The Conventional Wisdom Is Failing

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Our prime minister believes that "no taxes are good taxes." He simply parrots what has been the conventional wisdom for the last forty-five years. But, Alex and Jordan Himelfarb write, the conventional wisdom is failing:

According to the government’s own figures, federal revenue as a share of the overall economy is hitting lows not seen for 70 years. Cash-strapped governments behave as we all do when money is tight, cutting corners and focusing on getting through the day rather than investing in the future — even when this short-termism ends up costing far more down the line. We see this, for example, in crumbling infrastructure as governments put off necessary investments, increasing risks to health and safety, undermining competitiveness and passing on even higher costs to future generations.

We see this as well in the increasing concentration of income and wealth and persistent poverty as tax cuts weaken the programs that reduce inequality and mitigate its consequences — from child care to medicare. Today, fewer unemployed Canadians than ever have access to EI, this at a time when our labour market performance has been particularly shabby. Twenty-five years after our Parliament committed to ending child poverty, shamefully, things are actually worse. And perhaps most worrisome, we start to believe this is all normal and inevitable. Little wonder that trust in government continues to decline and more Canadians are asking whose interests government serves.

Now organizations like the IMF and the OECD are arguing that inequality impedes economic growth:

Over this past year, however, some unexpected voices have started to talk about taxes not as a burden, part of the problem, but as a key part of the solution to our challenges. Even some organizations that have always embraced and promoted the low-tax austerity agenda have started to wonder out loud whether this has all gone too far. The IMF, the OECD, bond rating agency Standard and Poor’s — past champions of austerity — have all published reports this year making the case that the costs of tax cuts now outweigh whatever benefits they were supposed to deliver.

For an economist, Stephen Harper remains breathtakingly ignorant of the latest work in his field. He will run in the next election on a platform of family friendly tax cuts. The myth that he is a smart fellow -- like the conventional wisdom -- is failing.

Imagine The Damage

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When Mike Harris became premier of Ontario, he appointed John Snoblen as his first Minister of Education. Ironically, Snoblen had dropped out of high school in grade 11 and never returned. His record not withstanding, he proclaimed that he was going to "reform" education. And the best way to do that, he said, was to "create a crisis."  He proceeded to do just that.

When Stephen Harper came to Ottawa, Scott Clark and Peter Devries write, he followed in Snoblen's footsteps, even though he inherited a very healthy economy:

In 2006, the Conservative government inherited a structural surplus of $13.8 billion, just under one per cent of GDP. This represented a major correction from the $39.0 billion deficit (5.5 per cent of GDP) Ottawa was carrying in 1992-93. The debt-to-GDP ratio had dropped steadily from a high of 67.1 per cent in 1995-96 to 28.2 per cent in 2008-09. Program spending had fallen to a record low of 11.9 per cent of GDP in 1999-00, down from a high of 17.0 per cent in 1992-93.

In other words, the heavy lifting was done already. Never before in Canada had a newly elected government inherited a sustainable fiscal structure — a structure that had produced 11 years of surpluses and a declining debt burden. The fiscal situation could not have been better for the Conservatives.

Harper, however, was obsessed with the idea that he was a better student of economics than his predecessors:

He had to prove his own budget bona fides. For that he would have to find a ‘fiscal problem’ that he could fix with tough spending cuts and public service layoffs — even if he had to manufacture one. If he could do this, he could make ‘sound fiscal management’ his political brand. All he’d need would be a good ad campaign.

The first step was for Harper to adopt an approach that had been used (unsuccessfully) by President Ronald Reagan in the U.S. — the ‘starve the beast’ strategy. The idea — which, on paper, seemed very simple and appealing — was to starve the government of revenue and then claim that, because the resulting deficits were bad for the economy, government programs and services would have to be cut to keep the debt in check. In doing so (according to the theory), the ‘beast’ would shrink in size and the private sector would become so deliriously happy as a result that it would immediately ramp up investment and spur growth.

So much for theory. It wasn’t hard for the newly-elected Conservative government to find a way to close the revenue taps in 2006. During the election campaign they had promised to cut the GST by two points. Say one thing for the Conservatives: They usually follow through on their election promises — especially the bad ones. Had Mr. Harper targeted income taxes instead of the GST, he could have claimed that he was undertaking good tax policy by reducing a disincentive to work and make money.

 But good policy seldom wins out over good politics. The GST was the riper political target, so the Conservative government cut the GST by one point in 2006 and one point in 2007. That cost the government $14 billion annually. As a result of the GST cuts, the government recorded a “structural deficit” of $5.8 billion in 2008-09 — down from a “structural surplus” of $9.6 billion in the previous rear, a single-year change of $15.4 billion. And that was before the 2008-09 recession had even started.

