Tag Archives: deficits

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:

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.

Mark that Economics Assignment an “F”

Much has been made of the Rt. Hon. Stephen Harper, PC, MA, MP’s background in Economics. Today, in his response to the Speech from the Throne, the outgoing Leader of the Opposition, Stéphane Dion, laid the blame for pending deficits and a bare cupboard in Ottawa not on the world economic situation but at Stephen Harper’s doorstep.

And the Hon. Dr. Stéphane Dion, PC, PhD, MP, although his degrees are in political science and sociology, has the right of it. The Harper Government has failed Economics. Today Dion may have spoken as a partisan — but he also spoke the truth, and it would be wise for the Conservatives to pay attention.

I have written previously on the dramatic increases in spending since Harper took power — not even Paul Martin, in his attempt to hang on to power in late 2005, has sloshed money around as Harper’s Conservatives have. The goal, of course, was to empty the proverbial cupboard, thus protecting against changes of course should they lose the 2008 election. Those of us who understand and support fiscal conservatism have been appalled at this. Now these decisions are turning to bite the Government. Witness Raphael Alexander’s rightful indignation at deficits as an intention (and this is not the first time he has called the Conservative Government on the carpet for a failure to deliver on their promise to, well, you know, actually be fiscal conservatives).

We should all look at the destruction this slopping cash around like a drunken sailor in port after a year at sea has created. Had we actually built something permanent with that money — some $40,000,000,000.00 over three years — perhaps there would be no issue. Forty billion dollars would buy a lot: it would buy a fair bit of new high-speed electrified rail line on key transportation corridors; it would buy a fair bit of rapid transit and interurban transit for our metropolitan areas; it would buy a host of other and useful things for the future. Alas, what we got were a basket of slops — some here, some there, a handout for this and a package for that — instead of anything that represented stewardship of the country for the future.

Weren’t the many programmes in Industry Canada, Heritage Canada, HRSDC, and so on created and left over from the Chrétien years enough? Weren’t the buckets of spending from the Martin years enough? (Almost all of these carry on, of course, now part of the base budget and headcount of official Ottawa, even though most of them had completed their task to a reasonable point long, long ago.)

Look, the NDP weren’t going to counsel restraint; they’re against tax cuts, and they favour operating programmes that require annual money and employ lots of people in the public sector. The Liberals had no sense of restraint in this area, either. If someone (like me) wanted fiscal rectitude, then that left the Conservatives, who preach it in their principles but fail to deliver in their practice.

Stephen Harper talks of pragmatism. I look at the neo-con that he was and see a right-wing liberal. I look at his track record and see a Liberal — worse still, a big spending one who could comfortably stand in Trudeau’s shoes — and it shames me to have Dion be the one to bell the cat.

But so be it: it is what it is.

So where next? Certainly economic changes in the global economy are tearing at the Canadian economy: commodity prices are sinking as the general world of finance capitalism lets the air out of its balloons, dragged down by weakening demand and the driving out of speculators forced to liquidate to deal with other losses. That impacts the West. Meanwhile, as loss of access to credit imperils the remaining industrial companies of North America, the branch plant and subsidiary supplier economy of Ontario and Québec get slammed as well. So it is not entirely true to say that our current fiscal capacity woes in Ottawa are entirely Harper’s fault.

Still, if he is an economist, he ought to have been able to recognize the bubbles for what they were — and somewhere in his undergraduate years he must have studied recessions, the Great Depression, and the concept of liquidation to reset pricing anomalies. My degrees are in philosophy and I could see it coming way back in the 1990s. Why can’t he?

Of course, for that matter, why can’t the Department of Finance?

Liquidation is needed to lead to capitulation: the point at which a firm footing for the future is possible. (Trying to stave off this — as the G-20 are and as the concerted efforts of Central Bankers is — merely makes it worse.) Now that our old fearless pundit, Garth Turner, is talking clearly for himself rather than trying to straddle the requirements of being a party member (and MP) with his desire to communicate the things he sees coming at us, his blog has become a sign of our near future (and worth reading for that alone). Paradoxically, he’ll do far more good for Canadians as an extra-Parliamentary voice than in it.

