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Stimulus or Austerity: Can Either Succeed?

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by John Brian Shannon

In the age-old debate between stimulus and austerity, many commentators fail to realize both schools of thought could be correct — and in fact, both are.

For one, look at the uncountable billions of stimulus added to the American economy during President Reagan‘s two terms. Unprecedented billions were directed towards defense, R&D, infrastructure — and even to Chrysler — although, strictly speaking, those were loan guarantees.

Do loan guarantees count as stimulus? Almost. And those guarantees tied up billions of U.S. Government dollars until they were no longer required — and served to establish and add gravitas to a new momentum in the U.S. economy. Courtesy of President Reagan’s leadership, I hasten to add.

When we look at historic stimulus, it works. When the stimulus is added at the first sign of recession it is most effective. Once all those factories are shuttered, trying to add stimulus to improve the economy is an uphill battle, every day.

The Marshall Plan to rebuild Europe at the end of WWII is a classic stimulus success story. Anyone who visited 1945 Europe and then visited again in 1960 can attest to that! About $40 billion dollars were used to stimulate the European economy — a lot of money in those days, even by United States’ standards.

Think of stimulus spending as emergency funding to keep the economy functioning. It really only works when applied immediately and at the first sign of recession.

For two, austerity does work. Although, it must be said, removing obscene debt and irresponsible deficits from a large economy constitute a major structural change. It is no band-aid solution — although as I said above, band-aids do work.

Austerity fixes the underlying structural problem — while stimulus fixes the symptoms, if you will.

There is no doubt about the Baltic austerity success story and there are others. You need only look as far as Canada in the 1990′s. Canada’s credit rating was on the rocks, the economy was in the tank and economic vital signs were heading in the wrong direction.

Prime Minister Jean Chretien and his astute Finance Minister Paul Martin, decided to adopt aggressive Canadian-style austerity and it worked (short-term pain for long-term gain) better than anyone had imagined. It just took some political leadership, unusually good communications with voters and some serious brainstorming.

A final word on economist’s everywhere. European economists work for Europe’s well-being, Chinese economists work for China, er, directly! While American economists work to arrange things to America’s advantage — you can’t begrudge any side for ‘playing for the home team’.

If the New York Times, Nobel Prize winning economist Professor Paul Krugman believes that it is in America’s best interests to float the economy with stimulus money, then he is right. Of course while agreeing with him, I always point out that stimulus is a merely a temporary fix and that additional deficit-financing (and accumulated debt) should be ‘pared down’ during the boom times.

Just as John Maynard Keynes suggested.

When this is not done, decade after decade, or should I say, recession after recession, it adds to the unbalanced economy and the entire economic structure is thereby weakened.

For now, stimulus — although it is almost too late for band-aids. Then, during the next boom, adroit movement towards zero-deficit financing — then, once that is achieved, regular scheduled debt paydowns after that.

Stimulus will stop the worst of the present economic malaise from taking an even higher toll — and later, austerity will begin to improve the entire structure of the U.S. economy.

John Brian Shannon

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An Unserious Man — MY COMMENT

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by John Brian Shannon

Read Paul Krugman’s An Unserious Man.

My comment on Professor Krugman’s article begins.

When 5 Minus 4 Equals 10: Republican deficit cutting

First off, let me say that I like Paul Ryan. Hey, I like Mitt Romney too.

I liked his dad, the great George Romney even more – a true and honourable captain of industry who represented American corporations with class and charisma. Now there was a man who should have been a two-term President.

What is before us this day, is the Paul Ryan plan for deficit cutting, tax cuts and cuts to Medicaid.

The proof is in the pudding as they say and independent groups like the non-partisan Tax Policy Center have declared that the Paul Ryan spending cut and tax cut budget will result in a budget deficit $2.5 trillion dollars higher than the one President Obama’s team is promoting.

And that is after essentially dumping Medicaid onto the states (many of which can’t afford their current spending programs, let alone additional spending) and dramatic cuts to the food stamp program (meaning fewer American’s will be able to eat) and cuts to education funding (meaning fewer American’s will be able to attend college).

Not only spending cuts, but tax cuts for America’s highest income-earners and their sponsor corporations. All of whom, are just doing fine, thank you very much, even without the proposed Ryan cuts!

The Paul Ryan budget plan is to cut, cut, cut — but spend even more, with a total of $4.3 trillion dollars of cuts over the next decade — and still the budget deficit will zoom $2.5 trillion deeper into the red than the Obama budget.

How can $4.3 trillion dollars of spending cuts and tax cuts phased in over the next ten years, result in an unsustainable budget deficit of $2.5 trillion dollars? How can offloading Medicaid onto nearly insolvent states help those Americans who depend on it? How can dramatic cuts to the food stamp program not correspondingly increase the property theft crime rate? And how do tax cuts to wealthy Americans and American corporations help the middle class, not to mention removing grants for more kids to attend college?