And then the recession hit -- something both Harper and his finance minister, Jim Flaherty, said would not happen. But consider what would have happened if Harper and Flaherty had not cut the GST:

Without that loss of $14 billion in GST revenue, the deficit would have been much smaller. Simply adding back the $14 billion would have given us a deficit of $41.6 billion in 2009-10, $19.4 billion in 2010-11, $12.3 billion in 2011-12 and $4.4 billion in 2012-13. There could even have been a $9.2 billion surplus in in 2013-14 — two years before the government’s deadline. Net debt would have increased by less than $80 billion by 2015-16 — just over half the $150 billion increase we’re expecting now.

John Snoblen knew nothing about education and Ontario is still trying to repair the damage he did. Imagine how much more damage Stephen Harper can do if he is re--elected.

A Pig In A Poke

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Stephen Harper hopes to be re-elected on his boast that he knows -- better than anyone else -- how to manage the Canadian economy. But the evidence keeps suggesting that he doesn't know what he's doing. Murray Dobbin writes:

However you see it -- as separate from society or integral to it -- Canada's "economy" is increasingly at the mercy of a risk-averse, inept corporate elite addicted to government tax breaks, and an ideologically addled government which more than anything else is simply incompetent. It is a deadly combination -- a sort of dumb and dumber team slowly dragging us backwards at a time when the world is just hoping there won't be another economic collapse.

Consider our sliding position among OECD countries:

An OECD study reported in the Globe shows that Canada has dropped out of the top 10 in R&D spending and now ranks 12th. While we de-industrialize and fall back on raw resource exports, previously underdeveloped countries -- Taiwan, Indian and Brazil -- are now outspending us as they industrialize.

We continue to decline in the World Economic Forum's World Competitiveness Index as well. For 2014-2015 we rank 15th. But even worse, in the category of "innovation and sophistication factors" we rank 25th.  In 1998 our overall rank was sixth. Some of the countries that now beat us: the United Arab Emirates, Taiwan, Hong Kong and Singapore. The dramatic decline in R&D has a continuing negative impact on labour productivity as well. According to OECD figures, for the year 2012 we stood at 73 per cent of the U.S. benchmark of 100. This failure to increase labour productivity through investment in new machinery and innovation has a huge impact on our standard of living and the domestic economy: as wages stagnate and personal debt increases domestic consumption starts to flat-line -- and that further suppresses investment.

And, while Harper trumpets his trade deal with Europe, India isn't even on his radar:

The other media report that reveals the pathetic level of government and corporate leadership on the economy focused on our complete failure to look to India as a potent export market. It is the fastest-growing economy on the planet yet Canadian corporations and their government partners seem asleep at the switch. Kevin Carmichael in the Globe and Mail quotes the president of Canada-India Business Council: "We've got to get in here fast or we're going to miss the boat. You've seen a rush to the gates [from other nations]. We seem to be taking a slow walk." Currently exports to India account for a minuscule 0.63 per cent of Canadian exports -- and 45 per cent of that is raw materials. Canada scarcely does better in other emerging nations. Of our top three destinations for goods, the U.S. takes 74.5 per cent, China 4.3 per cent and the U.K. 4.1 per cent. Australia, a Pacific nation we compete with, is far more diversified in its export destinations: China 29.5 per cent, Japan 19.3 per cent, South Korea 8 per cent, India 4.9 per cent.

The only thing that Mr. Harper is focused on is getting Canadian oil to foreign markets. But it's becoming apparent that Alberta bitumen simply costs too much to produce. And its overall economic benefits are miniscule:

Frances Russell highlighted the fact that "Canada's energy sector created only 1.7 per cent of all new jobs in Canada from 2007 to 2012." That was just 13,000 jobs. Compare that to the 22,000 jobs created in a single month, December 2013, in health care and social assistance. "The energy sector accounts for only 0.1 percentage point of the average 2.25 per cent annual GDP growth over the last decade," according to the IMF. As for the alleged benefits accruing to other provinces, a dollar invested in the tar sands boosts manufacturing in the rest of Canada by three cents and GDP in Ontario by four cents. And if none of the pipelines from the tar sands were built? The economy would grow 0.5 per cent less by 2020.

If you look at the numbers, it begins to dawn on you. If you buy Stephen Harper's vision of the Canadian economy, you're buying a pig in a poke.

Sheer Stupidity

The Harperites have always insisted that their principal virtue is competent economic management. But, recently, Christopher Flavelle has been making the point that their record tells a different story:

When the Conservatives took office in 2006, the median family income was $47,600. In 2011, the latest year for which Statistics Canada has released figures, it was $47,700. (Both figures are in 2011 dollars.)

In other words, at the end of Stephen Harper’s first six years as prime minister, a household in the middle of the income distribution was pulling in $100 more than it did when he took office. In fact, 2011 median income was $1,600 lower than at its pre-recession peak in 2008. 

Things have looked a little better for those at the top of the income distribution. In 2006, adjusted market income for the highest-earning 20 per cent of Canadian families was $104,000; by 2011, that had increased 5 per cent, to $109,200.

The change was less sunny for the bottom quintile of families, who saw their adjusted market income fall 6 per cent over the same period, to $8,300 from $8,800.

None of this should be surprising. Wedded as they are to the doctrines of Milton Friedman, the Conservatives are repeating the same pattern that drove the American and the world economy off the cliff in 2008.

