Inkless Wells

Inkless Wells

Paul Wells on all the latest out of Ottawa—along with the occasional post about jazz. Follow Paul on Twitter: @InklessPW

The half-trillion-dollar debt club and other random constructs

by Paul Wells on Wednesday, November 18, 2009 11:13am - 69 Comments

Our friend Don Martin this morning has a column saying Stephen Harper has joined Jean Chrétien as only the second prime minister to govern while the country is $500 billion in debt. Stephen Gordon, over at his aptly-named blog, puts this in some desperately needed perspective. Both Harper and Chrétien come out looking better than in Don’s column. First, a half-trillion dollars is a lot less, in constant dollars and in share of GDP, than it was in 1995. Second, 1995 represents a peak for debt by either measure, because Chrétien inherited a runaway debt train and, within three years, those curves had sharply reversed. Stephen’s graph on this is telling.

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  • http://intensedebate.com/people/Geiseric Geiseric

    Yeah but its painted blue so there's no problem.

  • http://nottawa.blogspot.com Mark

    Gordon makes a good point. But here's a counter-point:
    Measuring debt per capita may show a re-assuring line of sorts, going forward, at least where the "per capita" means the whole of the population.
    I'd like to see a graph of debt per capita where the "per capita" is the projected labour force.

    • Jesse

      "I'd like to see a graph of debt per capita where the "per capita" is the projected labour force."

      That's not really a useful measure because productivity can increase with a decreasing labour force (ie. mechanization).

      A projected GDP, projected debt graph would be a superior measure of the idea you're getting at – basically an extension of the blue line.

    • Jesse

      A projected GDP against projected debt graph would be superior.

      Production can increase with a decreasing labour force (mechanization) so its not really a good measure.

  • http://intensedebate.com/people/robert_mccl6309 Robert McClelland

    This is what inevitably happens when you pay attention to the charlatans at the Conservative Taxpayer's Frauderation. Why anyone takes their silly theatrics seriously is beyond me.

    • Jonathan Willis

      I'll agree the CTF is quite often over the top, but I'm curious as to why you slap the "Conservative" logo on them. After all, it's a Conservative government they're criticizing today.

      They have a hard right ideology that only occasionally matches up with official Conservative decisions.

      • http://intensedebate.com/people/PolJunkie PolJunkie

        "They have a hard right ideology that only occasionally matches up with official Conservative decisions."

        Isn't John Williamson Harper's new Comms Director?

      • http://intensedebate.com/people/robert_mccl6309 Robert McClelland

        It refers to ideology, not party affiliation.

    • Orson Bean

      Yes, why an organization of taxpayers should be allowed to publicly comment on matters of public policy is beyond me.

      • Lord Kitchener's Own

        Roberts not saying the CTF shouldn't be allowed to engage in their silly theatrics, he's just saying no one should pay attention to their silly theatrics.

        Of course they have the right to comment on public policy. And I have the right to role my eyes and disregard their theatrical commentary.

        • Orson Bean

          I guess my reaction is they're no more silly and theatrical than any other advocacy, activist or public-interest group in this country. You think Greenpeace and their ilk don't engage in silly theatrics? It's called playing the media/publicity game, and everybody does it.

  • http://intensedebate.com/people/Crit_Reasoning Crit_Reasoning

    From Don's column:

    Then they set to work on calculating how high a pile of 500 million (sic) loonies would stretch, which a numerically challenged person like me bet would reach the moon.

    It must be a law or something. Whenever "numerically challenged" writers like Don try to convey how stupendously huge a number is, they will invariably write "million" instead of "billion".

  • http://intensedebate.com/people/s_c_f s_c_f

    Event though Gordon is correct, I am happy to see Martin writing about this and making some noise, so that the pressure is maintained to rein in the spending soon.

    The USA is headed for a whole lot of hurt in this regard, they are an example of how bad the situation can get if it is not contained early.

  • Anonymous

    Yes, yes, we all know economists are good at math and know important stuff like debt-to-GDP ratios and constant dollars.

    Next.

