ORILLIA, Ont. — Canada's strong fiscal position and decision to avoid drastic tax cuts are among the reasons we avoided the deeper economic pitfalls that befell other nations, according to key thinkers at a public policy conference in Ontario.

But it's no time to relax, as our path to recovery rests on a fragile foundation.

Speakers from both sides of the political spectrum aired these ideas on a heady Friday night at the annual Lake Couchiching conference. The topic was "The Role of the State" in the aftermath of the financial crisis.

While the panelists seemed to agree that lack of government regulation in the world's top economies provided the ‘why' behind the financial crisis, they differed vastly on what would get Canada back on sounder fiscal footing.

"The financial meltdown of the last few years was, in my view, largely due to government failure than market failure," said Tom Flanagan, a political science professor and former senior communications advisor for the Conservative Party.

Flanagan dismissed some of the darker tones sounded during the conference about industrial nations' collective bad behaviour which contributed to the crisis.

The last 30 years saw governments loosen their shackles, leading to lower taxes, free trade and the extension of the market system around the world, which contributed to "wave after wave of technological progress."

"I regard the last 30 years as among the most optimistic periods in human history. And I don't think we need to re-evaluate where we're going."

So how and why did the party end in October, 2008? Flanagan points to a few reasons:

• The inevitability of recessions in market economies, as "all parties come to an end."
• Government regulation failing to keep up with the pace of financial innovation.
• The "well-intentioned" but ultimately doomed policy in the U.S. to force financial institutions to sell sub-prime loans, in the name of making home ownership more affordable.

Although there was some "flirtation" with sub-prime mortgages in Canada, we never went whole-hog with it. "Also, our fiscal position was stronger in Canada because we had learned from past experience what it was like to run unbalanced budgets."

Flanagan credited Canada's modest and short-term stimulus which had a clear exit strategy of two years from the get-go.

But Armine Yalnizyan, senior economist with the Canadian Centre for Policy Alternatives, argued Canada followed many of the same objectives as our neighbours to the south.

The current government's focus on heavy spending on the military and security while "preaching austerity" has put us on a troubling trajectory.

"This trajectory, I contend, is going to have far-reaching consequences on prosperity and democracy in the next couple of years," said Yalnizyan.

There was nothing "routine" about the market fall, she added.

The Canadian economy was riding high before the crisis, from being the 9th largest economy in the world in 2005, and the job creation rate outperformed any other advanced nation in the G8 between 1997 and 2007.

But after the crash, almost half a million permanent and full-time jobs had vanished from the Canadian job market in six months. "That's the fastest and deepest contraction in the labour market in seven decades."

Yalnizyan said it comes on the heels of a policy shift that has systematically favoured market-based solutions

While Canada's cautious approach was a boon, she said we still pursued many of the same objectives of deregulation, increased privatization and cuts to income support as our neighbours to the south.

"The result of this massive recasting of the purpose of the state was that ordinary Canadians, suddenly faced with the most brutal recession since the Second World War, were also more exposed to the economic risk of joblessness than any time since the Second World War."

By the time the economic storm settled on Canada in late 2008, less than half the unemployed had benefits and our household savings rate plummeted to levels not seen since 1938.

But things are getting better now, aren't they?

Yalnizyan says the triggers that led to the crisis are still "alive and well and living in Canada and elsewhere." These triggers consist of:

• Overleveraging by investors and households
• Inefficient and ineffective regulation in many areas
• The endless shifting of risk

She said these triggers were behind the recent employment numbers which revealed 130,000 of 400,000 jobs created since the recession have been lost.

"This is not a solid foundation for stable recovery," said Yalnizyan. "Nonetheless the current federal government of Canada believes it's time to get out of the way of the economy and focus on its real job: tackling the deficit. Time for business as usual."

The challenges

Alex Himelfarb, former clerk of the Privy Council and secretary to the federal cabinet, said Canada must move beyond what has become our dominant narrative: "We did less awfully than our friends."

He said our challenge lies in remaining a player in a hyper-competitive global economy; reducing our large household and provincial debt; tackling climate change; and reversing the deepening divide between the haves and the have-nots.

Yalnizyan added another -- looking beyond the business cycle and addressing the aging society.

Flanagan, meanwhile, spoke of the need to slash government regulation in vast areas of the economy -- media, transportation, agriculture, for instance – which is insulating us from competing globally. "We need to get back to market fundamentals and work to tearing down these barriers to competition," he said

He reached into the past – as far back as 18th-century philosopher Adam Smith – for some wisdom to guide us into the future.

He said government should stick to "those things not in the interest of the individual to produce": defence, administration of justice, and public goods.

Himelfarb quipped: "Adam Smith is dead."

He said Canada has been successful in avoiding making hard, "supply-side economics version of tax cuts," and pointed to the danger of disconnecting taxes from the services they provide.

"We did not cut taxes we didn't know how to pay for," he said, explaining the theory behind supply-side cuts as assuming the action would generate so much activity in the economy that the cuts would pay for themselves.

It makes for bad economics, "but good politics."