Sporadic editorializing over the past six weeks is congealing into an “issue”, what to do about current government deficits and their accumulated debts. Some saw this moment coming as soon as boots hit the ground in Iraq, or the week TARP was unveiled: others are just discovering its new potential.
Origins
Lest we forget how the public debt was created, three salient contributing factors: on the debit side, an illegal land war in Asia for almost a decade, and a massive bailout of the financial sector in 2008-2009 (yes, some significant program spending as well, but not as significant as the first two). On the credit side, a massive program of income tax reductions (including corporate and capital taxes) implemented over the same decade. (We could view income tax cuts as a form of spending, but for this purpose lets leave it aside.)
The merits of each of these three major policy choices should be debated — in fact, one of the striking things about the financial bailout is the lack of vigor in the debate over regulation of that sector — but that is spilt milk and doctoral theses.
Prognoses
Since the euphemistic emergence of ‘green shoots’ last March, only days following the bottom of the stock indices and well in advance of actual job gains — shoots were rising as a result of slowing job losses — we are informed of the coming recovery. We still are, and hard on the heels of this future good news is the new-found anxiety over the form of the deficit (structural?) and the impact of the public debt (bankruptucy?).
The aggregate size of this spending is typically measured as a percentage of GDP, and so in Canada, the U.S. and some major European countries, government debt as a percentage of GDP rose to, oh say around 10%. It rose a lot. But as always, context helps a bit. In the WWII years (immediately following that other major depression), it was 20-30% of GDP. So we’ve been here before, and public spending is keeping us all going, we think.
Other indicators are more worrying here and in the U.S., such as ultra-low individual savings rates, high personal and household debt rates, very flat wage inflation and hence long-term wage rates. In a nutshell, private spending demand-side problems do not seem all that green-shoot-ish.
But the public debt is being set up to capture public imagination on both sides of our border. The Washington Post and NYT have both been running columns and editorials on the crushing impact of it (where were these concerns when TARP was being handed out with no overight?) and the need to address it in a very specific way: government “restraint”.
Memories have shortened in order to come to this conclusion — eight months ago it was widely accepted that public spending was the only thing creating any demand at all, let alone liquidity in the credit system. However, as disaster appears to push out farther, the deficit hawks are preparing their editorial attack.
The odd banker and the odd historian have suggested revenue-generating schemes are more appropriate to discouraging still-spiralling executive compensation and building social cohesion: they are rapidly castigated as stifling growth if not innovation. (Stifling a little financial innovation strikes me as a good thing.)
Aside from a quick proposal to tax the banks to pay for the bailout, little has emanated from the halls of power as an alternative to “fiscal restraint.” Even that proposal was predicted to end capitalism, at least in New York, and they even put a world-wide price tag on regulating banks: $229B. By my count, that is still $500B less than the total TARP budget, and 1% of the notional value of derivative trading in any given day, but maybe it is a bad deal, I don’t know.
Analogs
Cut government spending, restructuring, do not tax the rich or we all fail: the contours of the debate are depressingly familiar. Perhaps that is because it played out in a similar way in 1992-1995, culimating in the infamous Martin Budget of that year, which took us back to 1957. If only! But before we recall that time, it is clear by most standards, this time we are worse off. Future posts will deal with the “leading indcators”.
If I remember correctly, as we emerged from the prior financial crisis (1987-9), we had a “jobless recovery” of sorts, until 1995. Government debts were not reducing, perhaps legacies from the 80s, although somhow Trudeau got blamed for a lot of it.
But in 1995, it appears that the government of the day called the bond rating agencies, asked them to downgrade their debt issue (when in the history of sane business practice has this occured?), and used the resulting freak-out to support what became an historic budget, one that effectively ended Federal-provincial cost-sharing on core programs that were and still are synonomous with national pride: health care and education. What Paul Martin Sr. had in large part created, Paul Martin Jr. was content to “save” by de-funding. Deficits were in fact slayed, budget surpluses were the result by about 2002 or 2003, taxes were handed back, and, here we are again.
And so it ought not to be surprising to hear Bill Robson recommend in the strongest terms that rather than raise revenues, Flaherty should consider capping or reducing transfers from the Federal government to provinces, or Michael Bliss say “without question” government restraint must be the first and primary method of deficit reduction. After all, it worked last time, its in keeping with orthodox opinion, and it gets published in respectable dalies. The Hon. Menzies has warned public servants their pensions will be “looked at very very closely”, and Hon. Day agrees, but reassures that the civil service is respected.
Who Are They?
There is an interesting inequity in all this that I find a useful litmus test of someone’s sense of irony, if not grasp of the actual issue. A most common proposition is that these debts and deficits must be reduced, or else they place a huge burden on future generations. In short, we are tightening out belts now, “for them”. In fact, the opposite is true: we are tightening belts now so we don’t have to pay more now. Paying more now would maintain the system, which in the future would “benefit them”. Eliminating the program spending or social support system now only benefits us. No doubt massive inter-generational equities are at play here, but I see very little fairness in the proposed solutions. Even more amusing is the awkwardly self-defeating nature of it, as the “population ages”.
What is farther out there that these simple ironies is the shifting form of social identity: we have long watched class identity give way to other forms, altough it seems “rich” and “poor” still have some traction in popular imagination. There is a now developing critique of consumption-as-identity (Thomas Frank or even Naomi Klein) and the whole consumption side of production-and-consumption. Equally interesting is this generational identity, something that it seems to me is strongest in the Boomers, and has been particularized by people as various as Douglas Copeland, David Foot and the ubiquitous Frank Graves and his Ekos. We are tribes, we are networked, we are paternal libertarians, we are disullusioned GenYers, we are most things a poll of attitudes can conceive.
More about these themes in the coming weeks.
