisis? To get from the moment of most despair to several paces down the road. And then to the other side. What do people want from their leaders at such a time? They want action.

The Conservative minority government in Canada found this out late in 2008 when it failed to recognize the anxiety that was building up across the nation. The price to be paid was a near loss of power to a coalition government of opposition parties.

What must a leader do in a time of crisis? Be responsive and be pro-active. If necessary, cajole those who would stand in the way of what is perceived to be forward thinking. And prepare everyone for the changes that are coming. There are other weapons in a leader/'s arsenal, such as “moral suasion” and “jaw-boning” (i.e., verbal arm twisting in both cases), but these are often left to be used by central bankers.

The Importance of the Passage of Time

Half a year has now transpired from the extremes of the financial crisis and the biggest losses in equity values. Money has been advanced and promises have been made to restore the quality of assets held by the banks. There is evidence of growing confidence in financial institutions. Stock market investments are starting to look a little more attractive again.

But the fallout from financial sector woes has not been the only unpalatable dish set out on this smorgasbord of difficulties. There have also been the problems of the auto sector, finding most expression in the potential failures of the Detroit Two, General Motors and Chrysler.

Again, the passage of time has played a key role. Allowing bankruptcy of either firm seemed inconceivable early on. Now it seems a more than reasonable means to achieve a desirable end. At the least, its prospect is helping concerned parties – management, labour leaders and bondholders alike – to focus on concessions and solutions. And the public has been mentally prepared for such an eventuality.

Manufacturing jobs in richer nations, with the U.S. in the forefront, are disappearing regardless. The only way that this will not continue to happen is if the value of the U.S. dollar sinks. Even high-tech jobs in alternative energy areas, such as wind and solar, will eventually see components production outsourced to low-cost labour in emerging nations.

The Third Leg of the Stool – Fiscal Stimulus and Infrastructure

Then there is the third leg of the stool that President Obama keeps referring to. This is the stimulus package comprised of some tax cuts, but mainly massive spending on infrastructure. Canada and many other nations have also committed to similar initiatives.

This is the area of government action that is most important for the construction industry. Will all the stimulus money actually be spent? Will it be needed? Governments have a history of coming to the party late. By the time, public money is flowing through the pipeline, the private sector has started to “boogie” once again.

I keep reading that Japan is the example of the dangers in halting stimulus spending too early. Japan slipped into another 15 years of economic inertia after interest rates were raised too quickly coming out of an office-building bust in the mid-1990s.

This overlooks the fact that Japan/'s economy is not a chrysanthemum-to-chrysanthemum comparison with North America or Europe. According to almost any measure – inter-corporate ownership, management accountability, mergers and acquisitions, import access, foreign listings on the domestic stock exchange, labour mobility and immigration – Japan comes up short on flexibility. Give western-style open economies half a chance and they will come roaring back.

A lot of the planned infrastructure spending has merit on its own terms – to improve the capital stock of public assets and to make necessary health and safety repairs. But it will be interesting to see in a couple of years/' time whether or not much of the hype will turn out to have been mainly talk.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News. Mr. Carrick also has a lifestyle blog that can be reached by clicking here.

by Alex Carrick last update:Apr 23, 2009

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