We only need to look at the utterly predictable results of this economic plan, to accurately judge it’s merits.

1) Dumping Medicaid onto the states, many of which are near-insolvent already, would have the effect of making some of them fully insolvent. It would push other states which are just managing to hang on, to near-insolvency. Strong states would become weaker. How does this benefit the United States of America?

2) Dramatic cuts to the federal food stamp program in an effort to cut spending, will simply result in greater federal law enforcement spending as many thousands of hungry Americans turn to theft, to be able to eat every day of the year. I’ll just bet that the FBI and city and state police forces don’t love this Paul Ryan plan.

3)  When fewer Americans can attend college, correspondingly more people will be entering the workforce with a lower level of education. How will the ‘dumbing down’ of America help the nation?

4) For those Americans in the top tax brackets and for many American corporations, tax cuts for them means a further concentration of wealth for 1% of U.S. citizens, a lower percentage of wealth for the middle class to share and even less for the lowest income Americans. What egalitarian society?

5) A substantially larger budget deficit allows more control over American policy by those financing American federal debt. For the foreseeable future, China (you know, that big, booming country that Republicans like to poke with a sharp stick at every opportunity) will be financing U.S. federal deficits and accumulated debt. As budget deficits and debt soar in America, the number of nations which can step-up to service that debt drops exponentially. The day is coming when China will be the only nation with the wherewithal to float the U.S. economy — IF they choose to do so.

Paul Ryan’s economic platform would weaken individual U.S. states, increase societal class friction, increase disparity in income and education, increase the national crime rate and allow more Chinese government say in U.S. policy.

If U.S. Republicans are America’s friends, who needs enemies?

John Brian Shannon

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ABOUT JOHN BRIAN SHANNON

I write about green energy, sustainable development and economics. My blogs appear in the Arabian Gazette, EcoPoint, EnergyBoom, Huffington Post, United Nations Development Programme, WACSI — and other quality publications.

“It is important to assist all levels of government and the business community to find sustainable ways forward for industry and consumers.”

Green Energy blog: http://johnbrianshannon.com
Economics blog: http://jbsnews.wordpress.com
Twitter: @JBSCanada

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The Case For Austerity

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by John Brian Shannon

Finally, finally, finally.

After decades of running endless deficits which, when left unpaid at the end of each year are added to the government debt — increasing the overall debt-to-GDP ratio numbers of nations, many governments around the world have begun to rein-in their spending.

Why is that important? Because those are the same debt-to-GDP ratios that the worlds major credit rating agencies cite when they lower the credit rating of nations which have managed to spend more than they take in year after year – through the good times and the bad times.

Decade after decade, deficits pile up, until one day your national credit rating has sunk from AAA+ to only B+ or worse! This brings about a number of unwanted consequences for those countries.

One, the cost of borrowing multi-billions of dollars to cover government debt is increased at each and every downgrade.

A small change to the interest rate doesn’t hurt much when the amount financed is a small amount, but it really hurts when the amount financed is in the hundreds of billions of dollars. For example, the U.S. is presently financing 15 Trillion dollars of debt (accumulated deficits) and will add another 1.4 Trillion dollars of deficit to the government debt at the end of this fiscal year – September of 2012.

Imagine the borrowing costs on 16.4 Trillion dollars. Now, imagine the borrowing costs on 16.4 Trillion dollars and add another 1% to that interest rate – which is the hypothetical equivalent of a one-point reduction in the credit rating, let’s say from AAA to AA for example. Forget about the B+ rating – you don’t want to know.

Year in and year out, in good times and in bad times, huge chunks of national treasure in the form of interest payments on federal debt and deficits are paid by the taxpayers to foreign lenders to cover the cost of government overspending. It is an automatic drain on a country’s wealth.

Credit rating agencies become empowered at times like these and begin making suggestions to governments in order for them to receive a better credit rating – and thereby lower their overall cost of borrowing.

One suggestion is to impose austerity measures to lower government spending – in an attempt to stem the economic bleeding of the economy in question.

Cutting the number of government workers to decrease government spending is one way to accomplish that – as is reducing the number, or quality, of services that a government performs. In fact, there are thousands of ways to raise revenue and lower spending to eventually produce a zero deficit condition. Levelization of government finances becomes the priority.

Which is a relatively easy thing to do during the good times when the economy is expanding, jobs are plentiful and the government is raking in boatloads of income tax, sales tax and other government revenue-generating schemes — although, even then it is rarely attempted.

Some excellent examples of exceptions to this paradigm do exist.

Austerity during the bad times has no redeeming value at all – except for one important point, which I will cover shortly.

Politicians have traditionally shunned austerity during the good times because in all but a very few cases it gets them voted out of office.

At the worst possible moment, we are now beginning to do the right thing — returning to balanced budgets and paying down government debt.

