Debt Myths

Myth 1: Government spending under Trudeau and Pearson accounts for most of Canada's debt

The notion that the Trudeau and Pearson spent Canada into debt is laughable. Leaving aside the fact that Most of Canada's debt accumulated under Brian Mulroney, when Trudeau left office Canada's debt to GDP ratio was slightly less than it was under Diefenbaker and for most of 60s and 70s debt to GDP ratios were well below what they were in 1960. Moreover, it was only Trudeau's last term in office that deficits to GDP reached troubling levels and that had nothing to do with new government spending.

At the beginning of the 1980s, the US Fed and other Western countries declared a war on inflation. The war was won, but it came at a terrible cost. Sky rocketing interest rates meant sky rocketing deficits in both Canada and the US. An example should put things into perspective. In September 1980 interest rates stood at already ridiculously high 13%; three months later the US Fed had raised them to 20%.

Monetary policy and not government largeness explains Canada's debt crisis in the 1990s.

It was also helps to explain why Martin was able to tackle the deficit. The last of those ridicously high yeild bonds had run out by 1993 and by 1992 new bonds were issued at a much lower rate. Lower interest rates also drove demand here at the same time as they helped lower the Canadian dollar against US dollar.

Myth 2: Canadian government spending is out of control

Using the mid 1990s as a reference pundits such as Andrew Coyne like to point out that government spending has grown by leaps and bounds. Indeed, it has. The problem is government spending in the mid 1990s was lower than it was at any point since the 1950s and given the demands of a modern economy, such low levels of spending were unsustainable. In other words, what we have witnessed in the last 10 years is not a spike in government spending but an inevitable and needed rebound. The amount of government spending in Canada as percentage of GDP is lower than most Western countries and is even lower then what it is in the States.

Furthermore, what is true for other countries in recent years is also true for Canada. What accounts for most of the deficit is a massive decline in revenues and not "Canada's Action plan".

Myth 3: The debt crisis in Europe is a result of government largeness

The acronym PIGS make it seem that Europe's debt crisis is a result of government spending. This is simply not true. Prior to the Lehman Brothers bankruptcy Portugal, Ireland, and Spain, had debt levels that were either comparable to Canada's or lower. Moreover, none of these countries were running huge deficits prior to the crash. Indeed, Spain was running surpluses. The huge deficits these countries are running now are a consequence of a massive decline in government revenues and the massive increase in debt levels is a consequence of large amount of private debt being transferred to the government books in the face of crisis brought on by a US private debt crisis and huge spike in oil prices in the summer of 2008. The UK is perhaps the best example of the later

Italy and Greece, of course, had higher debt levels. However, even here this has arguably more to do with with the revenue side than the spending side. This is especially true in Italy's case. Tax evasion is widespread in both countries. The situation is Italy is so bad that the former government proposed that every Italian's income be made public so that people could rat out tax evaders.

The origins of the debt crisis matter. If the cause of crisis is massive reduction in revenues, fiscal stimulus may be the only way out. Getting on with the business of reducing the debt in the face of 20% unemployment in Spain's case, is likely to make things worse. First there is the question of there being a liquidity trap. Then there is this. However big the real estate bubble was in the States it was far bigger in many European countries and where there real estate bubbles there are high consummer debt levels and most cases highly leveraged banks. Slashing services, rising interest rates, raising taxes that will in turn lead to increased financial burden for households will only serve to bring various European economy closer to the edge. It will lead to defaults which will in turn lead to bank failures. The consumer debt problem and public debt problem are actually one problem.

There is no easy answers and things only stand to get more complicated. For one, the true European debt crisis lies in wait. While there is nothing to suggest that the timing of the current crisis was consequence of government largeness, a rapidly aging population endangers every major European economy. Europe's "implicit debt", most notably generous but uncosted public pensions, will become more of a problem as Europe ages. This is especially true for the PIGS. Italy is Europe's oldest country and, if memory serves, Greece has its lowest birth rate. Many Europeans have been loath to embrace immigration for fears that it would erode national identity. Europe must now embrace higher immigration if it wants to maintain its current way of life.

