Flagellation letter in National Post
Appraising fiscal health
Jan 17, 2018
Re: Feds plan to reduce deficit in long term, Morneau says, Jan. 13
A monetarily sovereign government is not like a firm or household and can never run out of its own "money" - its own IOUs. The only meaningful way to appraise the fiscal position of the Canadian government is to assess the state of the economy in real terms: do we have full employment, environmental stewardship, and first-class education and health infrastructure?
History demonstrates that government deficits and debt ratios alone tell us little. For example, as a result of substantial WWII deficit spending, our peak federal debt-to-GNP ratio of 106 per cent occurred in 1946, yet the postwar era was the golden age of capitalism when the Canadian economy expanded dramatically and many social programs were introduced.
So-called "fiscal anchors" instituted in peacetime are simply ideological vehicles intended to limit government spending, much as medieval monks recommended flagellation as a means of curbing unwanted desires.
Footnotes to Editor:
1. The Deficit: Hysteria and the Current Crisis
During the war years 1942 to 1945 the annual consolidated government deficit averaged 16.9 percent of GNP. The debt to GNP ratio peaked in 1946 when it reached 106 percent of the GNP!
2. New IMF Paper Shows Yet Again that Reinhart and Rogoff Results Are Erroneous
http://www.economonitor.com/lrwray/2014/02/14/new-imf-paper-shows-yet-again-that-reinhart-and-rogoff-results-are-erroneous/#sthash.FYcSVKXq.dpuf"If you’ve got your own sovereign currency, and you do not peg, and you do not issue debt denominated in a foreign currency, then there is no reason to suppose that higher debt ratios cause lower economic growth. Yes, budget deficits can be too high—causing inflation. They can be too low—causing slumps. Debt ratios can be high for “good reasons” and they can be high for “bad reasons”. Focusing on government debt ratios, alone, tells you nothing about the health of the economy in such cases."
3. William Mitchell, Professor in Economics and Director of the Centre of Full Employment and Equity, University of Newcastle, NSW, Australia
"Forget the deficit. Forget the fiscal balance. Focus on what matters – employment, equity, environmental sustainability. And as we would soon see – the fiscal balance will just be whatever it is – a relatively uninteresting and irrelevant statistical artifact."
Modern Monetary Theory in Canada