Raise the Hammer

Whoa. I thought I had read recently that Ireland had some of the most massive debt in the world. Amounting to some ridiculous per capita number. (...just checked, according to Wiki, Ireland's debt is $519,000 per capita.) Not sure what they've done in recent years, but that's a pretty big mountain of debt to climb out of.

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This is terribly non-objective garbage. I shouldn't even bother to argue the points. This is analogous to jumping up and down with an orange sign shouting slogans for your side; you're no better than a drunken sports fan.

How might austerity programs be affected by the various trade agreements and relationships with neighbouring countries, and their fiscal health? If, for example, 80% of Ontario's exports go to the US and the US is tapped out, and the province is already constricted by the cost of servicing massive foreign debt levels, might that not put a crimp in our fiscal strategies at the provincial and federal levels? How much tighter might our options become if credit ratings become an issue? I'm not trying to defend the philosophy that informs these budgets, but it does seem to me that we as a society have been living beyond our means for quite some time now. Nobody in power wants to raise taxes, and so service and sepnding cuts are the most likely outcome of that daydream scenario.

COMMENTS on recent Federal & Ontario BUDGETS

News NOW Magazine last Thurs., NOW | April 5-12, 2012 | VOL 31 NO 32
Canada’s taste for waste
Don’t look for economic productivity in either Liberal or Conservative budgets
By Wayne Roberts http://www.nowtoronto.com/news/story.cfm?content=186077
EXCERPTS
....---Ontario’s budget is just as dim-witted. Its failure to increase energy purchasing from the local economy, via wind and sun, and its lack of interest in economy-stimulating retrofitting and conservation only exacerbate the financial hemorrhaging that goes with relying on oil from elsewhere. This isn’t restraint: it’s willingness to waste and squander.

Instead of pushing the local energy economy, the Libs will increase revenue from gambling and boozing. Give me the lunacy of the GOP leadership race, which is at least good entertainment in a sort of sick, Survivor kind of way, over this moronic substitution of unhealthy and morale-destroying revenue creation for real economic development.

The attack on public service pensions is beneath contempt, as anyone knows who is aware of the function they serve. These pensions ensure career-long commitment to the public service even when, as during an economic boom, the sector’s wages lag far behind those in the private realm. Over a career of service, the costs and savings balance out, while the public gains a civil service with cost-free institutional memory and commitment.

This recession has lasted so long that many have forgotten the wisdom of boom times, but one function of the civil service used to be to counsel governments against bad policy based on brainless prejudices and resentments fanned by the ignoramuses at the Toronto Sun.
----....

The government's renewable energy contracts offered pie-in-the-sky returns and that was the Achilles heel of the whole program, even more than the NIMBYism that stalls windfarms time and again. I'm all in favour of green energy, but the Liberals' game plan has been blind to the impact of their incentivization of the sector. This was underlined in no uncertain terms by the Auditor General's Annual Report and the Drummond Report. FIT/MicroFIT are examples of profligate policy that, amazing, entirely skirted consultation with the energy sector. If you're looking for "willingness to waste and squander," take a gander at the hydro dynamic that has hydro consumers bridge the gap between market rates and contracted guarantees. (The retrofitting and conservation initiatives, if memory serves, were a federal initiative.)

Speaking of ganders, I won't even touch the radioactive potato that is public sector union arbitration, except to agree that there is a golden goose in there somewhere. It's far from clear, however, if there is only one hand holding the fatal blade.

Kudos for posting this Ryan...glad to see this kind of analysis on RTH.

If "overspending" created the Euro crisis then wouldn't it be Sweden, Norway and Denmark with collapsing economies and riots in the streets? That logic just doesn't add up. What do Spain, Portugal, Greece and Italy have in common? They're poor. Since switching to the Euro, they've totally lost control of local monetary policy. If Greece still used the Drachma, it could simply print a bunch of money, drive down the value and create a whole pile of jobs in the process (stimulating revenues). Since it adopted the same currency as Germany and Sweeden, it's only monetary option has been going into larger amounts of debt.

The problem with Austerity is that it doesn't work. As Ryan mentions, crippling an economy only makes it harder to repay debts, and that's exactly what's happened in Greece. Tax revenues have fallen as the economy continued to fail under these cuts, leaving the government with less spend on debt repayment. As this happened, investors stopped buying their bonds sending their interest rates skyrocketing. It's called a debt "trap" for a reason.