To further complicate matters, there is the Euro. Greece has been in and out of default for a good portion of the last hundred years. What makes this most recent crisis different is that should it default the future of the Euro would be in called into question. As Paul Krugman et al, have suggested default may be impossible to head off default. The problem is that countries in Greece's position have tradionally devalued their currency in order to get back on their feet again. (To very real extent that is exactly what Canada did in the 1990s.) So long as Greece uses the Euro, that option is not open to them though. In order for Greece business to complete with their German counterparts, for example, there most be real reduction in Greek wages. If Greece was not a Euro member, it could accomplish the same by devaluing its currency.

Myth 4: This is 1995 all over again

Canada is also vulnerable. Sure are banks are better shape, but this is no small measure do to the fact that Canadian housing corporation and not the banks and AIGs of the world are on hook should the real estate bubble burst in Canada's biggest cities.

You see, one of the first things the Conservatives did upon taking office was to extend the mortgage amortization period from 25 years to 30 years in February 2006, extend it to 35 years in July of 2006 and extend it yet again to 40 years in November 2006 During this period they also reduced the needed down payment on second properties from 20% to 5% and allowed for 0 down on one's primary residence.

Such actions allowed Canadians to take on mountains more debt, house prices went through the roof and so has the Canadian housing corporation liabilities. It was 100 billion in 2006. It is expected to reach $500 billion by the end of the year. A sharp increase in defaults will add billions and billions and billions to Canada's net debt.

The slash and burn policies of the 1990s will only make a bad situation worse. Indeed, with Canadian consumer debt growing at amazing 7% a year, slashing services that will in turn lead to increased financial burden will, here too, only serve to bring the Canadian economy closer to the edge. Canada needs to take action least a private debt problem become a public debt one. That means above all insuring that real estate does not continue to rise and to lessen the financial burden of young families in particular. A national day care program is great place to start. The type of services that Canada should be cutting -- if not gutting -- are the ones that offer no direct financial benefit to Canadians. Military spending and the Conservatives daft get tough on crime policies are great place to start.

Germany and Podolski blow it

In the first 36 minutes German Serbia game no time did anything of note and the only entertainment was provided by guessing who a absurdly whistle happy ref would card next. During that time, the ref handed out an absurd 6 yellow cards, two of them to Germany's Miroslav Klose. Shortly after Klose was sent off Germany forgot how to mark and Serbia took a 1- nill lead on a Milan Jovanovic's goal.

For the next 32 minutes, a 10 man German team dominated possession and had the better of the chances. If not for the inability of Lukas Podolski to hit the net and convert a penalty, Germany would have tied the game. For the second game a Serb defender reached out and touched the ball in the crease. One can only guess why Joachim Loew let Podolski, whose name is Polish for can not hit the board side of a barn, take the penatly or why he gutted the creative potential of his midfield by subbing Ozil and Muller off in the 70th minute. Germany did nothing in the last 20 minutes and the Serb's failed to capitalize on two good chances.

Canadians GM on Crack: Halak to the Blues

Montreal Canadians' GM Pierre Gauthier is on crack. He must not have watched Halak almost single handedly beat the Caps and Penguins. Gauthier traded Montreal's playoff hero to the Blues for pucket of pucks and a beer.

http://ca.sports.yahoo.com/nhl/blog/puck_daddy/post/Montreal-trades-rights-to-goalie-Jaroslav-Halak?urn=nhl,249277

Ignatieff's Foreign Policy Idiocy creeping into Liberal policy

Peace keeping means what it says. It involves keeping the peace between two identifiable warring factions who want peace and have invited third party in to keep it. It really only has a hope of succeeding when those groups are separated from one another by geography. In this sense Ignatieff was always right about the Afghanistan mission and the others dead wrong. Afghanistan is and never was suited to peace keeping. Furthermore, as guerilla war supplants state on state violence as the dominant form of conflict, peace keeping missions have become less and less useful. In this sense too Ignatieff is right, albeit for the wrong reasons, and his opponents are wrong. Peace keeping has had it day; it represents a proud chapter in Canada history, but that chapter has been written; let us move on.