Everyone is beginning to ‘get it’ governments simply cannot run huge deficits decade after decade and not face a downgrade of their credit rating, which drives up the cost of financing that accumulated debt load. Which, in turn, slows the economy – code words for increased unemployment, higher taxation, stagflation and a lowering of services provided by the government.

So, what is the important point? Voter acceptance – which may be putting it too strongly – but at the very least an understanding is now forming in the consciousness of voters, that governments cannot continue spending at unsustainable levels for decades at a time. Tentatively at first, but now with increasing resolve, politicians have begun to feel empowered to speak out about lowering government deficits and cutting national debt loads.

Now that the process has started (very unfortunately, during the bad times) I would expect it to continue during the coming good times – which, according to the legendary words of economist John Maynard Keynes – is the proper time for deficit-cutting and debt paydown.

It has worked before. In the early 1990′s, Canada was facing high deficits, a toxic government debt load and a lowering of it’s credit rating — at a bad time economically speaking. The then-government of Prime Minister Jean Chretien and his astute Minister of Finance Paul Martin, jumped at the opportunity during a time of nominal growth and higher taxation to cut the deficit to zero and dramatically paydown the accumulated Canadian federal debt.

In short, a win for austerity. A wildly successful effort by those two gentlemen who made it look easy and who never, ever, once complained once about the task fate appointed them.

In fact, there is no doubt at all about it in Canada – austerity won and it won handily.

In the case of Canada, there was no option but to win, there were no better choices available and no big brother like some nations in the EU have available to them to bail us out. The government of the day decided to pare down spending, increase revenues and they were so successful at doing so their plan worked better than even they themselves had envisioned.

The reason Canada was so successful?

Theirs was anything but a clumsy attempt to balance the budget and paydown the debt and both the Prime Minister and the Finance Minister went around to meet the Premiers of each Canadian Province to sell the austerity package to Canada’s Premiers before attempting to take their plan further afield.

Then, and only then, they went to Wall Street to sell the world’s leading economy on the Canadian plan to eliminate Canadian deficits and lower the country’s total debt load.

Once all of that had successfully taken place, Canada’s Prime Minister and its Minister of Finance approached the credit rating agencies with a fait-accompli plan.

By ensuring the full support of every relevant player well-beforehand, Canada won over the credit rating agencies in a moment.

John Brian Shannon writes about green energy, sustainable development and economics from British Columbia, Canada. His articles appear in the Arabian Gazette, EcoPoint Asia, EnergyBoom, Huffington Post, the United Nations Development Programme - and other quality publications.

John believes it is important to assist all levels of government and the business community to find sustainable ways forward for industry and consumers.

Check out his personal blog at: http://johnbrianshannon.com

Check out his economics blog at: http://jbsnews.wordpress.com

Follow John on Twitter: https://www.twitter.com/#!/JBSCanada

SEE ALSO:

http://www.theglobeandmail.com/report-on-business/economy/the-lesson-from-canada-on-cutting-deficits/article4252006/?page=all

A short excerpt of this excellent article appears below. Please click on the link above to read the entire article.

The lesson from Canada on cutting deficits
LOUISE EGAN, RANDALL PALMER
OTTAWA— Reuters
Published Monday, Nov. 21, 2011 2:32 PM EST

“Finance officials bit their nails and nervously watched the clock. There were 30 minutes left in a bond auction aimed at funding the deficit and there was not a single bid.

Sounds like today’s Italy or Greece?

No, this was Canada in 1994.

Bids eventually came in, but that close call, along with downgrades and The Wall Street Journal calling Canada “an honorary member of the Third World,” helped the nation’s people and politicians understand how scary its budget problem was.

“There would have been a day when we would have been the Greece of today,” recalled then prime minister Jean Chrétien, a Liberal who ended up chopping cherished social programs in one of the most dramatic fiscal turnarounds ever.

“I knew we were in a bind and we had to do something,” Mr. Chrétien, 77, told Reuters in a rare interview.

Canada’s shift from pariah to fiscal darling provides lessons for Washington as lawmakers find few easy answers to the huge U.S. deficit and debt burden, and for European countries staggering under their own massive budget problems.

“Everyone wants to know how we did it,” said political economist Brian Lee Crowley, head of the Ottawa-based think tank, Macdonald-Laurier Institute, who has examined the lessons of the 1990s.

But to win its budget wars, Canada first had to realize how dire its situation was and then dramatically shrink the size of government rather than just limit the pace of spending growth.

It would eventually oversee the biggest reduction in Canadian government spending since demobilization after the Second World War. The big cuts, and relatively small tax increases, brought a budget surplus within four years.

Canadian debt shrank to 29 per cent of gross domestic product in 2008-09 from a peak of 68 per cent in 1995-96, and the budget was in the black for 11 consecutive years until the 2008-09 recession.

