During the Great Depression, power flowed from the provinces to the federal government in Ottawa. In the 1990's, Canada decentralized and power flowed back to the provinces. Robin Sears writes that, as a result of the pandemic, the flow of power is once again being reversed:
In the next three to five years, as we clean up from the massive bloodshed — human and financial — of the pandemic, the new centre of power in Canada will be the federal government. Conservative pundits, blinded by their hatred of the breathy theatrical style of our prime minister, promote mayors and premiers as Canada’s new leaders. They do not understand where power concentrates as a crisis moves to recovery.
The old military cliché that God is on the side of those with the biggest guns, has a fiscal corollary. She is also on the side of those with the biggest financial guns. When everyone is a beggar and a borrower, who has the untrumpable advantage? The one who can create vast sums of new financial ammunition for their guns. Improbably, in the 21st century, this is not cities, nor multilateral institutions, nor even global banking giants. It is still nation states.
They alone have the right to create new credit, to print new money, without limitation. The right of seigniorage — the exclusive prerogative to print money — becomes the most powerful weapon when everyone is a borrower. Yes, big banks can create millions in new lending, but governments can create billions with a key stroke. Another time-honoured cliché — if you owe the bank a million dollars and cannot pay, you have a big problem; but if you owe the bank a billion dollars, they have the problem — will further enhance Ottawa’s power to declare winners and losers.
This may dramatically change the power dynamics in the Canadian federation. Canadian governments from big cities to small provinces will spend more than they can tax for some years to come. They cannot raise taxes meaningfully, nor can they cut expenditures by any useful amount. They must borrow. Cities are forbidden to go into operating debt. Bond buyers always have the provinces by the short hairs — issue too much debt, and your credit rating plummets and your servicing costs explode.
The shift is going to drive conservatives crazy:
“Premier Kenney, you need five billion recovery dollars? You got it, but not to revive zombie oil and gas companies. Spend it on reducing emissions and a transition to a low carbon economy or we will give it to someone who will.”
“John Tory, you need two billion to get your transit projects up and running? OK, not a single dollar will be spent on dirty diesel buses.”
They will not be happy. On the other hand, any attempt to humiliate them would be a mistake. It's absolutely essential that the federal government be seen as an honest broker:
Ottawa will need to be very careful not to be seen to be bigfooting every other government because they have the only big chequebook.
Provinces and cities, in the borrowers’ queue for years to come, will need to ensure that their case is better than those in line behind them. That will mean listening to and negotiating with Ottawa on its policy goals.
Once again, our federation will be tested.
Image: teacherspayteachers.com
