Conservative austerity - Not what the doctor ordered

Brian at Just Damn Stupid has found this Bloomberg article which shows the folly of cutting budgets when the economy is rocky:

Sorry, fiscal austerity doesn’t work. For evidence, look no further than the U.K.

This can’t be good news for the U.S. political right, whose mantra has been: cut spending, put a lid on deficits, and growth will improve.

All sorts of good things, it is claimed, will spring from a turn to austerity that stops all this stimulus nonsense and prevents the Federal Reserve from doing more quantitative easing. Reductions in spending, according to a theory known as Ricardian equivalence, will do no harm because lower borrowing will automatically lead to higher private spending. Plus, of course, there is the notion of crowding out, meaning that reining in the public sector leaves room for the private industry to step in and all will be well.

This is dangerous hogwash.

There is little historical precedent in the real world, though lots of fantasizing in the made-up world of economic theorists, to suggest that fiscal austerity works. The best example of austerity’s failure is the double-dip that occurred in the late 1930s in the U.S., when spending was reduced too soon in a nascent recovery. In contrast, the U.K. didn’t have a double-dip because it was engaging in classic Keynesian spending as it began re- arming.

And as Brian goes on to point out, Hugh McFadyen's promise to balance the budget on an annual basis would require ridiculous budget cuts... not what Manitoba needs by a long shot.

Budget notes

The new provincial budget introduced by Finance Minster Rosann Wowchuk is not particularly shocking. Like the federal government and virtually every other province, Manitoba is going to be running a deficit until 2014. Several governments, including the feds, will be running deficits for longer than that, so overall we're doing pretty well, and all efforts are being made to maintain front line services. To do this the government will need to amend Manitoba's balanced budget legislation to make it more flexible. The provincial Tories and their ilk will whine, but considering that the federal stimulus would not have been possible if the feds (you know, the folks Hugh McFadyen would presumably like to emulate) were constrained by similar legislation, I don't think they don't have a whole lot to complain about.

Interestingly, U of M economist Fletcher Baragar thinks that the balanced budget legislation should be scrapped entirely. I'm inclined to agree, though it might be hard to sell the public on the matter.

McGuinty to borrow a page from Harris' book?

Sure looks that way:

The cash-strapped Ontario government is looking into the sale of all or part of its collection of Crown corporations, including the provincial lottery company and the retail monopoly on liquor sales, to raise cash to close a $24.7-billion deficit this year.

The Liberal government of Premier Dalton McGuinty recently hired two banks with experience in privatizations, CIBC World Markets Inc. and Goldman Sachs Group Inc., and charged them with writing a blueprint for possible privatization of agencies, investment banking sources said. The sale candidates include icons such as Hydro One Inc., the Ontario Lottery and Gaming Corp., the Liquor Control Board of Ontario and Ontario Power Generation, said the bankers, who asked to remain anonymous because the talks with the government are private.

The planned time frame for the initial study is short, just a couple of months, and then the government can decide whether to go ahead with any sales.

From the Globe and Mail. It seems awfully shortsighted to me, especially with things like Hydro and the LCBO, which are reliable sources of government revenue. To sell those would be choking the chicken that laid the golden egg. Indeed, it's noteworthy that even Mike Harris backed away from doing this, so hopefully McGuinty will do so as well.

A fresh take on deficits

We often hear that deficits are getting out of control and that we have to cut spending drastically, regardless of how much need there might be for that spending. But is it really necessary? Stephanie Blankenburg thinks not:

What to do about Britain's national debt and its annual government deficits in the here and now remained less clear. Had deficit spending not been once and for all discredited at the end of the 1970s? Was John Maynard Keynes really about budgetary spending in times of crisis or did he not rather regard fiscal expansion as a secondary tool to be employed, where absolutely necessary, alongside long-term monetary policies (low long-term interest rates) to keep business cycle fluctuations under control?