For Canada, the vicious debt circle turned into a virtuous cycle that rescued a currency that had been dubbed the “northern peso.” Canada went from having the second worst fiscal position in the Group of Seven industrialized countries, behind only Italy, to easily the best.

It is far from a coincidence that the recent recession was shorter and shallower in Canada than in the United States. Indeed, by January, Canada had recovered all the jobs lost in the downturn, while the U.S. has hardly been able to dent its high unemployment.

“We used to thank God that Italy was there because we were the second worst in the G7,” said Scott Clark, associate deputy finance minister in the 1990s.

Canada’s experience turned on its head the prevailing wisdom that spending promises were the easiest way to win elections. Politicians of all kinds and at all levels of government learned that austerity could win.”  read more…

 

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Why Are We In Debt? – MY COMMENT

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by John Brian Shannon

As far as economist’s go, you can’t have enough respect for Professor Paul Krugman. Passionate about his calling, vociferous in his critique of failed fiscal or monetary policy and as fine a gentleman as you could ever hope to meet.

He is so compelling and believes in his mission so deeply that even his fiercest economic critics find themselves nodding in agreement with him – before they snap out of it and return to the party line they were following prior to the beginning of the good Professor’s speech.

He is arguably the leading economist on the planet – and I doubt he would have a problem with me putting his life’s work into those terms as he himself realizes that he is in some pretty fine company.

So why would I, wearing my junior economist hat, ever disagree with him on any matter of economics? Just who do I think I am?

Well, I have found a clearer version of my usual answer and it was the kind Doctor of Economics himself, who provided it to me in one of his recent articles.

To read his article, please visit: The New York Review of Books

How to End This Depression
by: Paul Krugman
http://www.nybooks.com/articles/archives/2012/may/24/how-end-depression/

In case you just got back from Mars, Krugman is famously anti-austerity, regularly informs us of the ills of the American economy and posits remedies for present fiscal and monetary maladies. I should say right now that he is most often right. Depending which year it is, that is usually 364 out of, oh well, 365 days of the year. Just saying.

So, three paragraphs into his fine article, we read this:
“But don’t we have to worry about long-run budget deficits? Keynes wrote that “the boom, not the slump, is the time for austerity.” Now, as I argue in my forthcoming book*—and show later in the data discussed in this article—is the time for the government to spend more until the private sector is ready to carry the economy forward again. At that point, the US would be in a far better position to deal with deficits, entitlements, and the costs of financing them.”

Imagine me nodding my head in full agreement with Professor Paul Krugman! Me – a fervent austerity-booster! Imagine that. Didn’t I tell you that was going to happen? Yes I did.

He does have that effect on economist’s all over the world – including those who disagree with his views on the austerity question.

I too, am a Keynesian and I agree profoundly with those words spoken by John Maynard Keynes so long ago and I’ll prove it now.

Ricardian Equivalence aside, lagging economies do need stimulus! The time for the government to begin spending money to boost the economy is in the first few seconds after an official recession has been called by the market. That’s three consecutive quarters of zero growth or decline, or a mixture of both, followed by an official announcement in order to qualify for recession status.

Irregular government stimulus has been happening since before the stock market crash of 1929 when government intervention began in earnest the American marketplace as a force against market turmoil.

Let me say it as plainly as I can, John Maynard Keynes and Paul Krugman are absolutely right, stimulus has been proven to work, it begins to work immediately and it does fulfill the desired effect. It works every time.

The fact that Ricardian Equivalence kicks in part way through the process to begin the incremental process of diminishing the government stimulus – doesn’t change a thing. The stimulus does exactly what it is supposed to do and the fact that consumers later adjust their savings and spending, resulting in a flat net gain to the economy a decade or two later matters little – because all of that takes place on a completely different schedule compared to the instant economic gratification stimulus spending plan.

To put it plainly, the full effects of Ricardian Equivalence take 10-20 years – and if the stimulus hasn’t recovered the economy before Ricardian Equivalence kicks in, you have way bigger problems than three quarters of net loss in the market!

Spending our way out of recession by virtue of taxpayer-supported government stimulus is the equivalent of knowing well-in-advance the exact future day that your house will burn down — and going to the bank as soon as you find this out, in order to borrow sufficient funds to buy the property next door and build your new house identical to the old house — and having it completed and ready to move into, just hours before your old house burns down.

You are no further ahead in absolute terms – but you have an exact duplicate house and property and the exact same mortgage and you don’t have to sleep in a hotel for six months waiting for your new house to be built. Saving you significant misery – which is the whole point of government stimulus, saving millions of citizens from significant misery in the 0 – 10 year time-frame.

This is the secret of government stimulus spending. The government can spend as much stimulus money as it wants. If government stimulus is large and the spending commences soon after the announcement of recession, the economy begins improving almost immediately.

