Politicians should take economists' advice on economy
Federal leaders' balanced budget mantra flies in face of expert advice, Louis-Philippe Rochon writes
The current federal election offers Canadian voters three parties with similar economic platforms. In the end, all three main parties agree on the need to balance the federal fiscal budget. Both the NDP and the Conservatives promise to balance the budget now or within the year, while the Liberals promise a balanced budget in three or four years.
The promise to balance the federal budget now or soon afterwards amounts to bad economics and will put Canada's growth in jeopardy. The International Monetary Fund has revised downward, yet again, Canada's growth prospects for the next two years, and now some economists are confirming that we are settling into a period of stagnation — a decade or so of very low growth.
Canadians have many reasons to be worried.
Balancing the budget may not be a bad thing, but a few things have to happen first, including reforms to the tax system and a more equitable redistribution of income.
The primary objective should be to adopt full employment policies along with other reforms. Let's create jobs and pursue policies that will generate high growth rates, and if these create a deficit or even a surplus, so be it. This is the fundamental idea of what is called functional finance as opposed to the current government view of sound finance.
In the current context of diminishing fiscal revenues, balanced budgets act like straitjackets by restraining the government's ability to react to ongoing and unforeseen events. In this context, balanced budgets are equivalent to austerity.
In a way, it should come as no surprise that all three political parties have adopted this fiscal conservative approach. Conservatives have always advocated this in theory, and the Liberals have made this their mantra for the last two decades, albeit to a lesser degree in this campaign. As for the NDP, they are following in the footsteps of other so-called progressive parties around the world, espousing the values of fiscal conservatism in order to get elected.
In the real world, this practice has failed repeatedly, and economists have warned against austerity during periods of recession or depression. Even the IMF has changed its tune on this point. But political parties still don't listen and continue on their merry austerity ways. The current crisis in Europe has much to do with governments following failed policies that are proving to be increasingly destabilizing. Ironically, rather than reducing deficits, they often lead to increased deficits and debt.
In Canada, since the 2007 crisis, our economic performance has been less than stellar, ranking among the worst in the G20. This is the result of pursuing austerity policies under the false pretence that it will somehow be expansionary.
In all of this, we have forgotten what economics is all about. Economics is about the creation of wealth, not the single-minded pursuit of balanced budgets. Somehow, this was lost in translation. Now it appears that unemployment, growth, poverty, and income distribution have become secondary problems. The first goal is to balance the budget "come hell or high water," as Paul Martin used to say.
The repercussions will be severe. Our economies now risk settling into secular stagnation -- anemic growth for the long foreseeable future. That will mean higher than normal unemployment and lower wage gains. Welcome to the age of austerity.
Louis-Philippe Rochon is an assistant professor at Laurentian University and co-editor of the Review of Keynesian Economics.