The politics of austerity

Austerity has swept Europe, is spoken of in the United States, and has made its way to Canada. Don Pittis examines how our politicians tackle fiscal prudence, if at all.

Ah, austerity, there's nothing like it. It's the new panacea. U.S. President Barack Obama is talking about it. So's China. The Europeans are actually doing it, though so far they seem to prefer imposing it on their poorest neighbours first, as an experiment.

Here in Canada at budget time, austerity is on the lips of every federal and provincial finance minister.

Grim-faced, determined. "We don't want it, but we need it," they say.

It fits into the same category as cold showers, long brisk walks, fasting, and Rolfing — a kind of brutal massage given by large Swedish women. It hurts, so it must be good for you. 

Having been raised by Presbyterians and Methodists, personally I don't mind the idea of being austere. Besides being morally stimulating, I think it has economic and social value. And the scientists back me up. Frugality and deferred gratification have been shown repeatedly to be good for an individual's economic well being.

If you don't believe me, check out the cute kids in the Stanford marshmallow experiment. Kids as young as four who choke down the marshmallow right away instead of delaying for a greater reward are doomed. They just don't do so well in later life.

When you think of credit card debt as the adult version of the marshmallow experiment, that makes a lot of sense.

And maybe it doesn't just apply to personal finances. Even as a society, a move to the Presbyterian kind of self-denial may not be a bad thing, at least for a while.

The philosopher Max Weber certainly believed in it, crediting the Puritan work ethic as the engine for Euro-American capital accumulation.

Maybe Max was right. Having enjoyed the high life for a few decades, maybe we need a patch of hard work and frugality.

But I'm not sure that is what our politicians are up to.

Certainly the fearful example of Greece is helping to concentrate certain politicians' minds, which, as I have discussed before, is better than the alternative.

That said, national or provincial budgets are not the same as spending by households. If the adult marshmallow eaters amongst us go on a credit card spending spree, that is money we will never see again. We may still be paying back long after the shoes are out of style and the iPad embarrassingly retro.

Government spending is quite different. Money spent on teachers, say, or social services, or road building, does not disappear from the economy. A little may leak out of the country as foreign holidays or foreign built machinery, but since Canada sells more than it buys from the world, that's not really a problem. It stays and circulates, being taxed and re-taxed as if flows through the economy.

Finance Minister Jim Flaherty arrives to deliver the previous federal budget in the House of Commons on June 6, 2011. (Adrian Wyld/The Canadian Press)

One more advantage for governments. Unlike you and your credit card, Canada pays about two per cent for the money it borrows, as opposed to your 19 per cent. 

So when a government decides to move from stimulus to anti-stimulus, it better be sure it's worth the price.

One of the prices can be a general depression of the economy.

If everyone gets the same idea at the same time the cumulative impact may be even worse than anyone realized. You, inspired by thoughts of a Swedish massage, buy fewer iPads, shoes and cars. Municipal, provincial and federal governments, inspired by Greece, reduce their spending on jobs and social programs. That, combined with a global trend to austerity, could mean another recession.

There are two more political dimensions to the current talk of austerity that makes the government kind unlike the Pesbyterian frugality mentioned above.

The banner of austerity can disguise other motivations. Saskatchewan, for example, rolling in dough, is cutting arts funding. Another difference is that the frugality is not one proposed and accepted by the individual seeking austerity, nor is it distributed evenly. Some get a cut imposed, while others are even more prosperous.

If we really wanted to accept the Puritan kind of austerity, accept it as a society, share its hardship and take a good Rolfing, there is a kind of austerity that only governments can impose — with the stroke of a pen. That is the cold shower, the bitter medicine, of an across-the-board one-time tax increase to wipe out the debt. Such a sharp short shock, followed by a sharp rebound could well be better economic solution than years of painful contraction.

Currently most politicians fear tax increases more than they fear the backlash from cuts. But that may be changing. The Los Angeles Times reports that two-thirds of Californians support a plan to raise taxes. And everyone knows Californians are trendsetters.

There is another saving grace coming from south of the border that may soften the impact of Canadian austerity.  Although Mr. Obama and his friends may be mouthing the words, the G20 Toronto Declaration agreed right across the road from where I am sitting, does not require governments to start reining in their debts until 2013, after the U.S. presidential election.

As Obama knows, and as Prime Minister Stephen Harper knows too, austerity may be sold as a painful necessity at other times, but never during an election when somehow, there's always money to spend.