If it spends the stimulus money too slowly, over a ten year period for example, the effect is greatly minimized and could end up a complete failure in every sense. The law of diminishing returns is what happens when government begins a large slow-motion spending program designed to stimulate the economy.

But when it begins immediately and is targeted to produce the best results, it is the exact medicine a country needs – even if, sometime past the ten-year mark, the national economy is no further ahead in absolute terms on account of that stimulus.

Why is stimulus important? Because it immediately and dramatically begins to lower the misery felt by millions of citizens who suddenly become unemployed during recessions. In fact, government stimulus spending creates jobs and can prevent further job cuts as the market sees the strength of the economy and the level of government commitment to the economy. Many a recession has turned out to be a paper recession because a government took early action, spent much – and pushed the evil day farther down the road.

We’re here at the evil day. And if not now, certainly by the next recession – which used to be farther down the road, but is now close to where we live these days.

Keynes wrote that “the boom, not the slump, is the time for austerity.”  – That is very true.

As Professor Krugman wrote in his article which I quoted above:

“Now, as I argue in my forthcoming book… is the time for the government to spend more until the private sector is ready to carry the economy forward again. At that point, the US would be in a far better position to deal with deficits, entitlements, and the costs of financing them.”

Which decade after decade, continues to not happen. Many multi-billions have been spent on government stimulus but none, not one, of those borrowed multi-billions have ever been paid back. Deficit after deficit has accumulated since before there were rocks, and now the debt is piled so high we might not have the chops with our lenders to borrow stimulus multi-billions so that we may assist those who are in unemployment misery – or worse.

The simple fact is, governments can borrow as much as they like and not pay it back – ever! And they have. But eventually, a day will arrive when nobody will lend us more money. Whether this is the case now, or whether it waits till the next recession, we are at or near the end of this particular paradigm of borrow, stimulate and not pay it back during the boom times.

We can’t blame the economist’s – their job is to help the economy progress, to create wealth, to lure capital, to innovate new ways of using money for the good of the nation – and so much more. But economist’s do not have secret powers to force governments to “pay off deficits and pay down debt when times are good” as John Maynard Keynes many times suggested.

We can’t blame the Russian’s anymore – this wasn’t their fault.

We can’t blame our politician’s – because any politician who brings up the topic for even a nanosecond – simply does not get elected!

We want our nice life now, we want our tax breaks now, we want our government spending programs now, we want our toys now, and we don’t want to hear about paying for them.

Why are we in debt? Because that’s what we have asked for every year since before there were rocks.

If we want to continue as a solvent and sovereign nation, we need to authorize a President and a Congress (at the same time!) to print enough money to cover next year’s deficit, effectively clearing our current account to zero. We need to pass legislation that will eventually outlaw deficit spending – except during times of national emergency. We need to pass laws that will force the government to pay down the accumulated government debt by 2% per year until it reaches a sustainable level, say debt-to-GDP ratio of 50%, or less. And we need to start living within our means as a civilization.

Other nations cannot be expected to take the lead on this and until the U.S. begins to do so, western countries will remain uncomfortably near the end of this present paradigm, living uncomfortably close to economic disintegration.

An economic netherworld beckons.

Follow John Brian Shannon on Twitter: https://twitter.com/@JBSCanada

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Greek and French Voters Overturn Austerity

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By John Brian Shannon

Greek and French voters have overturned austerity in Europe, but voters have really overturned a change to sustainable economic policies.

The structural changes there have caused some level of financial problems for individuals and families.

But the alternative was to let the outrageous, drunken-sailor spending continue until there was nothing left of the economies in question. Eventually that would have caused a real pan-European depression  – instead of five years of austerity in only those countries foolish enough to have overspent themselves for decades.

It is the obscene deficits which have run year after year (and have piled up into unaffordable debt) that are responsible for the lowered credit ratings in those countries and the poor economic performances found only in those particular European countries, it must be said. I note that the rest of Europe is doing quite well – even accounting for the combined drag and multi-billion euro bailouts of Greece, Portugal and Spain.

Blaming austerity, is like blaming the doctor who is now fixing your broken arm for the original accident — as you drunkenly stumbled out of the casino! The Greek economy was a basket-case long before austerity ever arrived and it will be a basket-case now that austerity is leaving Greece.

Greek and French citizens have voted for the former glory days of unrestrained spending with lots of toys and goodies from their governments – and to hell with paying for it!

“Let the EU bail us out forever, for tonight, we drink like drunken sailors!” And, if you think that isn’t being hollered at full volume at many thousands of cantina’s and spilling out on to the streets of Greece tonight, you’ve never been there!

Follow John Brian Shannon on Twitter: https://twitter.com/@JBSCanada

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The Economist Asks: Does Britain need a fiscal boost? — MY COMMENT

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Just as a matter of principle, the UK should not be running deficits. It is  unconscionable for any 1st world nation, especially one with so many gifts, to NOT spend within it’s means.