Now Garth calls the future as follows: major home “value” resets in multiple markets, upward of 50% or more. Why? The “rules for prudent lending” — much more important when the capital is tied up and not recycled through exotic mortgage-backed securities — are based on a century or more of experience. They proved themselves through the Great Depression and every up and down since. Those say maximum term 25 years, initial equity a minimum of 20%, and a maximum debt service ratio of 36%. Unstated — because before the downturn of the 1970s it didn’t need to be — is that that 36% can be met on one salary. Your beat up Kitsilano home going for around one million dollars is a thing of the past. The faster the crash to sustainable prices at 25/20/36 comes about, the more quickly the real estate market unlocks. You can read the rest of his projections at his site.

Paying down debt was a good thing; real tax relief was a missed opportunity; slopping money around like drunken Liberals of the past was a sheer waste. That’s the 2006-2008 track record to date.

A deficit now may well be needed, but it needn’t have been. That’s the 2008-2010 reality.

Trying to “soften the blows”, “keep the doors open” (take your demand for money elsewhere, auto industry: you make far more cars than there is a market for, anyway — and that market will shrink, not grow, so, yes, you do need to close down at least one company and many plants) and the like just wastes money we will borrow. Borrowing to build for the future, on the other hand, leaves us with assets — assets we will need in the near future and for many years to come.

So I hope, Mr. Harper, that you are deadly serious about reviewing the Ottawa that exists, because if you’re not willing to outright terminate a lot of the past programmes and slop chests and focus on investing in our futures appropriately then there is no reason to vote for you or your party in the future. After all, if you’re all going to be socialists and redistribute what was once wealth and is now only depreciating cash, making no difference between you and others in your “pragmatism”, then I might as well vote NDP.

After all, they’re honest about their intentions — and know that they can’t be too profligate. Unlike the man who spoke truth to power today and his party — and you and yours.

Common Sense about Deficits and Spending

Well, it didn’t even take as long as I might have thought for the political consensus to change. All of a sudden, deficits are back in fashion in Canada. I suppose for those of us who want this country to be more like ones they deem “successful” the idea of piling debt upon debt and never making hard choices would be validated, in some perverse way, by the fact that these other nations haven’t fallen into even deeper trouble — yet. For those of us who would prefer Canada to chart a common-sensical course of its own, however (as we had been doing since the mid-1990s, spending less than we took in in taxes and paying down the accumulated inheritance from the previous generation shoved onto our shoulders to bear) this development is one of the most gloomy in a year that has had no shortfall in mood swings, financial fallout and decay.

Paul Martin, of course, has been talking to any outlet that would print his musings in the past forty-eight hours about how poorly the Harper Government has done — because they’re not sitting on that slush fund formerly known as “massive Federal surpluses”. There is a minor consideration here: had the Conservatives not consciously set out to balance the Federal books there would be a huge surplus available to throw into relief measures without the possibility of a deficit. Of course, Martin himself never saw these surpluses as feedstock for a rainy-day fund (i.e. not to be spent) — and that’s the major consideration. Martin, like Chrétien before him, was an over-taxer who saw to it that slush money was available to throw around.

At least Harper has ensured that the slush capability is gone. Far better, of course, would have been to lower taxes and let Canadians keep their hard-earned gelt — to balance the Federal budget by reducing intake to match outflow — than by sloshing around money at an even faster rate than either of his Liberal predecessors (and they were outright masters, never seeing a “priority” that didn’t need funding).

The Keynesian proposition was that it was the proper role of government to provide a counter-weight to the economic trend: if the economy slowed and hardship rose, the government should use deficits (if it did not have an accumulated rainy-day fund for the purpose) to create new activity and thereby relieve the hardship. Once the next upswing took hold, however, the government was to retire the debt it has accumulated and restock its rainy-day provisions for a future downturn.

Well, it only took the first downturn to move into the post-Keynesian consensus: “there’s no need to pay off the debt because we owe it to ourselves”. This is the source of the notion, expressed by Gordon Campbell (no lightweight in the wasteful spending department himself) of BC about how deficits create the desire for “a little more deficit, please” — and the Mulroney Government’s discovery that once an entitlement or handout is created, taking them back is the devil’s own job.

