What a difference a summer “does not make”.

On Friday last week, Statistics Canada released its Labor Force Survey for the month of August. The Survey showed that the economy lost 11,000 jobs in August, following an unprecedented decline of 112,000 private sector jobs, only partially offset by an equally unprecedented increase in self-employment.

In July Statistics Canada had initially released a Labor force survey showing that the economy had created only 200 jobs.  Statistics Canada was forced to retract this number and subsequently released a new estimate of 42,000 jobs, all part-time. There was still a decline in full time jobs, just smaller than first reported.

Such a mistake had never been acknowledged before and future Labor Force Surveys will be viewed with suspicion for some time. Indeed the August employment numbers are already being regarded with skepticism.

The budget of Statistics Canada has been cut by $23.9 million and about 800 staff has been laid off. The long-form census has been eliminated; depriving provinces, municipalities, and researchers of critical data; and, the Chief Statistician has resigned. The credibility of Statistics Canada has been seriously eroded under this government.

The dismal job creation performance over the past 12 months is in fact a continuation of a longer-term trend. The economy has been in a growth and employment slump since 2010, with economic growth and employment growth falling year after year. The government’s response to this jobs stagnation has been to repeat that a million jobs have been created since 2008.

The government has been in denial about the poor economic and job performance of the Canadian economy for some time.  The government’s only response has been to repeat over and over that a million jobs have been created since the end of the recession in 2008.

The overall unemployment rate remains at 7 per cent and the unemployment rate for young Canadians has been stuck between 13 and 14 per cent. The labor force participation rate (the number of people employed and unemployment as a percentage of the population) and the employment rate (the ratio of persons 15 and older working to the population 15 and older) are both below their 2001 and 2008 levels.

Most of the jobs created over the past year have been part time. Canadians have stopped looking for work, and Canada has increasingly become a part time employment economy with stagnant labor income. But the federal government  seems oblivious to these problems. Finance Minister Joe Oliver’s only job strategy is to hope for  a recovery in the U.S. Apparently, he believes there is nothing the federal government can do to strengthen domestic demand and job creation, except to stick to its plan to eliminate the deficit by 2015-16.

The late Minister of Finance, Jim Flaherty, for years criticized the U.S. government (and indeed other G-7 countries) for its failure to take sufficient action to eliminate its deficit quickly. The U.S. government, fortunately, rejected his advice, and took the correct view that a rapid reduction of the temporary stimulus from the 2008 recession would undermine the strength of the recovery.

The U. S. was right and Canada was wrong. The U.S. economy is growing and the Canadian economy is lagging behind. Mr. Oliver must be very thankful that the U.S. rejected Mr. Flaherty’s advice.

In August, Finance Minister Joe Oliver held a meeting with private sector experts to discuss ways to strengthen economic growth and job creation.  We don’t know what advice they gave Mr. Oliver, because there has been no press release and no member of the advisory group has spoken, but we can conclude from its membership that it’s advice wasn't very different from what the government has been doing for some time. Eliminate the deficit, shrink the size of government and hope the private sector will eventually awaken from its “doldrums” and with renewed confidence “self levitate” to replace the lack of government support for economic growth.

Unfortunately this policy hasn’t been working for some time.

Several private sector economists have recently offered the same advice to the government. In their view the current fiscal situation is simply too risky (which it isn’t) and more government spending (e.g., on infrastructure) would be a disaster (which it wouldn’t). In other words, just accept slower economic and employment growth for the next several years as inevitable.

Professor Ragan of McGill University, a highly respected economist who was a former adviser to Jim Flaherty, wrote in a recent report for the C. D. Howe Institute that there was nothing the Federal government could do to strengthen economic growth and job creation.

 “Given the continued slow pace of the global economic recovery, a significant rebound in Canadian private demand is unlikely in the near future. High household debt suggests that consumption is an unlikely source of near-term growth. An investment revival will require a return of corporate confidence, while an export rally will depend on a strong and sustained foreign recovery. Canadian policymakers should therefore accept the likely continuation of Canada’s slow-growth recovery for the next few years.”.

We agree with Professor Ragan that the medium-term economic prospects for the global economy are not good.  The EURO area is in a recession because France, Germany, and Italy are in recessions. It will be many years before the EURO area solves its structural and policy issues, if in fact they are solvable. Many experts expect a period of long-term economic stagnation in the EURO area.

The Chinese economy is also slowing, as are the economies of the other BRIC countries. More importantly the outlook for the U.S. economy is extremely fragile. There is considerable geopolitical uncertainty to say the least.

The Chair of the Federal Reserve Board remains very cautious about the prospects for the U.S. economy. She has stated over and over that, despite some good monthly job numbers, unless there is a fundamental strengthening in household income and the housing market, the U.S. recovery would be in jeopardy. In fact the job numbers for August were not that good. Many respected economists in the U.S. believe the U.S. economy has already entered long-run period of diminished growth.

What should Canada do when confronted with these uncertain international growth prospects? It is exactly because of this global uncertainty and a secular decline in global growth that Canadian policy makers need to look at what can be done internally in Canada to strengthen growth.

There is absolutely no reason why policy makers should accept Professor’ Ragan’s conclusion.

There are of course policy options open to the government to strengthen growth and job creation, but they are not ones this government could accept for ideological reasons. The Conservative government is ideologically committed to lower taxes, less spending, balanced budgets, and smaller government. But why should Canadians accept this ideology of smaller government, and “the continuation of Canada’s slow growth recovery for the next few years”?

So the Conservative government is stuck in a conundrum, of its own making, in the lead up to the 2015 election. The government would like to run on a record of good economic management, defined as simply eliminating the deficit. Previously (last week) we wrote that the government would eliminate the deficit this year, one year ahead of their political commitment. But simply eliminating a deficit, which they themselves created, does not define good economic management.

Economic growth, strengthened in the second quarter, after a dismal first quarter, but private sector investment remained in the doldrums. Income growth, and employment growth are stagnant and the government has clearly failed to manage the domestic economy. Canadians today are not better off than they were in 2011, in 2008, or 2001. Nor do they expect their employment and income situations to improve in the coming years.

The government is currently forecasting a surplus of around $6 billion a years beginning in 2015-16. Subsequent surpluses will be restrained because global economic growth is unlikely to strengthen as it did in the 1990s and the early years of this century.

The coming years will be challenging times. Governments in Canada, both federally and provincially, will need to develop a “made in Canada” economic growth and jobs strategy.

Minister Oliver has stated that once the deficit is eliminated, he will reduce taxes for Canadians. Does this mean introducing income splitting for families with children under the age of eighteen, a commitment made in the 2011 election.  The evidence is clear that such a tax cut would benefit a very small number of high-income Canadians, while contributing nothing to economic growth and job creation. The same thing goes for extending the fitness tax credit to adults, a commitment also made in the 2011 election.

In the past, the government has also committed to reducing the absolute level of government debt by $3 billion annually once the deficit is eliminated. Under this government, the federal debt has increased by $150 billion, so it is easy to understand how this commitment plays to its political base.

But how would this contribute to economic growth? The ratio of debt-to-GDP is at already at 30 per cent and, without any reduction in debt, is forecast to decline to levels that haven’t been seen in half a century.  Why not stabilize the debt ratio at 30 per cent of GDP? Why shouldn’t a government borrow to make new investments when ten year, thirty year, and fifty year interest rates are at historically low levels? Surely that is what future generations would want us to do.

In the upcoming months as the political debate unfolds, any economic policy proposed by any political party, to be financed from the rather small projected surpluses, should be judged, at a minimum, on how it will strengthen economic growth and job creation.