Trudeau is talking sense amid deficit hysteria

Posted on August 27, 2015 in Debates – Opinion/Commentary – Justin Trudeau broke with prevailing economic orthodoxy when he refused to commit to balancing the federal budget immediately at a time when economic growth is sluggish. The Liberal leader is right.
Aug 26 2015.   By: Marshall Auerback

Justin Trudeau broke with prevailing economic orthodoxy this week when he refused to commit to balancing the federal budget immediately, saying it would be wrong to claw back billions in government spending at a time when economic growth is sluggish. The Liberal leader is right. Prime Minister Stephen Harper’s obsession with balanced government budgets (oddly parroted by the NDP’s Thomas Mulcair) is akin to blaming the thermometer when it records the temperature of a patient suffering from influenza.

A large deficit is a symptom, not a cause of economic weakness. The bigger problem today, which Trudeau implicitly recognizes, is the lack of jobs and decent demand in the economy.

As the Liberal leader noted, when there is unemployment and falling income, private confidence will be low and subdued spending behaviour will follow. Firms will not invest until they are sure that they can sell the extra output that would be produced by the new productive infrastructure. Consumers will not provide them with those guarantees because they are worried about their job security.

If the private sector is reluctant to spend because of uncertain growth prospects, then clearly some other sector needs to pick up that slack. At a time of contracting global growth, exports clearly can’t pick up the baton of growth. That leaves the government and, yes, a budget deficit or two, if that’s what it takes to restore economic growth.

The important thing to note is that government deficits cannot be divorced from the economic context. For example, if the Canadian economy was at full capacity and the government tried to undertake a major nation-building exercise then it might hit inflationary problems — it would have to compete at market prices for resources and bid them away from their existing uses.

But that is not the problem we have today. Like much of the rest of the world, Canada has an economy that is operating below capacity; people who need work; stores that need customers; infrastructure that needs rebuilding.
In the words of Abba Lerner, the economist most closely associated with “functional finance”:

“The central idea is that government fiscal policy, its spending and taxing, its borrowing and repayment of loans, its issue of new money and its withdrawal of money, shall all be undertaken with an eye only to the results of these actions on the economy and not to any established traditional doctrine about what is sound and what is unsound.”

In other words, look at economic context. Those who argue dogmatically that we need to release the economy from the “shackles” of excessive government deficit spending, irrespective of effects or context, are actually the people who are truly advocating “mindless” and irresponsible economic policy. It’s the triumph of ideology over common sense. Absent some countervailing government spending, deficits will invariably go up as formerly employed taxpayers become social welfare recipients. It also robs all of us of what these people would produce if they were fully employed — roughly billions of dollars’ worth of goods and services that won’t be created.

The ongoing economic crisis of the European Union is a perfect illustration of this. There, governments have largely embraced the mantra of balanced government budgets in the mistaken belief that this kind of fiscal policy was the exemplar of prudent economic management and provided a supportive environment for monetary policy. With more than 25-per-cent unemployment, ask any Greek or Spaniard how that’s working out for them today. In fact, the European experience illustrates that a mindless pursuit of balanced budgets actually creates the opposite conditions, as yet more income is sucked out of a slowing economy, unemployment grows and deficits rise inexorably.

Unemployment is hugely expensive. Public debt, by contrast, is relatively cheap (especially in today’s world). So why are we debating how to cut the deficit when we should be debating how best to use the cheap money to put more Canadians to work?

A patient can’t recover if a doctor refuses to examine him and sticks with a preconceived diagnosis. The same is true of an economy. Justin Trudeau’s message implicitly recognizes that fact, and he should be applauded for having the common sense to say so.

Marshall Auerback is an investment fund manager and a director of Economists for Peace and Security.

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