Give a grudging credit (a somewhat tarnished penny would be about right) to Chrétien and Martin for having finally faced up to the reality of a generation’s worth of indisciplined spending by balancing the budget and then beginning to retire the accumulate debt. It’s not much credit precisely because their hands were being forced: the country’s credit rating was at risk, and interest payments on the debt were more than 33% of Federal spending. (Indeed, Mulroney and Wilson managed operating budgets that were balanced — what a business calls EBIT [earnings before interest and taxes] — but ran deficits to cover the interest payments, causing them to grow annually as a percentage of spending.) Doing something that needs doing earns credit; doing it before you’re forced to is the real accomplishment.

Now a Federal deficit waits in the wings, as tax receipts are projected to fall. But the problem isn’t that income will drop below outflows. The problem is that outflows were not reduced while we had the chance. Now, as with Chrétien & Martin, we’re going to have to do it while times are tough.

The reality of this country is that taxes are too high, because we will not make hard choices.

I can recall saying, earlier in the year, that I’d cut off the whole Department of Sport and Amateur Fitness. An outcry ensued bemoaning my hard-heartedness towards the dreams of athletes, and the joy the country would feel as Canadians mounted the podium to receive their medals. Well, in a choice between panem and circenses, I choose bread over circuses. I know amateur athletes, and I know how hard they work and how little support they get today. But this is not a priority and I am willing to make hard choices about that, to say rather than “too little spread too thinly” to make a difference, “none” would be better. If times were better (or about to be so: as I’ve previously written, there are structural reasons they won’t be) I’d be more willing to spend “well and focused”. But we must choose, not try to have it all and defer the costs into a future even less able to pay for than we have been for the lavish waste of Trudeau and his followers.

Common sense would say that, if times are going to be structurally hard — especially if they are deflationary — cash is king, but only if it is in the hands of Canadians. Now we could tax it away, only to send it back as entitlements — but that comes at an average cost of 20% “lost” paying for the bureaucracies that do this under best circumstances (as I have previously written about). Far better to reduce tax receipts and leave the cash in the hands of Canadians with no losses due to it passing through Ottawa.

That, in turn, would require that programme spending be cut, so that outflows would once again match inflows (at a new, permanently lower level). In other words, we would choose what was better done by central redisbursement (with all its friction costs), and what was better done locally, as a matter of local choice.

But common sense comes at a steep price. It requires politicians that not only have the courage of their convictions to push an unpopular change through the din and clatter of every two bit agitator, opposition member, interest group, media “personality”, etc. claiming that the end of the world is nigh and that those taking action are heartless bastards who don’t give a damn about anyone but themselves; it requires that we learn to change our expectations. Governments aren’t in the growth business, and they’re not mummy coming to kiss every little mishap better. They aren’t here to pay for things we won’t pay for ourselves, and to support causes we think other people ought to support.

They’re in the business of peace, bien-être and good (i.e. prudent) government, and nothing else, when the chips are down. The result of that is order, including a society where subsidiarity lets decisions take place close to the action — and the closest place to the action is in each of our homes, not in some Palais des fonctionnaires off in a capital somewhere.

Common sense has been in very short supply. Call it Conservativism if you like; I call it Toryism — another capacity in very short supply. But I hope, as Harper’s 1,000th day in office approaches, he and his team can find it, and the courage to pursue it.

Tax Policy for Turbulent Times

There’s a presumption in Canadian life that “the answer is the government; what was your stupid question, anyway?” that needs to be challenged, especially as the global economic storm clouds gather to lash Canada as well.

First, let’s dispense with the notion of helping out internationally. By good management and good luck, Canada goes into this economic hurricane in excellent shape. Our national debt continues to fall, not rise; our books are generally balanced; our trade balance remains positive. We are the only OECD country that has run surpluses in the past few years. In other words, despite every nasty thing that could be said about how the surplus was too large (read: we were over-taxed) each year and how it has been squandered by governments Rouge or Bleu on blatant attempts to bribe us with our own money, we are better prepared than any other country for this.