  • Mulletaur

    It was inevitable that public finances would go into the red as the federal and provincial governments did their best to prevent the financial system from collapsing and to keep the economy afloat. It is mainly a temporary phenomenon which will improve as the economy improves. However, public finances would have been in a much better position had the Harper Conservatives not created a structural deficit with their GST cuts, which had no stimulative effect on the economy. To quote Stephen Gordon :

    "And here we have an explanation for the structural deficit: the cuts to the GST. Each percentage point of the GST generates about $5b-$6b in revenues (the figures above are net of the GST rebate), so the gap between what current revenues are and what they would be if the GST had stayed at 7% is about $10b-$12b – which is also the PBO's estimate for the structural deficit."

    • kcm

      Former Harper CoS: GST cut 'worked' because it helped elect CPC …
      15 posts – 10 authors – Last post: 30 Mar
      Ian Brodie is right. The GST cut contributed to the Tories being electable. And its not that far a cry from our premier paying out a bribe …
      http://www.urbantoronto.ca/showthread.php?t=8879

      And when you marry that to this, you should have a political firestorm. We don't , why not? It's like we're sleep walking into the future.

      • Mulletaur

        If they stay in government that long, it will be interesting to see the reaction when the Conservatives maintain that they need to cut social spending because of the structural deficit. They will of course omit to mention that they created the structural deficit in the first place.

        • kcm

          It may not matter a hill of beans what you and i think. It may only matter slightly more what jounos like PWs thinks. But what is concerning [ evident if you read that link] is when players like Brodie or Lynch find nothing disquieting in having good politics trump bad policy; shugging their shoulders, as if to say ca cera cera. It's almost like they believe this country is essentially ungovernable if you present the people with the unvarnished truth. The public may not be as cynical yet, but give em time Brodie…give em time.

          • Mulletaur

            Politics is about power, not about good policy. Good policy is what occasionally gets made when, in rare moments of clarity, altruism and understanding, politicians make good decisions. They are severely limited by what has already been tried, what happened before and what people believe. The time frame is long, and it almost always takes a long time for the principles of good policy to be accepted and then implemented.

            Deficits are a perfect example of that. It took at least 10 years of discussion for our polity to accept the need for balanced finances. It took 20 years for universal medical care to be legislated at the federal level from when it was first introduced in Saskatchewan. In all cases, it takes leadership to implement good policy and then to survive the next election. Economists and opinion formers knew that reducing GST was bad, people not so much. GST was not well accepted when Mulroney introduced it, and was arguably never completely accepted by people because the case was never made for it convincingly. And in the next election, Mulroney's party was reduced to two seats.

            I wish I could find the citation for a study I have seen which shows that voters believe that politicians have the same views as they do if they like the politicians in question, irrespective of the fact that from any rational perspective, there are huge and irreconcilable differences in views. People don't vote on the basis of policy, they vote on the basis of leadership.

          • Orson Bean

            I certainly agree with you that one of the greatest failures in connection with the implementation of the GST was the Mulroney government's utter failure to make the case for it. I found it to be head-smackingly irritating at the time, how, e.g., the overwhelming majority of Candians had no idea that it was not a standalone new tax, but rather a replacement of the old MST, which was being eliminated alongside it. The Mulroney government's communication strategy (assuming they even had one) was abysmal, and they reaped what they sowed as a result.

          • Mulletaur

            It's too bad, because it was very good policy, particularly in tandem with free trade with the Yankees, and has done us a lot of good. Mulroney deserves at least that much credit. But taxes are always hard to sell, they're the Buckley's Mixture of policy.

          • kcm

            Perhaps i'm just naive and unworldly. Can you cite another example similar to Brodies" it's about the election stupid"? Does it go on all the time? If i really thought so i'd abandon politics for good as a vehicle for the advancement of anything worthwhile. It's utter cynicism. I'll retire to my boat on the coast and our elites can go $#@% themselves.

          • Orson Bean

            Another example: crime. It's the crack cocaine issue for politicians. They just can't resist the "tough on crime" stuff, because polling tends to show that it's almost always popular. This is one of the main reasons I bailed from the world of organized, partisan politics. I found that the seasoned pros I dealt with were so cynical when it came to this. Whenever we discussed the issues, the pros always went on and on about crime. If you want to win, talk about crime — even though it's actually falling. People think it isn't. So convince them that it truly is out of control, scare the hell out of them, and promise that you'll throw everyone accused of a crime in jail for life and throw away the key. Unbelievably cynical, but you talk to the pros and they'll tell you, it works.

