Why a Deficit is Immoral

Conventional wisdom has it that governments must spend, spend and spend some more to dig the country — and the globe — out of the current downturn.

Conventional wisdom is dead wrong. All of this deficit spending will barely — if at all — make a difference in the near-term, and it will pile up problems not for the long-term, but for the medium-term: years in the middle of the next decade, at best.

A Little Bit Pregnant

First, let me say that I am not a deficit fanatic. I would like my government(s) to run balanced budgets: budgets that they expect to come in close to break even. Perhaps they have a good year and tax receipts are higher than expected? Then we have a surplus. Perhaps it was a tough year and receipts were lower? Then we have a slight deficit: exactly the same as the commissioned sales person or self-employed contractor who draws the same amount month after month for living expenses and could either end up with money left over as savings at year’s end, or has to dip into his savings to balance the books.

So a little red ink, from time to time, doesn’t worry me. In fact, it worries me far less than do massive surpluses because every line item, every department, every program has had contingency funds up the yin-yang. These are a recipe for bad decisions at the end of the fiscal year, otherwise known as utter waste, within the departments — and sloppy handouts, ill-thought-out programs and the like in the hands of politicians.

On the other hand, structural deficits — situations where the budget is planned to be in deficit annually (and where, as in the mess inherited from Trudeau and Turner by Mulroney, the deficit deepens annually as the interest pile up takes over everything) — are an incredibly stupid idea, on the same plane and of about the same moral quality as liar loans being written to create fees knowing they can’t be repaid.

Now, to be even-handed about this, none of our politicians are calling for a return to permanent structural deficit. No, all of them claim that we just have a crisis to solve now: we run up serious amounts of red ink for just a few years, and then we can return to fiscal prudence. So they say.

But when was the last time a government program was terminated, its workers fired, its office leases broken, with not one penny more to be spent on that again, ever? I can’t recall one. I can recall occasional shrinkages — rare moments, those — but in general, once a department or Ministry has a mandate, it never gives it up, and it never stops funding it.

For every dollar of “stimulus”, some civil servant handles it. Someone else supervises them. Someone else manages them. Someone else develops policy for the effective use of the money — and they have supervisors, managers, directors, too. Someone else audits them, supports them technically, prepares their briefs to Treasury Board, procures their supplies. All of these have management chains, too. Every one of these increments becomes permanent, because pay grades are based on the number of people — and number of dollars under administration — associated with a job. So every new initiative does two things: it adds to the pile of spending that is “Ottawa”, “Victoria”, etc., never to be removed — and it siphons 20¢ of every dollar spent off the top to pay for itself (on average).

Now do you see why I believe any planned deficit is an almost automatic route to structural deficits? At the risk of offending people, the planned “stimulus” deficit is like getting pregnant. The plan is to abort the pregnancy. Instead everyone delays — there are so many reasons not to act — and the child comes to term.

You can’t be a little bit pregnant. You either are — or you’re not. When it comes to the dangers of structural deficits, “not” — don’t spend, by intention, beyond your means — is the best public policy course.

Deficits Avoid Decisions

Governments that say they’re making the hard decision to forgo all the hard work of sweating down the last structural deficit and to take action “as it’s needed now” miss the point. Choosing to run a deficit is avoiding the decisions that do need to be taken.

How many old programs — all those civil servants and their management trees, chasing ever smaller returns in their program areas — could be outright eliminated to find the funds required for your “stimulus”, if, indeed, it is needed. (That’s a separate question that has as much to do with vote buying as anything else. Another day, perhaps.) Yes, that’s the harder decision, for almost every one of those programs has some advocate in the country who will scream bloody murder if it’s touched in any way.

Nevertheless, MPs and MLAs are elected for the express purpose of making decisions. If you don’t want the job, resign. (Regardless of party, voting your party line likewise is avoiding a decision. Each MP has a personal moral responsibility to decide issues on their merits. The House and Senate need far more Chuck Cadmans and far fewer trained seals.)

It would have been nice if we’d had a cap in place on spending ages ago: something along the lines of “Federal spending is, by law, not to exceed $5,000 per capita”. Budget growth then becomes a function of population growth. Otherwise, to start something new, you have to wind up something old. Perhaps the people who point at Olympic Gold Medals and demand more spending on amateur sport would be upset if the whole Department of Amateur Sport & Fitness (or whatever bureaucratic monicker it is using today) was summarily axed, along with all its spending, because GM and Chrysler need the money. But a cap would have trained our politicians to cut, and to do so regularly. At the moment they don’t have the habit trained. So they reach for deficits. It’s easier.