Canada, on the other hand, enjoys very low interest rates, has its own currency and the lowest debt:GDP ratio in the G8. We're extremely rich in natural resources, which our government seems intent on giving away (translation: "we're a great place to invest"). Our drive for austerity is clearly political, and that says just as much as the continuing failures of these policies in Europe.

Do Harper and McGuinty seriously believe that what we need right now is a dose of Greek-style crisis economics? Is this what we, as the Canadian people want for our country?

>> Most important, after almost two decades of tax cuts that mostly favoured the wealthy, we're not adding new taxes to help share the responsibility to balance the books.

These numbers are the net lending/borrowing(-) OR surpluses/deficits of the four main sectors of Canada's economy (billions of dollars).

They reflect who is going into debt and who is accumulating savings.

http://www.statcan.gc.ca/pub/13-020-x/2011004/tab-eng.htm


Gov't(s) Households Foreign Corporate Discrepancy

2000 31,705 -988 -40,340 11,121 -1498

2006 23,780 -39,502 -24,902 42,142 1518
2007 21,551 -54,182 -12,332 43,449 1514
2008 -6,317 -43,047 -7,811 56,816 359
2009 -74,724 -18,773 48,399 44,676 422
2010 -90,244 -28,662 56,647 62,670 -411
2011 -78,178 -37,031 51,266 62,300 1643

As you can see, households continue to pile on debt, while foreigners and corporations grow their cash savings.

>> The cuts introduced by the Harper government since 2006 amount to $13 billion a year in lost revenue, creating a structural deficit that serves mainly to justify real cuts in program spending.

The feds have a printing press called the Bank of Canada. This is from the Bank of Canada's website...

"The Bank of Canada was created to be the sole issuer of bank notes and to facilitate management of the country's financial system.

Having an independent monetary institution allows for the separation of the power to spend money from the power to create money.

Separating the central bank from the political process enables it to adopt the medium- and long-term perspectives essential to conducting effective monetary policy."

So, technically the feds don't create money. Instead, they get the Bank of Canada to create money and then that created money is deposited into their bank account at the Bank of Canada...

The reason they issue debt is to control interest rates...

"In contrast to a fiscal surplus, a fiscal deficit results in an influx of cash into the private economy since the government injects more money through its spending than it collects in taxes. This added liquidity – in the absence of any intervention by the Bank of Canada or the Government of Canada – would create an imbalance in the form of surplus liquidity in the private economy that would drive the overnight rate lower. It is the Bank’s role to neutralize, on a daily basis, this injection of liquidity with a corresponding withdrawal of cash from the private economy."

It does this by swapping treasury bills for cash. Of course, the cash used to buy the federal debt was created by the Bank of Canada in the first place.

Oddly enough, Britain looked to the mid-90s austerity programs of Nordic countries when formulating its own response to the recent fiscal crisis.

http://m.thelocal.se/29794/20101024/

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It's not the debt:GDP ratio that makes us a "good place to invest" (which I put in quotation marks for a reason). It's the part about giving away natural resources.

The Tar Sands, for instance, are being extracted from public lands via short-term leases (much like logging, etc). This process is heavily subsidized, but the royalties we charge for this oil are more in line with Ecuador than Norway (or even Russia). Throw in some tax cuts, slash environmental laws and govern the nation as if Calgary were the capital, and yes, you'll have a great place for (oil company) investment.

Where's the evidence that social spending is "out of control"? We've been in the midst of cuts and freezes since the 90s. As A Smith constantly points out, our economy may actually be suffering from a lack of public debt, since this too is essential for "investment" (treasury bonds). We don't need to fear printing money in the same way some nations do, since they still need Canadian dollars to buy our large stock of increasingly scarce resources. Anyone else glad we didn't form a single North American currency?

What should nations like Greece do at this point, lacking both our resources and financial autonomy? Default on their debts and leave the Euro.

Comment edited by Undustrial on 2012-04-10 11:44:03

The first thing you can and should do is audit your spending and cut wasteful spending.

And what I'd love some honest politicians to do is take a hard look at the tax breaks and subsidies that should be first and foremost on the list of unaffordable programs/wasteful spending. Luckily for those gilded individuals and corps. that receive such taxpayer funded beneficence, the public has so fully internalized laissez-faire dogma that they believe such moves are a tax increase instead of a spending cut.