          • kcm

            It's a depressing picture you guys paint. It sounds like 90% of the time politics wins out over good policy. And it seems to assume the worst of human nature. Futhermore It seems to contradict the notion that the reason most people go into politics is to make a difference. Are we sending the wrong people to parliament? Just the overly ambitious and venal. Or do they get compromisd along the way? No wonder they say that if you like sausages or politics you shouldn't witness either one being made

          • Orson Bean

            Well, I think it's observably true that a lot of good people who go into it get turned off by it. And that a lot of other good people don't even go near it in the first place.

            I'm always amazed at the ones who survive for a reasonable amount of time and manage to maintain a reasonable amount of integrity — John Manley comes to mind. But note that he did not win the leadership . . .

          • Mulletaur

            You should get back into partisan politics, Bean. Canada would be a richer place for it.

          • Mulletaur

            I understand why you might be depressed about what you perceive to be cynicism, but you're wrong to be so. Our pluralistic political system is based on the idea that political parties compete for power. That means they have to be responsive to public opinion. In Canada, it means brokerage parties. They compete to put together winning electoral coalitions. They work hard to get support, and they try to make people happy, however those people define their happiness.

            Consider an alternative political universe which is 'rational', that is to say, based purely on ideas. That would naturally lead to ideology. Ideology leads to dogma, dogma to dictatorship, and it's not very far along this historical progression before you outlaw all those you disagree with and physically eliminate them. There are lots of historical examples of this.

            So, you see, our political system may be based on cynicism, but it's peaceful, and, for the most part, leads to increasing improvements to our lives. Even Stephen Harper abandoned his ideology to govern. That is a sign of political maturity, not weakness. It is certainly no reason for despair, unless, of course, you're Andrew Coyne.

          • kcm

            Thanks M. That's a thoughtful and generous analysis of our polity. I'm not sure i believe a word of it :) but it's certainly a pov i've never heard before. As i tend to share Andrews despair [ sometimes] i'd love to here his response to your thesis. As i understood you you're arguing nobodies perfect, so why the hell should we expect it of our politicians. Well perfectionism is a neurosis so perhaps your view is the more rational one? And maybe i should steer clear of politics altogether.

          • Mulletaur

            Not at all. You should engage and do what you can to make things better. We live in an imperfect world, but that doesn't mean we should stop fighting to make it a better place. The vast majority of politicians and people involved in politics actually believe that, despite our negative image of them and despite all the cynicism.

      • Winnie the Pooh

        To eliminate the structural deficit, would Stephen Gordon argue that Harper should introduce a Carbon Tax?

        "But I don't see why they have to make such a big deal about it being revenue-neutral. $12b-15b is a significant chunk of change – roughly the equivalent of the two GST percentage points that the Conservatives frittered away to no apparent purpose."
        - Link

        • Mulletaur

          If there were a tax on irrelevant postings by ConsTrolls, you would be in the upper bracket.

    • Style

      I think Prof. Gordon is letting his distaste for the GST cut get the better of him here. Looking at his own analysis, there was no structural deficit after the GST cuts. The structural deficit seems to come from the current recession and deficit, and the PBO's less optimistic projections of Canada's future economic growth.

  • burlivespipe

    Debt is debt and it essentially ties hands as to what you want to do going forward. That Harper has so proudly swallowed his past words (nothing new there) and embraced it with enthusiasm has put conservativism on its head; he certainly hopes to benefit from the fact that our society has changed its tune on debt over the past 10 years — the depression-era kids and their baby boomers are not the majority anymore…

  • http://intensedebate.com/people/SisyphusThis SisyphusThis
  • peter

    Does anyone know who holds Canada's debt? What is the domestic percentage, what is the foreign percentage? How many billons in debt charges go offshore? How many billions are paid as dividends in Canada and get re-circulated through the domestic economy? What is the multiplier effect at home of that?

  • http://intensedebate.com/people/Blamo Blamo

    This structural deficit is brought to you by the colour Blue, and the letters 'G', 'S', and 'T'.

  • http://intensedebate.com/people/sourstud sourstud

    Question for the Liberals on this forum: is there any government spending that should ever be considered for elimination? I mean the GST cut is the only thing that anybody ever considers. What about all the billions of government programs that just never should have been (Ie. Gun Registry)?