Running deficits year in and year out, is the kind of undisciplined behavior we expect from the most primitive undeveloped economies, not the UK, for goodness sakes!

Legislation should be passed in the UK (and independently in all other 1st world nations) banning deficit spending by the federal government except during wartime, or other significant emergencies.

Whether it is affordable or not, is irrelevant as it is simply morally wrong to mismanage, when sound management would suffice.

Mismanage how?

Every pound that is borrowed when in deficit, and then later tacked onto the federal debt of a nation, takes food out of the mouths of the citizens – as each individual pound borrowed carries with it a borrowing cost (compound interest) which, any banker can tell you will end up costing you very many pounds in compound interest.

Which would be almost fine, I suppose, if that interest was staying in the country. But it’s not.

International lenders carry shiploads of money out of the UK and other Western economies every single year in the form of interest paid on government deficits and accumulated deficits (debt) from years and decades gone by.

It is a travesty and it’s immoral to give away the wealth of a nation in slow motion. That money is gone forever.

For now, to solve the immediate problem, the UK as it is sovereign in it’s own currency, should print more than enough money to pay the deficit — PLUS 20% — and that 20% could be used as a stimulus fund on “shovel ready” infrastructure money in the highest unemployment regions of the country.

Instantly, that money would begin working to return the economy to a better place and through taxation (employed people spend more and pay more income-tax) lift the government’s revenues.

Not only would the government save the cost of the compound interest for this year’s deficit, they would receive much of it back through various taxation, further removing stress from the government’s accounts. Let alone continuing to pay interest on it for a decade or two, before finally getting this year’s deficit paid off.

And while they are at it, they should invoke a slight devaluation of the pound, to enhance exports, to further stimulate the economy, adding jobs in the process, which means adding more taxpayers to the government revenue stream.

To read the original article and to vote in the poll, visit:

http://www.economist.com/economist-asks/does-britain-need-fiscal-boost

Follow John Brian Shannon on Twitter: https://twitter.com/@JBSCanada

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The Debt of Democracy!

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Democracy is, by definition, always a work in progress. That’s not a knock against democracy, for every other system so far, has turned out to be worse. But it is a realistic appraisal of our system.

One of the things about the democratic system which is in drastic need of improvement is the present election cycle which rewards politicians with more terms in office for tossing unaffordable goodies at taxpayers, usually just before each election.

We keep falling for it! Is is “their” fault, or is it “our” fault?

Well, we keep re-hiring them! So, it’s our fault!

Not only that, it’s worse than that! Remember former Prime Minister Jean Chretien and his Finance Minister Paul Martin?

Weren’t those the two that took Canada from near ‘junk-bond’ status – well on-track to be in worse shape than Greece (!) is now, and within 6 years returned Canada to a zero-deficit condition AND… AND(!) with significant government debt pay-downs?

Well, yes they were.

For that stellar accomplishment Jean Chretien and then Paul Martin were booted out of office!

I say we get the governments we hire, the governments we deserve, and the governments that spend more than we can afford, because that is who we as a people are – rotten little children. And then we compound that by being profoundly ungrateful towards those who actually do something to restore our fiscal balance.

Until we grow up as a society and learn enough to know better than to hire over-spending politicians we will ever be in a state of near-economic peril.

In the meantime, I’m a big fan of balanced-budget legislation for all levels of government. Not only that, Canada’s total accumulated debt is obscene for a first-world nation with uncountable resources and a small population, we must do better than merely balancing our budgets every year, we must pay down our debt to reasonable levels.

My goodness, little Leichtenstien with next to no resources nor territory runs zero deficits and has no debt at all!! Many other well-run countries do well with tiny deficits for convenience-sake, not for the sake of crisis management and barely noticeable government debt. None of them has Canada’s advantages – for crisis’ sakes!

Wikipedia has some good but basic information on this, check Wikipedia “Economy of Sweden” “Economy of Norway” Economy of Australia” – same goes for Leichtenstien, Oman, Qatar, Argentina (yes, Argentina), South Korea and many others.

Apart from having 40% debt-to-GDP ratios, or less, and low government debt, all of the following countries are otherwise “normal” having excellent growth, low inflation and unemployment figures, they score well on the global competitiveness index and their citizens enjoy good-to-excellent living standards . They also have low per capita crime rates and fine health care systems. Two, effectively have 0% debt-to-GDP.

