Let’s Talk about Deficits

Posted on August 29, 2015


About a month ago, as this election campaign was beginning, Stephen Harper’s conservatives had an apparent weak-spot: The deficit. Harper had promised to clear the deficit by 2015, and lo and behold, he has failed. Even if you count short-term windfalls such as the sale of the General Motors stock, the Federal government has a small deficit. Without things like that, the deficit appears a lot bigger.

Unsurprisingly, the Liberals and NDP pounced. Thomas Mulcair and Justin Trudeau have been taking shots at Harper’s fiscal record ever since the campaign began, and while I haven’t done any formal quantitative analysis, I wouldn’t be surprised if the word “deficit” wasn’t among the most frequently-spoken words during the debate on August 6. Politicians are by nature opportunistic creatures, and after Stephen Harper so obviously failed to fulfill his earlier election promise, it was to be expected that the opposition would go after him for it.

Was that really such a good idea, though? I worry that it wasn’t. Sure, we can criticize Harper plenty on the economy. His decision to bet the farm on the Albertan oil sector isn’t exactly paying off. And it is indeed true that the current federal deficit is evidence that the Conservatives are, for whatever reason, unable to live up to their own principles. Beyond that, however, we shouldn’t see a government deficit as inherently a bad thing. To illustrate that, let’s look at some Canadian fiscal history, courtesy of Worthwhile Canadian Initiative:


I wasn’t able to find any data going back before 1960, but as you can see, for the last 50 years or so, deficits have been more the rule than the exception. This is notable because those 50 years included all kinds of economic and political events, including recessions, economic booms, resource crises, and wars. To get a bit more data, let’s look at some other countries. Here’s the US public debt, as reported in The Atlantic:

As you can see, debt seems to skyrocket during crises. That, obviously, makes sense. The government needs to spend lots of money to deal with problems like wars and depressions. And clearly the presence of government debt is not incompatible with general national prosperity. During the prosperous 1950s, for example, postwar debt was declining, but was still comparable to what the US debt was in 2011. Same goes for the roaring 20’s, after the end of the First World War. Here’s a graph for the UK, courtesy of the Daily Mail:

The Mail, true to form, are using that graph to argue that Britain’s debt as of 2009 was a major threat to the country. But does their data really suggest that? Certainly, Britain’s debt has been higher in the past. As in the USA, it tends to have spiked during crises.

All this fits pretty well with what several Nobel laureate economists, including Joseph Stiglitz, Thomas Piketty, and Paul Krugman, have been saying about debt for years now: Sure, you should try to balance the books. But not by recklessly cutting in determined pursuit of short-term surpluses. Admittedly, they’re a pretty left-leaning bunch, and there are economists who disagree with them. But it seems obvious that whatever its long-term implications, short-term deficit spending is not likely to bring about economic Armageddon.

It’s dangerous to compare public finances to private finances, but in this case, it appears as though there really is a parallel we can draw: Debt should be treated like respect. You probably shouldn’t be using a credit card to pay for an expensive Caribbean vacation unless you have a realistic plan for how you are going to quickly pay off the balance. But if you need to buy a house or a car, then borrowing is a perfectly reasonable option. Some purchases are simply too big to be paid-off in the short term, but important enough that it makes sense to pay a bit more for them in total so that you can spread your costs over the long-term. For countries, the equivalents of houses and cars are things like wars, stimulus spending, bank bail-outs, and investments in infrastructure.

That’s why the much-touted status of Ontario as the most indebted sub-sovereign borrower is really not that big a deal. That debt is from infrastructural investments, and it has not triggered any serious economic consequences. And the same thing goes for Trudeau’s recently announced plan to use deficit spending to build infrastructure. Crucially, Trudeau’s plan includes investments in tackling climate change through investments in green energy. We should see that as a response to a crisis, and therefore the most justifiable reason to increase government debt.

But, politicians being opportunistic creatures, Trudeau has been attacked for this plan. Harper, in a rare moment of actually appearing like a human being, mocked his “tiny deficit”. That’s not surprising. What is a bit more surprising is that Mulcair has bought in to Harper’s framing by reassuring voters that his plan does not involve deficit spending. Mulcair is trying to justify his apparent rightward turn on the grounds that you can’t build a progressive government while you’re saddled with interest payments. I think that’s just his cover story. Really, Mulcair has to condemn a Liberal deficit, because he is already on record condemning a Conservative one. By evaluating the Harper government according to its own austerity-driven priorities, he has inadvertently endorsed those priorities, and bought into the clearly false idea that short-term deficits invite disaster. That’s how you turn a socialist party into a neoliberal one.

This, as I see it, tells us two things:

  1. Canada, unlike the US or the UK, does not have any mainstream politicians who are truly willing to challenge the austerity narrative. Even Trudeau, while he is willing to finance his promises with deficit spending, is careful to the point of being apologetic about it. We don’t have anybody willing to aggressively question Harper’s economic logic. That is unlikely to change during this election campaign, but progressives should try to make sure that it does happen during the next one.
  2. Progressive politicians should be wary of using conservative metrics of success, even if these can be turned against the Conservative politicians that promoted them in the first place. That might be a great way to win the electoral battle at the expense of the ideological war.
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