Hair of the Dog

By John Lumbard.

  Unemployment claims are down.  The trade deficit is rising.  The Fed is printing money.  A new cut in payroll taxes (less FICA taken out of your paycheck) and an extension of unemployment benefits will mean growing federal budget deficits—and a big new stimulus for the economy.  We’re borrowing and spending our way to another boom!

Well, the word “boom” might be a bit over the top, but this is another dose of the same medicine we’ve been guzzling since the 1980s;  party all night, and cure the hangover with a Mimosa in the morning. 

Ever since the Great Panic of 2008 we’ve been saying that the trouble with Stimulus programs is the deflation (the shrinkage in the economy) that follows when the programs end.  Now even slow-learner Paul Krugman is questioning whether “a year of modestly better performance is worth .. additional debt.”  Paul Krugman!  Too bad the package didn’t include some trains, because Paul has loved trains since he was a little boy.

The leading nations of Europe have responded to a similar set of problems—debt and bloated government—with austerity.  The Brits have slashed social benefits and half a million government jobs, fending off a bleating chorus of American critics who fret that the result will be further economic weakness.  Well, duh;  but Canada actually slashed deeper in the mid 1990s, when it courageously overcame a combination of debt, deficits, and bloated government that ranked among the worst in the world.

In fact, Canada’s  debt—as a % of GDP—was actually worse than the one that has caused the Greeks to cry for help.   A shocking one-third of all government tax revenues were being devoured by the cost of interest that the nation had to pay on its debt.  You never heard about this from our “news” media, but our neighbors to the north laid off fourteen percent of the government’s work force.   The 490,000 layoffs under way in Britain sound like a lot, but it’s just 8% of total government employment.

At the same time Canada reformed its welfare system, reduced benefits, cut corporate taxes, cut income taxes, and launched a Value-Added Tax that shifted part of the “penalty” of taxation from income to consumption.

If that sounds harsh, take a look at the results.  Over the course of the next ten years the percentage of Canadians classified as low-income declined by more than 30%, according a new book titled The Canadian Century.  Welfare recipients declined from 10.7% of the population to 6.8%.  The federal budget was balanced within 3 years, and the nation went on to produce 11 straight budget surpluses.

Austerity works.  In recent months these policies have been copied by Britain, Ireland, and the entire continent of Europe (none of whom gave any credit to Canada whatsoever).  This might not be the best time to follow suit—somebody somewhere has to buy things, if the world economy is to keep chugging along—but let’s not fool ourselves into thinking that we can spend our way back to financial health.


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