For example:

http://en.wikipedia.org/wiki/Economy_of_Australia

http://en.wikipedia.org/wiki/Economy_of_Liechtenstein

http://en.wikipedia.org/wiki/Economy_of_Qatar

http://en.wikipedia.org/wiki/Economy_of_Oman

http://en.wikipedia.org/wiki/Economy_of_Kuwait

http://en.wikipedia.org/wiki/Economy_of_Sweden

http://en.wikipedia.org/wiki/Economy_of_Switzerland

http://en.wikipedia.org/wiki/Economy_of_South_Korea

http://en.wikipedia.org/wiki/Economy_of_Argentina

http://en.wikipedia.org/wiki/Economy_of_South_Africa

http://en.wikipedia.org/wiki/Economy_of_New_Zealand

Finally, the best link on global debt belongs to The Economist:
http://www.economist.com/content/global_debt_clock

For plenty of links on these topics visit my blog:
http://www.scoop.it/t/politics-in-the-21st-century

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Europe’s Economic Suicide by Paul Krugman — MY COMMENT

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The Euro was doomed to failure from the start IF all of Europe did not convert to the Euro early on. Having a centralized currency in some parts of Europe while national currencies operate in other parts of Europe (operating together and against each other) in some jurisdictions is unworkable.

It would be the equivalent of having an Eastern U.S. dollar and a Western dollar in the U.S.A.

Obviously, both regional currencies would trade at a different value and compete against each other with the goal of defeating the competing currency. Effectively, one region of the U.S. would be at economic war with another region of the U.S.!

Currency speculators worldwide would be quick to make that opportunity work for them – regardless of the economic consequences to either region!

Which is exactly what has been happening to Europe since 2000 and to think otherwise is to be looking through the wrong end of the telescope.

The quiet, almost polite, currency/economic war raging in Europe over the past decade increased unemployment, lowered profits, decreased confidence domestically and abroad and charted an erratic path for the often different national economic systems there.

This wound in the very fabric of Europe won’t heal until the decision is made to either drop the Euro completely – or the European nations embrace one currency.

If that decision is deferred much longer, Europe will continue to lose economic power, until there is complete and utter economic failure there.

To read Professor Paul Krugman – visit:

http://www.nytimes.com/2012/04/16/opinion/krugman-europes-economic-suicide.html?_r=1#comments

Follow me on Twitter: https://www.twitter.com/@JBSCanada

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Government deficits and debt: Unsafe at any level?

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by John Brian Shannon

Some countries do not have much debt, therefore they do not need to reduce their government debt.

At the other end of the scale there are nations which have far too much government debt – and although borrowing rates are presently low for governments in heavy debt, one day that debt will face much higher interest rates – making it much more difficult to pay off.

If they can’t presently pay for current spending and therefore need to run deficit after deficit – resulting in an ever-growing pile of debt, how will they pay the interest on all their accumulated debt once interest rates start to skyrocket! See Greece, Iceland, Portugal, Spain and Italy fall backwards (faster than they are doing now) at that point!

My own country, Canada has an 81.6% government debt to GDP ratio (all levels of government) this year according to The Economist’s Economic Intelligence Unit, which is an unacceptable level of debt, for three reasons:

1) it has in the past affected our credit rating with the credit rating agencies,

2) the debt chokes off growth as the government is constrained by that debt – and can’t borrow more money in order to stimulate the economy,

3) and the interest rate on that debt WILL increase over time which steals a nation’s wealth.

Many government’s with obscene debt levels are also (surprise!) in economic peril – so they must very carefully go about eliminating any deficit financing and paying down their debt.

If only they would pay it down during the “good economic times” then it wouldn’t pile up as it does.

The first rule then, is to not damage the economy further. Second, lower the amount of deficit spending until there is no more deficit.

Even this may take years to accomplish. The U.S. deficit is 1.4 trillion dollars this year, to suddenly cut that to zero would cause more damage than it would solve.

Third, growing the economy will generate much more revenue for the government in the form of taxes, some of which can be used to lower the deficit and once that is done, lower the existing debt. Exports help the economy directly as it is “new” money coming into the country.

Fourth, raising taxes also helps a government raise revenue to help with the deficit and debt picture, but this must be carefully done as it can prevent or slow recovery.

Fifth, lowering spending (austerity) helps to stem the economic bleeding, but governments can not afford to be clumsy about this, as it can wreak havoc with society.

Sixth, legislation passed to not allow deficit financing will prevent over-financing from occurring again.

Regarding the Canadian federal government budget announced yesterday: To balance the country’s books and to take care of the most important matters, here is how to do it:

A) Increase the HST by 1%, use that one percent increase for job creation ONLY. That would have stimulated the economy generally and that of families and individuals.

B) Inform every ministry and government crown corp, etc… that their budgets would face a one-time cut of 5% (every business person knows there is ALWAYS 5% “fat” which can be cut with minimal impact in any organization).

C) Inform MP’s that starting the day after the next election, there will be a new pay package – one which requires them to pay 50% of their pension contributions themselves.

D) Delay indefinitely, the F-35 fighter and purchase 20 ready-to-fly F-18 SuperHornets, or SAAB Grypen fighters or BAE Hawks – to replace the 20 worst condition CF-18 fighter jets and put them in a museum, where they belong.

