March 2, 2013 – In his latest column for Postmedia, MLI Managing Director Brian Lee Crowley says even Keynes opposed permanent stimulus. He writes, "There is a time when government steps back, hands over responsibility for growth to the resurgent private sector, and uses the tax revenue from that growth to pay down debt." Read more in his column below.
This column is published in the Ottawa Citizen, Calgary Herald, Vancouver Sun, Montreal Gazette, Edmonton Journal, Saskatoon's StarPhoenix, Regina's Leader-Post, Windsor Star, The Province, and Canada.com.
By Brian Lee Crowley, Ottawa Citizen, March 2, 2013
As Canada's view of the recent recession moves ever more resolutely into the rear-view mirror, we are about to learn whether we are responsible enough to be trusted with the keys to the Keynesian car.
Remember that the rationale for "stimulus" spending of the kind championed by John Maynard Keynes is that government must compensate for the collapse of demand by private companies and consumers during downturns. Governments borrow money and use it to spend on so-called shovel-ready projects, where plans are ready and people can be employed immediately. Even as tax revenues (that depend on private sector activity) collapse, governments can backstop the economy until the private sector's energies are restored. The price is rising public debt, but it may be worth paying in a downturn.
You don't have to accept the theory, and Keynes has his detractors, of whom I am one. But assume Keynes is right. What do we do now that the recession is indisputably over in Canada?
This is where Keynes's acolytes often inexplicably lose interest in what their guru actually said. He was of the common sense view that since the reason for stimulus was temporary, stimulus should be, too. Once the recession is over, governments should run surpluses and pay down the debt acquired to combat the recession. Real Keynesianism swims against the economic current all the time — borrowing and spending when times are bad, running surpluses and paying down debt when times are good.
But one of the reasons why Keynesianism is such a dangerous doctrine in practice is only half of his prescription is attractive to his patients, and those under his care therefore do not take all their meds.
These are the people for whom the economy is always on the brink of collapse and for whom every job is precarious. For them government must always be stimulating, and the time never arrives for the second half of Doc Keynes's therapy. That's the part where the government steps back, hands over responsibility for growth to the resurgent private sector, and uses the tax revenues from that growth to pay down its debt.
But there are logical consequences to only following half of the doctor's orders. Every recession becomes a one-way upward ratchet in the permanent size of government. And because politicians like the pleasure of dispensing money but are averse to the pain of increasing taxes, deficits become a permanent feature at budget time because governments are unwilling to raise taxes to match their rising spending.
This is a central reason why Canada ran 25 years' worth of deficits in good times and in bad until Paul Martin and the Chrétien government decided that there was a limit to how much debt Canada could shoulder. By the time a third of all federal revenues were going out the door every year to pay interest on the burgeoning debt, we had to change course.
I was on the radio the other day opposite one of these apostles of all-cake-all-the-time Keynesianism. Sid Ryan, the head of the Ontario Federation of Labour, is stumping the province making the case against an "austerity budget." In a recent op-ed in the Citizen, he and his co-author claimed that Ontario, currently running a $10-billion dollar deficit, doesn't have a spending problem, but a revenue problem.
Let's test Ryan's proposition. A decade ago, Ontario was spending about $66 billion annually. Today that has risen to nearly $123 billion. Now inflation has eroded the dollar over that decade, and the population has grown, so what has happened to per-person spending adjusted for inflation? It's up by 37 per cent. I doubt the average Ontarian thinks the value of public services has risen by that much, yet this increase in spending in real terms by over a third is now, in Ryan's view, an untouchable baseline. If taxes don't cover it, well, taxes should just go up. Temporary stimulus? Fuggedaboutit.
As for the notion only big government can improve our job prospects, we can test that, too. Canada is one of only a handful of industrialized countries to have recovered all the jobs lost in the recession and more. We have the highest share of our population working of any G7 country. The new jobs have been hugely concentrated in private sector, full time and above-average wage jobs, including in manufacturing, where employment is rising faster than in booming mining. Raising taxes on the private sector is to kick the real job-generating sector just as it hits its stride.
But then only a tiny minority of private sector workers pays union dues to Ryan; the bulk of his membership is in the stimulus-addicted public sector. Keynes wouldn't have been fooled by the special pleading of Ryan and his ilk across the country and neither should we.
Brian Lee Crowley is the Managing Director of the Macdonald-Laurier Institute, an independent non-partisan public policy think tank in Ottawa: www.macdonaldlaurier.ca.
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