Why This Deficit Matters More than Previous Ones

There are many opinions out there today about what the future holds, and I’m not going to chew through all of them now. Suffice it to say there are three things on the immediate horizon that make running deficits a bad idea now — as I think you see, I think Trudeau-era deficits were an equal problem, but we had the time to fix that problem, and at the moment it doesn’t look good for the “ability to fix” this one out in the 2010s or 2020s.

You might remember Canada was the only G7 country running surpluses, and the only one retiring its national debt. This — and the price to get there was higher than it needed to be because of so many previous bad decisions (and so many bad ones made in reversing our disastrous structural deficit course) — was a benefit that would have made the 2010s and 2020s truly “easy street” for Canadians relative to other parts of the world. That’s what we’re giving up later this month, for it seems apparent that the Conservative Government will introduce a deficit-laden budget (and if they don’t, their successors will).

The three worries I have for the future are:


Demographics
The demographic bulge of the Baby Boomer generation is coming to “retirement”, and even with them continuing to work that work is likely to be part-time, both for personal reasons and as employers seek to reduce labour costs and revitalise their workforces. This reduces income tax receipts and employment tax receipts at the same time as pension demands increase. In other words, this was why we were working so hard to reduce the debt, knowing we were about to have a hole knocked permanently in government revenues. (Everyone who will work and pay taxes in Canada in the next twenty years is already alive, and we are singularly inept at maximising the return on our investment in immigration, aka “doctors and engineers driving cabs for a minimal income”.)

Liveable Infrastructure
This refers to the complex effects of energy costs on transportation, delivery, work and schooling, effectiveness of the housing stock, etc. Our current city-sprawl and choice to have goods — such as food — shipped thousands of kilometres so that we can enjoy the same diet year round is a infrastructure for living that probably is unsustainable into the future. That, in turn, implies spending a great deal of money to retrofit our human environment to deal with issues of affordability and cost, for it would be even more expensive to abandon what we have and build anew. What will be needed isn’t altogether clear yet, nor is how much of this must be done privately, what must be public:private in partnership, and where government intervention might be helpful. That it will need doing, though, is at the same level of clarity as a long-range winter forecast for cold and snow just about everywhere in Canada.

Unsustainable Program Transitions
This last refers to the entitlement programs already in effect in Canada — some federal, some provincial — that are slowly but surely eating us out of house and home. The public medical system in Canada, for instance, is in decay in most provinces, while simultaneously chewing through one dollar in two of the provincial budget (or more). Eventually the combination of decay, delisting of procedures and reductions in service capability that have been the norm ever since the provinces restricted medical school enrolment coupled with Paul Martin’s balancing of the Federal budget by slashing transfers to the provinces in the 1990s will bring the system teetering to the point of collapse. Throwing more money at these systems is probably not the answer; figuring out how to restructure the entire system is — but the longer we wait to tackle these hard questions, the fewer options we’ll have and the more likely we’ll toss money we don’t have at the time at the problem. After all, the auto makers wouldn’t have “needed” a handout now if they’d tackled their problems a decade ago.

All three of these argue that at some point in the next few years the Government’s freedom of manoeuvre will be deeply curtailed. Balanced budgets en route to that point would ensure we continued to hold the line on interest expenditures (which, as with our own personal budgets — a $10.00 pizza bought on a credit card at 24% interest and paid off by minimum payments turns into an over $220.00 pizza by the time it is discharged — is a pure waste of money). Practice at real decision making rather than sloughing the problem off into deficit spending would prepare the way for much harder decisions to come.

Oh, and I haven’t yet noted that the next years are likely not to be growth years. Indeed, except for the twentieth century, the norm in economic life is a balance of inflationary (growth) and deflationary (consolidation) years. After a sixty year continuous inflation, we should reasonably expect at least a decade-long deflationary consolidation. Instead, central bankers and politicians around the world think just slopping cash around in as many forms as possible will allow us to escape back to the abnormal conditions from 1945 to 2008. Bad thinking, at least from this student of economic history’s point of view.

So there you have it. These are the arguments for not going into deficit. Such a move robs our future, impoverishes our children, and probably is like standing, in the grand tradition of Canute, in the way of the tide. But there are few moral thinkers in Parliament today. Instead, I expect the calculation of votes, the bribing of we citizens with our own money, the unrighteous indignation of most days in the Commons and the subordination of the strategic to the tactical to continue.

This is, after all, Canada, a nation of whingers, who even as they manage their own money well will demand that their government do anything but.

