Thursday, October 21, 2010

Some perspective on the "Canadian Renaissance"

Sometimes one picture tells a thousand words. Consider the following editorial cartoon that appeared in Canadian newspapers*:

David Hay of Evergreen Capital Management recemtly elaborated on these sentiments by highlighting the "Canadian Renaissance":
As I’ve given various speeches over the last year, it has become clear to me that very few Americans are aware of the extraordinary recovery Canada has achieved since the mid-1990s. When I bring it up, most people seem surprised that Canada could have gone from a laughing stock to the envy of the developed world in just a decade. But, actually, 10 years wasn’t the true recovery period. And that was my big surprise from reading The Canadian Century. The reality is that Canada achieved stunning progress in a mere three years. Further, this time frame was consistent at both the federal and provincial levels.

Hay: "Not all is lost"
His message for Americans is: "Not all is lost, there is hope." If Canada can go from a basket case and enormous deficits in the mid-1990s to the relative fiscal health today, so can the United States. All it takes is a certain amount of willingness to take some fiscal pain.

Having lived in both countries, I feel uniquely qualified to comment on Hay's message. Just as America isn't Japan in the Lost Decade(s) parallels, America isn't Canada either.

While it is true that the Canadian Liberal government, under prime minister Jean Chretien and finance minister Paul Martin Jr. (who later became prime minister), moved from deficit to surplus in the 1990s, it was aided by substantial tailwinds. Don't forget that the US federal budget was in surplus at about the same time during the Clinton years. Much of the US surplus was helped by capital gains during the Tech Bubble of the late 1990s, which is not likely to be repeated.

Fiscal divergence during Bush II era
Hay's essay implies that all it takes is the political will and discipline to take some pain, whether it's in the form of higher taxes and/or reduced government spending, and all will be well. I believe he understates the problem.

Canada and the US diverged substantially during the Bush II years. While Canada maintained its fiscal discipline on a relative basis, the Bush II Administration embarked on two spending initiatives that made the federal budget dive into deep deficit waters. The first was the tax cuts. With another election coming up and contentious debate on both sides of the issue, it would be inappropriate for a Canadian resident to wade in on that debate and I'll leave it up to the American people to decide on whether a continuation of the Bush II tax cuts is a good idea.

Outspending the enemy 10 million to 1
The second, of course, was ramp-up in military spending in the post-9/11 era. Being in government is about making choices. In a democracy, it is up to the people to make choices through their elected representatives. From a strictly fiscal viewpoint, the wild ramp-up in military spending makes no sense. American troops are in Afghanistan, Iraq and the Gulf as a direct result of the 9/11 attacks. The cumulative cost of the Afghan and Iraqi campaigns now exceed $1 trillion.

It makes no fiscal sense to spend $1T in response to the actions of a small group of men, spending roughly $100,000 on a mission that flew civilian airliners into buildings. Nor does it make fiscal sense to propose spending $1.2 billion in aid because one guy tried to get on an airplane with a bomb in his underwear. A strategy of consistently outspending your enemy by 10 million to 1 will make you the loser over the long run. Of course, in a democracy you get to make choices of how to spend money. If a continued military commitment is the choice the citizens of a country chooses to make, then let the People express its will.

Paul Krugman once characterized the federal government as a giant insurance company with an army and I agree. Some really hard decisions have to be made and the choices are stark. In simplistic terms, Americans need to decide between their pension (Social Security) and health care or the essence of their post WW II identity (world prestiage and status) by standing down from their far flung military outposts around the world.

It isn't as simple as firing a few civil servants - Tea Party supporters take note. Also see the New York Times article entitled "As the GOP seeks spending cuts, details are scarce".

* Canadians may be getting overly smug by taking the victory lap and cartoons like this, which reflect popular sentiment, may be the top tick for Canada. Both the Bank of Canada and most recently the Toronto-Dominion Bank are warning about excessive consumer debt - and we know what happened to the American consumer in the last downleg.

1 comment:

Boudewijn Koole van Brigdamme said...

Your comment is right on the spot, I assume. In Europe too we have to learn the difference between the bottle half full (as in the past) or half empty (as now, with the need to accommodate to reality after many big spending years).
I really hope politicians will have the courage to tell the truth about what is really needed. If they don't, there will be many more casualties than when they do, because the last will help many to go with the needed measures. I assume.
All only if we get the time still, because it seems that a period of readjusting the economic and so political powers in the world is not that far away ... I hope with you for the best.

Boudewijn Koole, Driebergen, The Netherlands