All true and valid. But for a hands-on perspective on current national debt and government deficits, it is well worth keeping in mind two basic points. First, the current deficit hysteria – to use Samuel Brittan's term – has no historical grounding. Britain's national debt currently runs at about 40% of GDP. Depending on who you believe and what parts of bank debt are counted as national debt, it is predicted to either stay close to 40% or increase to anywhere between 60% and 100% over the next few years. Between 1918 and 1961, UK national debt averaged well above 100%, remaining closer and, at times above, 200% for the best part of this period. What was achieved? Fascism was defeated and the foundations of a modern welfare state were laid. Since the mid-1970s, UK national debt has oscillated between 30% and 40%, at the beginning of the 1990s falling to below 30% for a few years. What was then achieved? Finance-led corporate capitalism rose to power, leaving behind an all but destroyed manufacturing sector in the UK, rising income inequality and, eventually, a financial sector in tatters. And last, not least, wars are being lost.

From the Guardian. Trouble is, it may be hard to sell the public on this idea, given the pathological fear of deficits that's been drummed into us for the last few decades.

The Bloc rushes in where federalists fear to tread

And justifiably so, in this case:

Wealthy Canadians should pay a special surtax to help slay the deficit, the Bloc Quebecois says.

Monday, the Bloc became the first party in the House of Commons to propose costed measures to eliminate the $56-billion federal deficit, including drastic cuts to the civil service.

“There are people who do not pay their fair share of taxes,” said Bloc finance critic Jean-Yves Laforest.

The party championed a temporary tax on the rich, similar to a plan U.S. President Barack Obama proposed, where Canadians with a taxable income above $150,000 would pay an extra 1%. The measure would affect 450,000 people and add $1.5 billion to federal coffers, according to the Bloc’s estimates.

From the London Free Press. Such a simple and sensible idea, yet the other parties are reluctant to talk about it. News flash -- not all tax increases are bad.

Twilight of the Tories

It really looks like it's happening:

The Liberals and New Democrats signed an agreement on Monday to form an unprecedented coalition government, with a written pledge of support from the Bloc Québécois, if they are successful in ousting the minority Conservative government in a coming confidence vote.

The accord between parties led by Stéphane Dion, Jack Layton and Gilles Duceppe came just hours after Liberal caucus members agreed unanimously that Dion would stay on to lead the Liberal-NDP coalition, with support in the House of Commons from Bloc MPs.

From the CBC. The full text of the agreement is here. The Reformatories are now panicking, of course, but I really think they went too far when they covertly taped an NDP conference call. That sort of shit tends to undermine any remaining credibility they might have had.

So what now? A coalition is an interesting prospect; the new government will face big challenges, though:

The benchmark TSX index took a record dive Monday, dropping 864.41 points, or 9.3 per cent, to 8,406.21.

The percentage drop was the second-biggest on record, after the 11.3 per cent plunge on Black Monday, Oct. 19, 1987. The TSX point fall broke the record set on Sept. 29, when it fell by 840.93 points.

The Dow Jones industrial average also plummeted, falling 679.95 points, or 7.7 per cent, to 8,149.

Not an easy task governing the country under circumstances like this. The new government will indeed likely have to go into deficit if they hope to significantly soften the economic blows we're likely to be taking in the next few years.

Harper running deficit?

Mike Watkins thinks so:

Conservative leader Stephen Harper continues to claim that Canada is enjoying a surplus, yet his Minister of Finance Jim Flaherty this calendar year has racked up an operational deficit in six of the past seven reported months, totaling over $23 billion dollars, or $20.3 billion for this fiscal year to date. In either case these amounts are unprecedented during this decade.

So much for the Tories' superior financial management skills. It's been suggested that this may be the reason why they're delaying the release of this year's Canada Savings Bonds, because the interest rate that the bonds would have to pay would reflect things about the nation's finances that the Tories don't want public before next week's election is safely out of the way.