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13 responses to “Why a Deficit is Immoral

  1. bluegreenblogger

    Much of this post is fair comment. It is clear that Keynesian stimulus does not actually work in a world of good, if not ‘perfect’ information. In short, the taxpayer is not on balance deceived by government largesse. They take account and increase savings such that increased government spending is offset by decreased private spending. That’s the theory anyway.
    Where the case can be made for deficit spending are in a number of significant areas. First off, Investments in human capital, and much public infrastructure can often have a very strong rate of return. Individual private actors will demonstrably under-invest in both these areas if left alone, so state intervention yields a net positive return to the state, and society as a whole. They may more than pay for themselves in the long run.
    Second instance. The state enjoys borrowing rates well below the private sector, due to the lack of a default premium. Again, this has a positive impact as many otherwise marginal capital investments may show a handsome Net Present Value when cost of capital is significantly reduced.
    There are also a number of areas where marginal investments would not be made otherwise because positive externalities, (spinoffs), would not be able to be captured by the investor. There are also areas where negative externalities, (smog from coal, vs. ‘excessive’ capital costs of clean power sources for example) can be averted by debt financed government investments.
    Indeed, all the areas you have pointed to as real worries for our financial collective future are to a greater or lesser extent candidates for debt financing, as they are potentially able to show a higher benefit than the carrying costs.
    Fiscal stimuli as envisioned by Keynes are rubbish, but deficit spending may be justified, depending on the nature of the spending. Let us wait and see before we condemn it. I for one would welcome a substantial investment in mass transport infrastructure. Health care costs have been escalating, but at a real rate roughly comparable to the extension in healthy human lifespans. Certainly public health-care has been way more efficient at doing this job than private health care can possibly come close to.
    If your’ objections are non-idealogical, and are based upon practical returns on investment, I bet I could come up with a huge budget deficit that would literally pay it’s own way, with a handsome dividend to boot. I don’t expect that an idealogical Parliament could manage this though.

  2. I’ll give those ideas some thought. I agree there are reasons to prefer public action over private in some domains.

    I am less sanguine about the “non default” premium that has historically been government’s key asset, if only because wanton currency destruction as is currently being practised in so many countries may very well flip around into a loss of standing. In these cases governments will be unable to place their debt without a significant risk premium, placing them on the equivalent status of a junk bond.

    More after digestion time, probably expressed as a new post.

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  4. I have enjoyed your take on this and am glad I stumbled onto your blog. I will be linking this to my blog for sure.
    I am curious to know what you think about using tax-cuts as a part of the stimulus package.

    I also wonder why there hasn’t been any discussion on tax reform. This has been the most broadly consulted budget in history (and many claim the most important) and no one is looking, to my knowledge at tax reform.

    I believe this is a perfect time to flatten our income tax rate. This could be coupled with increasing the basic personal exemption.
    I’d be interested in knowing what you think about this.
    darcymeyers.wordpress.com
    cheers
    Darcy

  5. Hi, Darcy: Welcome!

    If I were in power, my approach to stimulus would be centred on putting money in the hands of Canadians as opposed to companies. This means I would be extremely favourable toward tax cuts — and the balancing program wind-ups to pay for them.

    The cuts, in turn, should be permanent (give someone a temporary tax cut and it’s a signal to simply save the money) and be meaningful and obvious, which pretty much means income tax.

    A flat income tax would suit me as well. We want, I think, to encourage economic growth: more entrepreneurs. Getting rid of the jumps through the progressive scheme would do a lot to make people willing to risk a startup — and give a decent payback on $50,000-75,000 a year in company income. Indeed, it would do far more than any handout would do, if I’ve done the rough numbers rightly.

    There are certain items of national infrastructure that may — and I stress “may” — be worthy of investment that accelerates what would have happened privately anyway. As far as I’m concerned these should also be fitted into the revenue stream rather than be deficit financed, but if we were having a meaningful tax rate — say a $20,000-25,000 exemption, a flat tax of 20% at maximum, and we had cut programs out entirely to deal with the revenue drop — I might be persuaded to run a transitional deficit for two years maximum. It would be no less immoral, but it might well be appropriate politics.

