Analysis| Raising taxes and rebuilding roads will save economy

Low interest rates and tax cuts are not stimulating investment, so it's time to try a new "Big Idea": raising taxes across the board and using the money to fix our crumbling infrastructure, writes Don Pittis.

A solution to bolster the economy: tax and spend our way out of current stagnation

Prime Minister Stephen Harper announcing federal infrastructure money for a ring road in Calgary on May 22, 2009. The Conservatives need to spend more on fixing the country's dilapidated infrastructure, writes Don Pittis. (Todd Korol/Reuters)

"Madmen in authority who hear voices in the air are distilling their frenzy from some academic scribbler of a few years back." — J.M. Keynes

And it's not just the madmen. Keynes said that even practical politicians are slaves to some dead economist. 

We see it this week in the United States, as the congressional "debt panel" faces another deadline to cut $1.2 trillion US from the country's deficit.

It's as if a doctor, having treated a patient so long for obesity, just can't bear to change the treatment once fatness fades and the victim is emaciated by a wasting disease. 

It is rational — in a way. The economic treatment proposed by our political leaders and most of their advisors really would be effective, if only the world had not changed so much since the ideas were proposed.

Making radical changes in your thinking is especially difficult when times get tough. Even liberals get conservative. Uncertainty sends us harking back to the formula that worked last time — even if it is wrong.

WWII propelled U.S. boom

This isn't a recent phenomenon. We've been doing it repeatedly. In the 1960s and 70s, the dead economist in question was Keynes himself.

Keynesian stimulation, in the form of the Second World War, had been a huge success at pulling the U.S. out of the Great Depression. So, as North America was reveling in a postwar growth boom of a type never before seen in history, what did governments do?

Well, more stimulation, of course! More arms spending, the race to the moon, increased social services, big government.

The obese patient was being fed six meals a day.

Just as with humans, that was a recipe for inflation. But the feeding continued.

Each time, we discovered the next favoured economist's solution just as it hit its best-before date: 

  • Arthur Laffer famously scribbled his eponymous curve on a table napkin showing high taxes on wealthy people discouraged them from making money, just as rich people were making more money than ever before.
  • Reaganomics and the deregulation of the Clinton and Bush years came along just as Wall Street creativity had become overly creative.
  • Alan Greenspan, an academic scribbler-turned-central bank chairman, was lionized for cutting interest rates more and more, just as cheap money and irrational exuberance were creating an enormous borrowing bubble that finally popped in 2008, getting us into our current mess.

Give or take a few academic scribblers, that's about where we are today.

Business storing money, not spending it

So, here we are still using Laffer and Greenspan economics to bring our economy back from the brink. Unfortunately, there are some flies in the ointment.

The first fly is that Laffer's predicted tax revenues never grew enough to cover spending, resulting in huge and growing government debts that remain with us today. 

The second fly is that despite cheap money and low taxes, neither rich people, whom we have allowed to keep more of their income, nor businesses, which we have allowed to keep more of their profits, are using that money to fuel a new job-creating economic boom.

Instead, I'll tell you what's happening. And it's no secret. You can find it in the daily business pages. 

Most people and businesses with money aren't interested in restarting the economy. They are too busy desperately looking for some place safe to put their cash. With all that money chasing the same safe storage places, assets are getting bid up.

The price of gold rises even though gold produces no income. 

In Canada, where houses are seen to be keeping their value, house prices are bid higher and higher, rising much faster than inflation. 

Despite fear for the economy and little new investment, share prices stay relatively high.  

Companies buy their own shares, which, instead of increasing investment in factories, equipment and jobs, merely increases the cash value of the shares themselves.

And most bizarre of all, money of all kinds is pouring into U.S. government bonds, despite an interest rate close to zero.

Wrong prescription

Contrary to the theory that every economist "knows," low interest rates aren't stimulating real new investment. Some people call it a "liquidity trap."

It should be absolutely clear by now: the low-interest, low-tax strategy isn't working. I think it is pretty obvious why.

Politicians and their advisors are frozen in time, stuck once again following the prescription of the wrong defunct economist.

Bank of Canada Governor Mark Carney. The low-interest, low-tax strategy that economists and governments have been pursuing is not working in the current economic climate. (Chris Wattie /Reuters)

When an economy is humming along, as it was a few years ago, it is quite reasonable that cutting interest rates and taxes would stimulate spending and new investment. After all, when you feel rich and secure, you spend. 

When a business is expanding from strength to strength, who would not want to lend their money to those businesses? Better yet, why not buy a piece of the company to share in the profits?

But not now. Instead, we pay down debt; we sit on cash; money stops circulating in the economy. And when it comes right down to it, the circulation of money is all that an economy is.

There is a solution at hand. And I think only conservatives can make it work. Here in Canada, it is because the Conservatives have a majority government. In the U.S., the conservatives and liberals are wrestling on a cliff edge, hands on one another's throats, with the possibility that both will fall and carry their country with them. In the perfectly balanced death grip that is the current makeup of the U.S. Congress, only conservatives, who control the House of Representatives, can make this decision.

But this solution is very difficult and painful for conservatives, because it involves wrenching themselves out of one long-established conviction: that taxing and spending is an absolute evil.

Tax the rich — and not so rich

In the great economic cycles that govern all of our lives, we are in a place much closer to that of the mid-1930s than perhaps anytime since. It was not the private sector that pulled us out of that malaise.

Then as now, the giant anthill of the private sector economy had begun to crumble. Then as now, government budget cuts were further weakening the global economy. The only thing that got things going again and reignited the economy was a Big Idea. Unfortunately, in that case the Big Idea was war.

The private sector is not good at creating big ideas. Business only has one single big idea: to make a profit. That does not mean it isn't good at solving problems once they have been proposed. For both the Axis and the Allies, business and its leaders were inspired to new heights of creativity and efficiency in the war effort.

But there's a solution to Canada's and North America's economic crisis that involves a different type of war effort: the war on our crumbling infrastructure.

As you will see in this week's CBC special report,  The Big Fix, infrastructure spending has declined to a fraction of what it should be to keep the continent's roads and bridges and pipes and ports functioning and earning us money.

And as we see in Europe and America right now, borrowing money is no solution.

We must bite the bullet and allow our governments to tax us, to tax and to spend — just as we would in a time of war. We must tell them to tax not just the one per cent, not just the rich, but all of us. Because we all will benefit. And it's a heck of a lot better than waiting for the madmen hearing voices in the air to bring us another war.