Claudia Sahm’s Big Idea Is Making a Splash in Canada’s Election
Claudia Sahm’s Big Idea Is Making a Splash in Canada’s Election
(Bloomberg) -- Canada’s opposition Conservatives have latched onto an idea pioneered by former Federal Reserve economist Claudia Sahm, as they seek to unseat Prime Minister Justin Trudeau in a snap election this month.
The Conservatives are promising an overhaul of unemployment benefits that would ramp up payments automatically when a recession threatens. The extra cash would be triggered when unemployment over a three-month period rises by at least 0.5 percentage point from recent lows -- an indicator that’s become known as the “Sahm Rule.”
If the party is elected –- it has a decent chance, according to the latest polls -– and implements the policy, that would make Canada the first major economy to experiment with this particular tool.
Sahm’s idea has attracted a lot of attention in the past 18 months because governments all over the world have been grappling with the question of how much pandemic stimulus their economies need, and how long it should last.
So-called “automatic stabilizers,” like the one that Conservative Leader Erin O’Toole is proposing, can resolve some of these issues. That’s because they tie fiscal support to the state of the economy, so money is injected or withdrawn as needed, without lawmakers having to debate and vote.
There’s been some concern that Trudeau’s pandemic support -- among the world’s most generous, financed with hundreds of billions in new debt -- was indiscriminate as officials funneled cash to dozens of different groups, many of whom hoarded it in bank accounts.
While backing the spending in the legislature, the Conservatives have warned that budget deficits may have gotten too big. O’Toole has gained ground with a campaign largely focused on the economy, promising a better post-pandemic recovery.
This week, data showed Canada’s gross domestic product unexpectedly shrank in the second quarter -- a potential setback for Trudeau in his bid to regain a parliamentary majority.
The Conservative manifesto proposal would increase payments under the country’s Employment Insurance plan to 75% of a worker’s salary, instead of the usual 55%, when the Sahm Rule conditions are met. That would ensure both that relief arrives faster in future downturns, and that the amounts are appropriate for the economy’s needs, the party argues.
U.S. lawmakers from President Joe Biden’s Democratic Party have also attempted to beef up automatic stabilizers during the pandemic, but a proposal along similar lines -- though it didn’t explicitly invoke the Sahm Rule -- has so far failed to gain enough traction in Congress.
As for Sahm, who’s now a senior fellow at the Jain Family Institute, she says she was “pleasantly surprised” to learn –- via Twitter –- that Canada’s Conservatives have adopted her rule. It’s the first time, to her knowledge, that any political party has done so in a campaign.
“It’s a good principle to pass for future recessions,” she says.
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