  6. As you may have gathered from my earlier comments, my greatest interest in government and taxation is that in those respects that the government can provide the greatest collective benefit to Canadians, they should judicously exercise their powers.
    I believe that there are a great many badly designed taxes and programs, and probably 50% of funds raised, and monies disbursed are at best ill conceived.
    I think the most glaring, and plain stupid revenue sources on the books are collected in the form of direct levies on payrolls and employment. I used to own a company with about 35 employees, and there was nothing I hated more than the pile on of CPP, UIC, and Workers comp levies piled on top of my bi-weekly payroll. The companies share was the equivalent of about 4 extra employees, or a whole lot of training. These levies have to go. They are so goddam stupid. They raise so little compared to a point of so of the GST, and do so much damage.
    Income taxes are the second obvious target. Flat, graduated, whatever. Relief would be well done as it would eliminate many perverse incentives. I would happily vote to replace 50% of Income taxes with GST.
    As far a deficit financing goes, I don’t discriminate between deficit and program spending. Not as a moral decision anyways. If a deficit, and consequent debt is incurred to derive a flow of services ( the return). It’s justified provided the return exceeds the carrying costs. Accrual accounting was invented to allow private concerns to measure the relationship between stocks, and flows of money. It’s perfectly moral to seek a positive return on investment. The sources of funds, whether in a lump sum, (deficit), or in a matching flow (tax revenue stream) is immaterial to me. It’s a peculiarity of public finance that investments in capital assets, intended to generate a benefit flow are accounted as a lump sum expenditure, instead of accrued as per matching principle of accounting. I guess the trick is to hire honest and competent civil servants to ensure the accruals, and benefits are correctly valued.
    Sorry about this extended comment, the topic is a worthy one though, and I hope my little dissertation is not ill placed.

  7. No need to apologise: it’s a big topic and your comments are worth reading.

    We agree entirely on CPP, EI, WCB, etc. as damaging taxes. Do away with them!

    Recent events in Vancouver surrounding the City’s attempt to make a return on the Athletes’ Village for the Olympics show how easy it can be to have events move against a government, for these are not their normal area of competence. Of course, private enterprises can end up hoist on the same petards, but they were more likely to have better advisors, and early warning systems in place.

    Government is not an enterprise; it is something necessary and quite different. Running it more “like a business” doesn’t help. Therefore, I tend to think that politicians must make hard decisions about what to do.

    What do you think of New Zealand’s attempts to make accruals the norm?

  8. bluegreenblogger

    Being ignorant of New Zealands efforts, I grazed through a report by New Zealands Assistant Auditor General. Ouch.. I’m simply not well informed enough to judge the outcome. I can say though that I applaud their objectives, of introducing more clarity to the assets, liabilities, and funding/purchasing reporting. I guess that private sector financial accounting has developped GAAP over quite a period of time. I don’t know that the public sector has such a robust body of knowledge.
    One thing that caught my eye was a brief discussion about accounting for outcomes, as opposed to outputs. I can only say WOW!
    If clear GAAP rules were developed in Canada to measure, and render financial reports on policy outcomes, it could really do wonders for the way government works. Imagine if we could break down the functional silos that the public sector is broken into? Here’s a negative example for you. Royalty relief, and accelerated depreciation is sought, and received for a Tar Sand project. The potential public risks, and liabilities are not quantified. Only the direct financial costs are counted. Taxpayers believe it’s a good move, because the employment benefits, and future tax revenues are well quantified. The impact on Health care costs of:
    a) Risks of failure of tailings ponds.
    b) Known health care cost implications of quantifiable airborne particulates, and solvents.
    are not counted as liabilities. A true picture of public liabilities would measure the impact on the public purse across all ministries. I use this example, because it’s a graphic example of poor measurement, that could theoretically be captured by more transparent public accounting.
    A more positive example would be the converse. Budget allocations made for achieving public health outcomes could be spent across ministries. If Transport Canada can reliably account for positive health outcomes, or the food inspection agency, then they can dip into the health care budget to achieve health outcomes currently not directly recognised as part of their mandate. Kind of like breaking up the silos, and managing in pursuit of a basket of outcomes, rather than narrowly defined functions.

  9. Your observations are spot on, bluegreenblogger.

    If you remember Jane Jacobs’ book “Systems of Survival”, she talked about the differing ethical foundations of commerce and government. What NZ is trying to accomplish (and it is a Sisyphean task after years of “civil service as usual”) is precisely the conformance of the ethic of the public sector to the operation of it.

    Some of that is clouded by the shift to a more “corporate” structure (CEOs rather than Deputy Ministers, etc.) although this is designed, apparently, to allow the sense of tenure to be shaken in the former Ministries.

    Outcomes are what matter, for you do something in the public sector because it does not necessarily have a commercial cost benefit statement, but still needs to occur.

    Organizing the government around outcome areas would also make sense, e.g. environmental cleanup as a part of health & well-being.

    We have a great way to go to even start on some of this, but discussing it (and hope for candidates running with the pledge to work to implement it) is a good beginning.

    Thanks for your very thoughtful comments!

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