    • Blues Clair

      Military Spending could be, um… trimmed.

      "Half of Canadians want to scale back the Harper Conservatives' plan to boost military spending by $490-billion over two decades, a new poll suggests."
      Link

    • Mulletaur

      I think you are right to point out that it cost a lot of money to set up the gun registry, even though the cost to maintain it at present is small. It is certainly unfair that all Canadians had to pay for the cost of the gun registry. It would only be fair if the federal government were to recoup the cost of the gun registry from gun owners alone on the principle of user-pay. A truly conservative government would be in favour of this.

    • http://intensedebate.com/people/PolJunkie PolJunkie

      I'm not a Liberal but I would suggest to you that spending cuts are only part of the story. Income taxes must be increased or we will never be able to balance the budget.

      That's just simple math.

    • http://intensedebate.com/people/Blamo Blamo

      I do agree that the merits of the expensive use of resources of the gun registry is a worthwhile argument no matter what the government's fiscal situation.
      But if we want to avoid deficits and are concerned about why the present government is running a massive one, then expensive programs during times of massive surplus are quite different from expensive tax cuts during times of deficit. A question of fiscal prudence and social activism against populism and fiscal recklessless.

  • Holly Stick

    Martin seems to have a problem with numbers. Witness his column about H1N1 printed on Nov 17, which uses figures from about Nov. 7. He claims 20 deaths in Alberta, but I believe the number today is up to 39.

  • portage & main

    did you people all just fall off the turnip truck? As Paul noted in the title, the $500 billion debt club is a random construct which I take as no more or less than a club for Liberals to beat Harper over the head with. And many of you have risen gamely to the challenge, and not once noted the different situations Chretien was in circa 1995 and Harper today. To even suggest that Harper is running a deficit because he likes running deficits boggles the imagination. Faced with a global economic crisis, what choice did he have but to start shovelling stimulus money off the back of the truck. And if he didn't borrow the money, where do you think he would get it from? The money tree behind parliament hill?

    • http://intensedebate.com/people/Inkless Inkless

      I love that tree.

    • kcm

      Stay boggled then. Because deficit Jim was headed into deficit territory well before the meltdown. Or were you out picking up turnips in november?

    • http://intensedebate.com/people/PolJunkie PolJunkie

      portage, with the way Harper and Cie were spending money and the irresponsible cuts they made to the GST, we would have ended up with a deficit even without the economic downturn.

      The fact of the matter is that Harper was running the country with short-term, politically-friendly fiscal policies with no thought for the future. I personally think that the downturn provided this govt with a good political cover to explain the current deficit.

    • http://intensedebate.com/people/jolyon jolyon

      "what choice did he have but to start shovelling stimulus money off the back of the truck."

      He could have made cuts to massive Fed budget. Cons have increased spending by at least 15/20% since they took over, there is plenty that Harper/Flaherty could have done without threatening vital services. How about some reductions in salary for MPs and our massive bureaucracy – I don't understand why our public servants automatically get 2% salary increases every year even though the people who pay their salaries are being laid-off by the hundreds of thousands.

  • http://intensedebate.com/people/Geiseric Geiseric

    "what choice did he have but to start shovelling stimulus money off the back of the truck."

    Stay on the "no deficits" horse he rode in on?

    • portage & main

      But how does he or any other Canadian PM do that in the wake of a global economic crisis? Federal gov't revenues were guaranteed to fall once the economic crisis hit (or if not, show me how), leaving him basically with two options: 1) opt out of doing a stimulus program and seriously cut existing expenditures to make up for a decline in revenues in order keep a balanced budget, or 2) run the stimulus program and continue business-as-usual on the rest of gov't expenditures, leading to a hugh deficit until revenues pick up again. Clearly neither option is ideal, but what choice did Harper have, or would a Liberal PM have had in the same situation?

      • http://intensedebate.com/people/Geiseric Geiseric

        "But how does he or any other Canadian PM do that in the wake of a global economic crisis?"

        By being true to his word.

        • Mulletaur

          Well said. He would have had more room to do so by keeping taxes on consumption high, keeping interest rates low and, if necessary, reducing income taxes as a means of putting more money in the economy. The government would probably still have had to come up with the money for the auto bailouts and some other things like the ABCP bailout to maintain financial stability, but Harper could have retained his fiscal credibility without making the crisis worse. Instead, he listened to Guy Giorno.