As long as international counter-party risk remains an unknown — and the alphabet soup of bailouts from the US Federal Reserve and Treasury, from the Bank of England and Exchequer, from the European Central Bank and the treasuries of the EU countries, etc. has ensured that some debt-ridden carcasses suitable for a vulture’s meal rather than resuscitation were favoured while others, in better shape, are now in question — domestic commercial paper markets, bank lending, etc. will be subject to extreme risk management by our financial institutions. For that, you can read hmmm … let’s think a little longer before we say ‘yes’ (if we ever do). Credit will not be free-flowing and easy, nor will it be for many years to come.

Nor should it be. We have lived through an age of excess that must be worked off. It will take years to unwind all the loans that should not have been made.

Smart business folk, of course, have already gone looking for alternatives. CBC reported last night on The National of the case of one Winnipeg business whipsawed by the credit crunch. The owner approached his key suppliers to act as investors. They, in turn, were pleased to invest in something solid, real and easily monitored rather than fancy pieces of paper promising a return laden with unknown risks. He is suitably financed to carry on. In other words, the presumption that the system must be continued as is is wrong; put your thinking cap on and figure out how to thrive in this new world.

Funny me, I must be old. Isn’t that how asset-backed commercial paper came to dominate business debt requirements — when, in the crunch of the early 1980s just before this bubble began, banks stopped commercial lending? There is always a way to proceed, if you’re willing to work for it.

Of course, most aren’t. Instead, they want handouts. Programmes to fund product development, to train their workers, direct subsidies, loan guarantees, the works. This, for years, has been the stock in trade of Industry Canada’s many handouts, and of one Premier after another seeking “relief” for one industrial sector or another.

So, too, our monetary policy: it was sound under former Governor David Dodge, but the current Governor, Mark Carney, seems determined to emulate “Helicopter Ben” wherever possible. Bernancke’s actions in the US are leading to an inevitable debt collapse of the US Government. Good-bye America. Is this what we want for Canada? But rate cuts and the promise of more, term lending facilities and the like are seen by the hand-out centric business leaders and politicians in our mix as a good thing. Après-nous, le déluge, indeed, except that the flood this time is but days or weeks away, not a problem merely for those who get to bury you after a long life.

This brings me to Federal tax policy. The one solid contribution the Federal Government could make at this time would be to put serious money in the hands of Canadians. No more fiddling around the edges, with a credit here and a point off the GST there. Something big, useful (for this will be a period of rampant inflation masking deep deflation under the surface, one of the reasons programmes will be ineffectual: they are torn in two by this concurrent condition) and solid to calm fears and put some capital into the system where it would do the most good: where a person can see and monitor their investment in a business (their own or someone else’s).

We are discussing, in our house, how to live under these new conditions. All those discussions start with there’ll only be this much money coming in; how do we limit spending to fit under that number. We don’t know, of course (ah, the joys of self-employment) how much that number is, nor will it be constant, as with a pay-cheque. But the principle is the one the Government should use: set the limit on revenue and live within its means.

I propose an across the board 33% income tax cut. Each bracket drops by 1/3. 16% goes to 11%; 26% goes to 17%; 29% goes to 19%. You get the idea. That creates a noticeable difference in take home pay or retained earnings.

To get there, Federal spending needs to drop. You don’t do this by an across the board cut; you do this by cutting out — completely — whole programmes, perhaps even a Department or two. A balanced budget is put forward at these numbers: probably one without a lot of “contingency” built in, and therefore subject, depending on the storm winds, to a possible close out in a slight deficit (but not one planned).

Will the country scream? Absolutely. Will the combined Opposition dare to vote down the budget? Almost assuredly not: they cannot afford another election so soon, especially on platforms that would rescind a massive tax cut.

As for the Premiers, let them scream. The answer to the fiscal imbalance is not more money from Ottawa; the answer is for the provinces to make programme choices themselves. You want a socialist nirvana (as in Québec or Ontario)? Get your citizens to pay for it — and deal with the exodus that may result.

Fiscal sanity must support fiscal policy, especially in turbulent times. We do not want to follow the United States and the countries of the European Union down the rat-hole they have prepared for themselves. We need not.

All we need is the will to act boldly in our own national interest.