It is necessary to build solidarity between many factions of society, as poverty affects many facets.

What is the root cause? Is it the giant spider that has created a web which holds the cause and affect, which includes poverty, decline in workers rights, environmental issues not really addressed and the list goes on and on.

Is not about political power, who holds the cards, who has the ability to influence? Right now the poor have no power, they are divided, unorganized. Given the current social assistance system, it is no wonder why people are frazzled, to much time spend running around, trying just to cope, worrying about shelter and food.

Is it not a human right to have access to such basics? I do know that the UN Declaration of Human Rights is often mentioned. The question is does this declaration be truly enforced? My thinking is that if it was the utmost law, then many things would change.

Didn't the austerity budgets at the federal and provincial level do wonders for Ontario's employment situation in the 90's? The point of austerity is that it gets the government out of the way of the economy so that it can start operating again. I've never, ever heard of a country that faced economic calamity as a result of austerity. It just doesn't hold.

I think the article is loaded with the same assumption that the soviets had; the economy is run by the party, and it's the party's job to provide jobs to people. That growth comes from the government's management of people, and not from the people and their own efforts.

This is a fundamentally flawed philosophy. This has never worked and it can't work.

Can anyone explain the downvotes? Is this people trying to silence me because I speak in bad faith, or is it because they disagree with my opinions? I can't imagine that I'd get downvotes for stating facts...

>> The point of austerity is that it gets the government out of the way of the economy so that it can start operating again.

If the federal government sent every Canadian a cheque for $1000 dollars, that would increase government spending. However, if people took a portion of that $1k and spent it in the private sector, how would that hurt our economy?

Because it runs the overhead of going through the government. I'm not sure where I read it but I've seen stats showing that at best, only 20% of the money taken for social services actually ends up in the hands of people that need the money or coupons or meds etc...

Better to just eliminate tax on food, clothing, shelter/utilities and maybe nibble a bit at the bottom income-tax brackets.

Then every taxpayer would have to pay an extra $1000 plus interest in taxes. Where is the benefit? Spending your way out of a recession or debt has proven to be ineffective repeatedly. Printing more money has also proven to be disastrous. Ryan is correct that only a real increase in GDP makes a difference. We may disagree on the merits of reducing government spending to achieve real growth but we don't disagree that real, not artificial growth is needed

You say that printing money has been disastrous. But, in reality, that's how our economy works. Look at your money, its "printed" from paper.

The trick is to print just enough money so that our economy is vibrant and producing lots of jobs.

In recessions, people/businesses slow their spending/investment and start saving their "printed" money. Whether they do this out of fear of losing a job, losing customers, or rising bank debt, the net result is that less goods and services are bought and produced. This leads to job losses.

In order to counteract this contraction in spending, federal governments should use the power to "print" money to offset the increased savings desire of the private sector. In this way, the federal government acts as a thermostat ensuring that spendable cash, stays somewhat constant.

When governments talk about the need to tightening our belts, they don't understand that money is not the same as wealth. Money is paper, wealth is production. What drives production? SALES. Without sales, business don't have the funds to build.

What drives sales? Customers with cash.

So, what are the feds doing to increase consumer cash? Nothing. In fact, they are more focused on cutting the deficit, which means that they want to see higher tax collections from consumers.

How will draining cash from consumers help create jobs?

Printing money can be disastrous in terms of hyperinflation and knocking the economy out of whack. (stagflation, intertemperal dis-coordination, etc...)

By printing money, wealth gets funneled to the first recipients of the money. (bankers and the feds) The real tragedy here isn't the theft, but the fact that people don't know this is how it is happening.

>> Printing money can be disastrous in terms of hyperinflation and knocking the economy out of whack.

Most of the money printed in the U.S. is just sitting on bank's balance sheets...

http://research.stlouisfed.org/fred2/series/EXCRESNS

This "printed" money isn't circulating within the economy, which is why consumer spending has only averaged 2.24% over the past three years. In contrast, since 1929, it has averaged 6.20%.

In order to get inflation, you need nominal GDP to grow fast. For example, from 1970-80, nominal GDP in the U.S. increased by an average of 10.4%/year.