E) Set up a 1-800 number so that citizens can suggest ways that any level of government can save money. If any ideas turn out to be viable, citizens should receive a $500.00 reward.

See, it’s easy to balance the budget over three years!

How does that compare to what the Harper Government actually has done with it’s latest federal budget?

Here are the highlights of yesterday’s federal budget as announced March 30, 2012 by Finance Minister Jim Flaherty. (Courtesy CBC News)

Canada (March 29, 2012)

This budget was aimed at reducing the federal deficit, and it brought cuts to everything from Old Age Security to a range of federal departments.

Return to budgetary surplus forecast by 2015

Budget balance for 2012: $21,100,000,000 deficit

Federal debt: $602.4 billion ($581.3 billion in 2011/12)

Public debt charges: $30.8 billion ($31 billion in 2011/12) This is the cost of financing ALL federal government debt

Debt to GDP ratio: 34.4%

Real GDP growth (this year): 2.1%

Revenue (per cent change): +2.9
Program spending: (per cent change): +1.4

Total expenses: $276.1 billion ($272.9 in 2011/12)
Key policy initiatives:

The federal government is cutting $5.2 billion in spending over the next three years. The government will ask people younger than 54 to wait an extra two years for old age security benefits, is killing the penny, and will trim the operating budgets of federal departments, resulting in 19,200 federal public sector job cuts over three years. Among those hardest hit are the Department of Finance, the Privy Council Office, Transport Canada and the Treasury Board.

National Defence lost the most money overall, with cuts reaching $1.1 billion by 2014-15. The CBC’s base funding was cut 10 per cent over three years, a reduction of $115 million by 2014-15. Elections Canada funding will be cut by $7.5 million a year, starting in 2012-13. Foreign aid and international development assistance across several departments and agencies is being cut by $377 million by 2014-15, with the Canadian International Development Agency to bear the brunt at $319.2 million.

There were no significant tax changes for individuals.

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If you want some easy to understand and up-to-date information about the U.S. deficit and debt – along with many excellent links, please see:  http://brillig.com/debt_clock/

Here is some of the information you will see there:

“U.S. NATIONAL DEBT CLOCK
The Outstanding Public Debt as of 29 Mar 2012 at 09:20:15 AM GMT is:

$15,595,309,331,866.20 ($15.6 trillion dollars by the time you read this)

The estimated population of the United States is 312,486,603
so each citizen’s share of this debt is $49,907.13.

The National Debt has continued to increase an average of
$4.01 billion per day since September 28, 2007!

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To see The Economist’s Global Debt Clock – an excellent resource with complete researchable database visit:

http://www.economist.com/content/global_debt_clock

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If you are looking for general articles about government debt by respected Economics Professor’s, with some practical comments and good quotes and charts, see my blog at:
http://www.scoop.it/t/politics-in-the-21st-century

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To see the letter President Barack Obama sent me last week, visit:

http://johnbrianshannon.com

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The Austerity Debacle — MY COMMENT

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My comment on an article in the New York Times

By 

http://www.nytimes.com/2012/01/30/opinion/krugman-the-austerity-debacle.html?ref=opinion

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While Professor Krugman’s points are well-taken, there would be no need for austerity programs were there no outrageous federal government deficits in the U.S.A. and Europe.

Nor would billions of dollars have been funneled out of those economies – dollars which are now flowing out of those nations at exponential rates just to pay interest on reckless government deficits and accumulated debt.

Nor would governments have needed to lay off millions of government workers over the decades – workers whose governments could no longer afford to pay them, because revenues were earmarked for interest payments on debt!

All of these nations should adopt balanced budget legislation so that instead of paying multi-billions in interest every year to foreign lenders, gov’t revenue goes towards creating national infrastructure jobs for citizens.

Realistically, it may take 7 years to get to the point of balanced budget status in the U.S..

After that, a constitutional amendment requiring an orderly pay-down of federal debt spread over 25 years should begin.

The only real weakness of democratic systems everywhere appears to be that over the decades, politicians can’t resist spending taxpayer money to the extent they have almost bankrupted their own nations.

This is not a reason to adopt the statist model or even ‘managed democracy’ – all we need are checks and balances to manage the spending of elected politicians – who, for all their gifts, are not world-class economists.

johnbrianshannon@gmail.com

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The following information is courtesy of: brillig.com/debt_clock/ where there is everything you ever wanted to know about U.S. federal government deficits and debt.

U.S. NATIONAL DEBT CLOCK

The Outstanding Public Debt as of 30 Jan 2012 at 06:48:44 AM GMT is:

$ 1 5 , 2 4 9 , 4 9 7 , 2 6 5 , 5 4 0 . 6 0

The estimated population of the United States is 312,131,534
so each citizen’s share of this debt is $48,856.00.

The National Debt has continued to increase an average of
$3.94 billion per day since September 28, 2007!
Concerned? Then tell Congress and the White House!

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