Where Ignatieff errs is the prescriptions he makes. He seems to not to realize that just as age of Peace keeping has come and gone so thankfully has the age of nation building. First of all, the public has no stomach for it. For Ignatieff to suggest that Canada and other Western countries should greatly reduce spending on social programs just so they do not have rely on a "Pentagon General" to police the world is such bleeding heart gibberish it hardly merits comment.

http://www.youtube.com/watch?v=C43ewgn9CFk&feature=player_embedded

Most Canadians are interested in building up Canada, Ignatieff is alone in thinking Afghanistan and Dalfur should be higher priorities. Most Canadians would be aghast if billions of dollars were to be diverted from health budgets to pay for military hardware, but that is exactly what Ignatieff would like to do. The money quote: "we used to be peace keepers. We used to have capabilities. We gave them up. Because people wanted hospitals, schools and roads and god bless them." The man is a menace.

Second, nation building is a foul's errand. Western countries have had very little success in developing their own hinterlands let alone transforming the most backward economies in the world.

Finally, these missions only make it more likely that Canada will be attacked by terrorists home grown as in the Toronto 18 or otherwise.

Liberals doomed to die a Slow Death

So long as the Liberal party -- or a strong portion of it anyway -- remain committed to collective rights, asymmetrical federalism and means tested social policy the party is doomed to die a slow death.

One thing that made the Liberal brand dominant for so long was the party's commitment to universality, most notably the Canada Health Act and Canada Pension plan. However, under Martin and Chrétien the Liberals abandoned universality and favored instead means tested programs. The thing is means tested social programs do not win elections; the populace is not going to get excited about paying for a service that only a small percentage of the public can use. By turning every social program on offer into a form of welfare, the ability of the Liberals to offer anything other than tax cuts is very limited. This has hobbled the Liberals politically. As Tom Flanagan crowed after the 2006 election, there are certain issues that favour the Conservatives and the economy and taxation are two. The simple fact of the matter is that most of the public will not gain a working knowledge of each party's economic policies over the course of the campaign and when assessing each of the parties on the issue of taxation will rely on worn out stereotypes.

Of course, the one exception to such a dispiriting turn is the Liberals early childhood proposal. That said, the Liberals unwillingness to step on provincial toes and lay out a coherent plan ahead of time have rendered such a policy politically useless. Indeed, during the 2006 election the Liberals promise to work out a different deal with each province amounted to little more than a vague promise to provide more daycare -- which the Liberals said early childhood education was not --- at sometime in the future. Canadians could not figure out what this would mean for their lives and not surprisingly they preferred the Conservative baby bonus.

If the Liberals reintroduce such a program in the future, they need to present it in a form in which voters can understand. They could, for example, promise to provide all day preschool and kindergarten for every 4 and 5 year old in Canada. Now, it will be said that the Liberals can not do this; education is under provincial control, but such thinking is the heart of the problem. Education is under provincial control, but so is health care and that never stopped Pearson from introducing Medical Care Act. It is high time this group of Liberals grow some. No one is ever going to vote for a party that is scared of the Conservatives, scared of the provinces and just plain scared period.

The other thing that people admired the Liberals for was their commitment to individual rights. The problem is that the more emphasis Trudeau placed on individual rights and a commitment to linguistic equality the more the rest of the country, particularly the West, resented the Liberals inability to put a stop to bill 178 and and 101 and its willingness to make special accommodations for Quebec. Quebec's Official Language Act spelled doom for the Liberals in Western Canada from the mid 70s until collapse of the Progressive Conservatives in 1993. The Liberals won but 3 seats over the next 4 elections in the three most Western provinces, one in 1979, one in 1984 and one in 1988. The later two were won by John Turner. Ironically, it was the Mulroney's willingness to go even further in pandering to Quebec that gave the Liberals some life again. However, given that these same sentiments also gave rise to the Reform party, the news was not all good for the Liberal party. Today, the country is no longer neatly divided among regional lines, but least the Liberals forget the source of their troubles in Western Canada, the unpopularity of the a coalition that included the Bloc made it abundantly clear that special treatment for Quebec is still political poison in Western Canada.