  • Cadence

    Perhaps you could bend over further backwards to defend the Tories Paul? Trolling right wing blogs? really?

    • AT1

      Don't suppose you want to argue using numbers instead? I suppose it's easier to fling some insults about.

      You might want to read part of the blog that is referenced in this posting. Here a key line: "In order to reach debt levels that are truly comparable to 1995, the federal government would have to run $50b deficits for at least six years in a row".

  • Mulletaur

    Not true, by definition. A structural deficit is one which is independent of economic conditions. The amount of the structural deficit is estimated by the Parliamentary Budget Officer. Gordon is simply pointing out that the amount of the structural deficit is approximately equal to the amount of lost revenues from GST cuts.

    • Style

      You misunderstand me. A structural deficit is the deficit you have when the economy is at its potential. After the GST cuts, the economy was below potential but there was no deficit. That suggests the GST cut is not the cause of the future structural deficit. Instead, it seems more likely the structural deficit comes from the current deficit, which will increase interest charges, plus the PBO assuming Canada's economic potential is lower than the Government's assumptions. Prof. Gordon dislikes the GST cut to the point that he's blaming it for events it hasn't caused…

      • Mulletaur

        "After the GST cuts, the economy was below potential but there was no deficit."

        Factually incorrect. Canada had slipped into deficit after the GST cuts but even before the financial crisis effects hit.

        • Style

          No, the Fiscal Monitors show there really was still a surplus after January 2008, after the second round of GST tax cuts. Canada went into a persistent monthly deficit in March 2009.

          http://www.fin.gc.ca/fiscmon-revfin/2008-01-eng.a…

          • Mulletaur

            The lag time for the structural deficit to kick in was due to the phasing in of increased program spending.

          • Style

            What has that got to do with the GST cut? I accept the PBO's forecast of a structural deficit, although it strikes me as a manageable one that won't necessarily materialise. What I'm saying is that the GST cut is not the cause. The evidence is that, after the cut, Canada wasn't running a deficit until there was a clear economic deterioration.

          • Mulletaur

            It has everything to do with it. There are two sides to the equation : income and spending. The GST cuts took place when announced, the increased program spending was phased in. A structural deficit is what happens when the government can never get out of the red fiscally. Both contributed. If you like, we can agree that irresponsible program spending by the Harper Conservative government was responsible for the structural deficit.

  • AT1

    The opposition declined his offer to reduce all political parties' annual take.

  • AT1

    "The government would probably still have had to come up with the money for the auto bailouts and some other things like the ABCP bailout to maintain financial stability"

    Did we have an ABCP bailout in Canada? I must have missed that nugget.

  • Mulletaur

    Yup, a $4.45 billion backstop to cover the posteriors of foreign banks on a $32 billion position shared by the feds, Ontario, Quebec and Alberta. They didn't exactly trumpet it from the rooftops.

  • Mulletaur

    Yup, a $4.45 billion backstop to cover the posteriors of foreign banks on a $32 billion position shared by the feds, Ontario, Quebec and Alberta. They didn't exactly trumpet it from the rooftops.

  • AT1

    "The federal government, in conjunction with three provinces and other parties, will provide a total of $4.45 billion in financial backstops to rescue a restructuring plan for a massive slice of this country's commercial paper market."

    Sorry, I have no clue what a backstop is. Was the money actually used up or simply available if needed?

  • Mulletaur

    I think this article explains it a bit better :

    "The Canadian government, along with provincial counterparts in Ontario, Alberta and Quebec, are part of a group that pledged C$4.45 billion to cover investors should banks demand payment on the commercial paper. Banks agreed not to make any margin calls on the paper for 18 months."

    When the market collapsed due to illiquidity, the whole thing was frozen until it could be sorted out, so no trading and no margin calls. In the meantime, the short term ABCP was converted to a longer term investment which could mature in as long as nine years (even though the original ABCP was usually rolled over or called in three months). The governments are providing a loan facility to help cover the margin calls and ensure liquidity in the market, to the best of my understanding. Judging by Flaherty's press release he doesn't expect that it will be used. I don't know enough about this market to know whether that is likely to be true or not.

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