Monday, January 18, 2010

Micawber's Progeny

Last week, Parliamentary Budget Officer Kevin Page released a report, estimating that the Conservative government of Stephen Harper -- a man who prides himself on his economic expertise -- faced a structural deficit of $18.9 billion. "The decline in the government's structural balance relative to potential income over this period," Page wrote, "is largely due to lower revenues."

Others have noted that the Harper government's two point reduction in the GST accounts for $12 billion of that negative number. Add to that the government's reduction of the corporate income tax rate from 22.12% to 15%, and the reason for the hole in the government's finances becomes pretty clear, The Great Recession notwithstanding.

The Finance Minister was unimpressed by Page's report. "I see speculation. I don't see a lot of evidence." he said. "I'm comfortable with the fact that if we have reasonable economic growth and we, if necessary, restrain the rate of economic growth of government program spending, then we will get to a balanced budget in the medium term."

Conservatives like to talk restraint. But they never seem to practise it. The across the board tax cuts which Mr. Harper and Mr. Flaherty initiated were followed by unparallelled growth in government spending. They are Wilkins Micawber's progeny. Some of the most famous words Dickens wrote came from the mouth of Micawber: "Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery." The man became a literary joke simply because he did not practise what he preached.

The truth is that Mr. Harper and Mr. Flaherty have been mesmerised by what has become an economic joke, the appropriately titled Laffer Curve. In the 1970's, the American economist, Arthur Laffer, floated the theory that the tax rate that maximized government revenue was a rate that (at the time) was much lower than previously believed. Or, as Mr. Flaherty puts it, "Tax reductions are stimulus. The more money we leave in the hands of Canadian individuals and families, the more they have available to spend and help the economy expand and create jobs." That idea has become standard conservative boilerplate.

But, as economist James Tobin wrote, "the 'Laffer Curve' idea that tax cuts would actually increase tax revenues turned out to deserve the ridicule with which sober economists had greeted it in 1981." Despite that experience, the second Bush administration made the Laffer Curve the cornerstone of its economic policy, just as Mr. Harper and Mr. Flaherty have made it the cornerstone of their economic policy.

It's not as though Mr. Harper and Mr. Flaherty have no track record. Fifteen months ago, they insisted that Canada was going to skirt the recession and even run a small surplus. And those of us in Ontario remember the $5.5 billion deficit Mr. Flaherty bequeathed to those who succeeded him.

Einstein defined insanity as doing the same thing over and over again and expecting a different result. The patients are in charge of the asylum.

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