And, just as Americans tried to deal with income inequality by going into debt -- particularly mortgage debt -- the same pattern is being repeated here:

As incomes stagnated, the cost of living rose, pushing households deeper into debt. In 2006, Canadian households had debt equal to 135 per cent of their nominal disposable income, a figure roughly equal to U.S. households and about one-fifth lower than in the U.K.

By 2012, household debt had jumped to 165 per cent of disposable income in Canada, while it fell to 111 per cent in the U.S. and 152 per cent in the U.K. In fact, of the countries for which the Organization for Economic Cooperation and Development reports these data for that year, Canada’s household debt levels were the highest for 2012, the latest for which figures are available.

In Canada, history -- recent history, not ancient history -- is repeating itself.  The meltdown of 2008 held no lessons for the Harperites. They claim they stand for sound economic management. The truth is  they stand for sheer stupidity.

A Failed Economist

As Lorne over at Politics and Its Discontents noted yesterday, there has been much gnashing of teeth as the Canadian dollar has slid down to 90 cents (U.S.) But Tom Walkom writes this morning that the dollar can and should fall farther:

With luck, it will end back up at roughly 80 cents. Under the purchasing power parity rule, which compares the prices charged for identical goods in two countries, that’s about where it should be.

The rise of the dollar was predicated on the prime minister's ambition to turn Canada into a petro state and himself into a blue eyed sheik. But that dream is beginning to crumble:

There are more fundamental reasons behind the dollar’s decline. One is that commodity prices are easing world-wide – which means there is less demand for the currencies of countries, like Canada, that export natural resources.

Another is that the U.S. dollar is rising – largely because traders expect that country’s central bank, the Federal Reserve, to hike interest rates. (So-called hot money tends to flow into whichever country offers the highest yield).

Mr. Harper's dream of building a Canadian economy on a 19th century strategy simply isn't succeeding. And no matter how many loonies he spends on advertising, trying to convince Canadians that sound economic management depends on sending bitumen to foreign markets, it's clear that the game is up.

Mr. Harper is a failed economist.

Hot Air

Stephen Harper likes to crow about his government's management of the economy. But the facts are out of synch with the hype. Two days ago, Alex Roberts tallied up the record after eight years of Conservative stewardship. The report should be read in full. But consider just a few excerpts:

National unemployment rate in January, 2006: 6.6

National unemployment rate in December, 2013: 7.2

Increase in the number of unemployed in Canada since January 2006: 236,200

Youth unemployment rate, January 2006: 12.2

Youth unemployment rate, December 2013: 14.0

Rank of Canada’s unemployment rate in 2013 compared to other G7 countries: 3rd

Rank of Canada among the 34 OECD nations in employment creation 2007-2012: 20th

Then consider the following:

Number of governments since 1935 that have presided over a slower rate of real economic growth per capita than the Harper Conservatives: 0

Number of consecutive annual federal budget deficits: 6

Number of budget deficit targets hit by Finance Minister Jim Flaherty: 0

Number of consecutive annual federal budget surpluses under the previous Liberal   (Chrétien/Martin) governments: 9

Amount added to the federal national debt since Conservatives took power in 2006: 

$123,500,000,000.

And, finally, note the following numbers:

Percentage increase in the inflation-adjusted average hourly manufacturing wage, 2006-2013: 0

Percentage drop in productivity (GDP produced per employed person), 2006 to September 2013: 1.9

Mr. Harper likes to reward the private sector. But, in that hallowed world, an executive with that kind of record would be dumped. Yet he's still with us. And he's still full of hot air.

Cruel And Unusual Punishment

Jim Flaherty vows that the budget will be balanced by the next election. But at what cost? Daniel Tencer, of The Huffington Post, writes:

Job creation in Canada this year has been the weakest in a non-recession year in more than a decade, and the low quality of the jobs being created is causing some economists to raise concerns about the country's economy.

Looking at StatsCan’s latest job numbers, released last week, BMO economist Benjamin Reitzes notes that Canada created fewer than 175,000 net jobs in the year to date (meaning all of 2013 except December).

It's not just about a paucity of jobs. It's about the kind of jobs that are being created:

Even the latest numbers for November look negative when digging into the details. While the jobless rate held steady at 6.9 per cent and Canada registered 22,000 new jobs during the month, 20,000 of those were part-time, notes Erin Weir, an economist for the United Steelworkers.

“Broken down another way, 19,000 of the employment increase were people reporting themselves as self-employed,” Weir writes. “Canadian employers actually hired fewer than 3,000 [net] additional employees last month.”

Mr. Flaherty pitches this as progress. But he is not a policy genius. When he was running for the leadership of the (misnamed) Ontario Progressive Conservative Party, he suggested that the way to cure homelessness was to sweep the homeless off the street and throw them in jail.

It is no wonder that Mr. Flaherty is balancing the budget on the backs of the unemployed.  Like his proposed solution to homelessness, it is cruel and unusual punishment.