In contrast, nominal GDP in the U.S., from 2008-2011, went up by only 1.8%/year. In Canada, from 2008-11, nominal GDP averaged just 2.3%.

>> By printing money, wealth gets funneled to the first recipients of the money. (bankers and the feds)

Not necessarily. If the feds cut the GST from 5% to 0%, that's approximately $30 billion that stays in consumers pockets. And it is also money printing.

How would that not help our economy?

I've never, ever heard of a country that faced economic calamity as a result of austerity.

Then you seriously haven't been listening very well. As Jason pointed out, Greece and Ireland are facing huge economic shocks, and developing countries in Latin America and Africa that were forced into austerity (sorry, "structural adjustment programs") by the IMF and World Bank in the 80s & 90s faced many problems, and few saw the benefits promised by the austerity-boosters.

Hell, the IMF now believes that austerity measures do more harm than good: http://www.huffingtonpost.com/2011/09/13...

The only people that get off on austerity are debt-holders trying to protect their investments, and those moralists who love punishing large groups of people for the follies of their leaders.

No one should trust the world bank/IMF.

Austerity wasn't an option in Greece. They were broke. Now they're just facing the consequences of it. They literally didn't have the money to spend. This isn't austerity by choice, but necessity. If they had practiced it earlier, this wouldn't have happened.

>> Austerity wasn't an option in Greece. They were broke.

If Greece had its own currency, it could run 20% deficits in perpetuity. Greece is in trouble because it isn't in control of its banking system.

Comparing Ireland and Iceland is helpful in this regard.

Both Ireland and Iceland saw their public debt go from around 20%, to over 80%, since 2008.

The difference is that Iceland has its own currency, which allows the government to control spending levels, regardless of tax revenues. While Ireland's unemployment is at 14.3%, Iceland's is only 7.3%.

Nominal GDP in Ireland since 2008 is down about 10%. In contrast, Iceland's nominal GDP is up 16.95%.

Being able to control spending and deficits is important to ensure that there is enough spendable cash in the economy. If there isn't, the end result is slow spending and slow job growth.

"...never, ever heard of a country that faced economic calamity as a result of austerity." Greece (thanks to increasingly draconian austerity budgets) now has more young people unemployed than working, and is rapidly returning to an agrarian economy. http://www.energybulletin.net/stories/20... Ireland isn't faring much better. That's two, without going back in history more than two years.

See my post above replying to Borrelli.

Austerity is tough. But scenarios like Greece and Ireland happen when the economy is entirely dependent on the public sector for jobs and income, and the government goes broke.

When an entity goes broke, it means "there's no more stuff to give out"

You can't spend what you don't have.

This argument really needs to break out of ideological stereotypes and return to the facts of the matter. It's clear that some people (Ryan, Jason, Borelli) have actually looked at the history of these policies, but too many seem to be operating under the assumption that this can all be boiled down to the kind of left-right dichotomy presented in a 10th grade civics class.

First off, the only time that austerity programs actually led to a meaningful drop in debts/deficits was in the 90s under liberal politicians like Clinton and Chretien. Despite all the rhetoric, conservative politicians like Reagan and Bush ran up colossal debts, adding more than any others for decades while cutting social programs.

Secondly, modern economies depend on their public sectors for employment, services, infrastructure and monetary stability. Cutting these programs does not inherently make an economy healthier.

Thirdly, "economic growth" does not make economies more stable if it's concentrated in the hands of a few corporations and individuals 'at the top'. This only leads to enormous speculative bubbles, since the money involved grows totally out of proportion with the real-world economy. This was the story of the Mortgage meltdown, but also the dot-com bust, Savings and Loan crisis and even the crash which kicked off the Great Depression.

Finally, just because somebody argues for "free markets" or the entitlements of corporate elites doesn't mean they've ever actually studied economics.

"First off, the only time that austerity programs actually led to a meaningful drop in debts/deficits was in the 90s under liberal politicians like Clinton and Chretien."

Right. An exception doesn't prove the rule. Also, let's not bother to figure out why these became exceptions. Let's just sweep that under the rug. What about America 1921? Or the German miracle? More exceptions, I suppose.

I have a crazy notion: that the soviet philosophy of economics is wrong, and economic prosperity doesn't come from the government's direct management of the economy and wealth.