Frugality, at any cost, not always best solution to economic woes

Posted on in Debates – opinion/column
June 6, 2013.   R. Michael Warren, Special to QMI Agency

Are we reaching the limits of austerity?

You would think with two centuries of economic data, policy makers would know how to strike the right fiscal balance between austerity and stimulus. Apparently not. If anything the debate is heating up. Around the world and here in Canada the anti-austerity forces seem to be gaining the upper hand.

First there is the 28-year-old grad student who blew a huge hole in “the austerity bible”. TV political satirist, Stephen Colbert called him the “student who has fiscal conservatives’ panties in a bunch.”

Thomas Herndon, of the University of Massachusetts, found major errors in Growth in a Time of Debt authored by highly influential right-wing Harvard professors, Carmen Reinhart and Kenneth Rogoff.

They maintain that once a country’s debt reaches 90% of its gross domestic product, long-term growth is unsustainable and goes negative. Their remedy? Slash deficits by imposing deep cuts to government spending in order to eventually create jobs.

Herndon found serious inaccuracies in their basic premise about the negative effects of debt on growth. His findings have undermined one of the world’s leading academic arguments for austerity.

Last month the hard-liners at the International Monetary Fund surprised observers by advising European countries to scale back on their austerity measures. They also warned Canadian policy-makers against pulling too hard on the reins of austerity. They pointed to our weakening housing market and record high levels of consumer debt.

Paul Krugman, a Nobel prize-winning economist, has been arguing against premature fiscal austerity for years. He says, “The crucial thing to understand: the economy is not like an individual family.”

“Families earn what they can and spend as much as they think prudent. Spending and earning opportunities are two different things. In the economy as a whole, however, income and spending are interdependent. My spending is your income, and your spending is my income. If both of us slash spending at the same time, both our incomes will fall.”

Krugman maintains that’s what happened after the financial crisis of 2008. It was a plunge in incomes and employment “creating the depression that persists today.” He’s not an advocate of government spending and deficits under all circumstances. Only when tying to deal with a “once-in-three-generations” financial crisis.

Here in Canada, Kevin Page, the former Parliamentary Budget Officer, cautioned the Harper government about it’s zeal to balance the budget in time for the 2015 election. He estimated it would result in the loss of 62,000 jobs over the next three years and cut GDP growth by 0.12%.

Alex Himelfarb, a former clerk of the Privy Council, maintains austerity isn’t driven by fiscal policy or economics or evidence. It’s driven by political ideology: “A desire to make government much smaller . . . create a “pro-business” climate of less regulation and, above all, lower taxes.”

He calls the current federal approach “Austerity by stealth. It’s being implemented in slow motion” with very little information being provided on the extent and implications of the cuts.

His alternative? Make investments now in clean and green jobs; tackle the big challenges of climate change, inequity and poverty, eroding democracy. Renew our sense of common good and be realistic about taxes “because we only get the future we are willing to pay for.”

Himelfarb raises two compelling questions. How did the health of the so-called job creators become more important than the health of the rest of us? And, how do we put people and the natural world that sustains all else at the centre of the agenda?

There are also anti-austerity voices in Ontario. A report from the Canadian Centre for Policy Alternatives claims that Ontario’s experiment with austerity is “doing more harm than good.” It’s causing a “fiscal drag” on the province’s economy.

Of course, the budget hawks have other ideas.

Dr. David Gratzer, a fellow at the conservative Montreal Economic Institute, thinks Canada’s definition of austerity is “all wrong.” He points out most Canadian governments aren’t actually reducing public expenditures.

Ontario, for example, spent $99.6 billion in its first economic downturn year of 2009-10. This year it is forecasted to spend $124 billion, an increase of 25% over four years. “Some austerity” says Gratzer.

He also questions whether the federal government is really engaged in an austerity program.

“Ottawa’s 2008-09 budget projected annual program spending of $206 billion by 2011-12. But by then the federal government had already added another $37 billion to that pile” says Gratzer.

Finance Minister Jim Flaherty’s most recent budgets have added even more billions. But he’s assured Canadians there’s no need to “slash and burn.”

Himelfarb is right when he says the austerity vs. stimulus debate is driven by political ideology. In Ontario, the next election will likely come down to a choice between a right-of-centre PC austerity platform, and a centralist slow-deficit-reduction Liberal offering.

Meanwhile, has Premier Kathleen Wynne reached the limits of austerity in her first budget? Not even close. It calls for a 3.6% increase in total expenses over last year.

In Ottawa, Canadians are being kept in the dark about the details of the Conservative multi-year program to cut about $5 billion a year until the election in 2015. One observer calls it “strategic obfuscation”.

But is this really austerity? So far, containing budget growth to about 2% annually has only had a modest impact on program and job reductions.

The increase in this year’s operating budget over last has been limited to only .005%. Much less than inflation. It represents a reduction in real dollar terms.

If Harper maintains his current deficit reduction schedule until 2015 he will be testing the political limits of austerity for many Canadians.

R. Michael Warren is a former corporate director, Ontario deputy minister, Toronto Transit Commission chief general manager and Canada Post chief executive.

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