Going Retro: Deficit Financing Makes a Comeback
They called it the “meltdown summit.” For those of us who like “hype”, that’s a great moniker. Last weekend the G20 countries got together in Washington with George Bush as the host to try and work something out for the sagging global economy. The optics of it was a bit of a stretch. The western world is not used to George Bush searching for economic ideas with the leaders of Brazil, China and Saudi Arabia.
Others would surely say it’s about time. It is not necessarily that US economic primacy is fading because its not. However, other emerging nations like Brazil China, India and others have growing influence. According to them, the United States started this problem, but their economies are suffering because of it.
Here is a short bulleted list of what the G20 leaders agreed to. (From Reuters)
ON THE ECONOMY
Use fiscal measures to stimulate domestic demand
Help emerging markets gain access to finance
ON FINANCIAL INSTITUTIONS
Expand the Financial Stability Forum to include emerging economies
Reform the International Monetary Fund and World Bank
Ensure the IMF, World Bank and other development banks have sufficient funds
Give emerging countries a greater voice
ON TRADE
Trade barriers would not be raised over the next 12 months
Work on restarting global trade talks by the end of the year
ON REGULATORY RULES
Establish supervisory “colleges” for major international financial institutions
Review how compensation packages affect risk-taking
Ensure credit rating agencies meet high global standards and provide greater disclosure
Improve accounting standards
More disclosure on complex financial products (Reuters)
It’s all interesting stuff and vitally important for our way back to economic prosperity. However, some things will have more impact on you than others. That little line about “fiscal measures to stimulate domestic demand” is going to cost you money. In short, it means everything.
Simply put that means governments are going to ramp up spending in a coordinated fashion to build up aggregate demand. If that means a bridge to nowhere, then they will build it. The result will be more orders of cement, more service related industries working and more jobs, jobs, jobs. The hope is to get the global economy back on track. However, an even bigger goal is to restore confidence in our economic system. If people can see that there is hope in the financial system, they will be more willing to spend their money.
Clues will surely come tomorrow when Parliament opens. During the election campaign Stephen Harper and Jim Flaherty went to great lengths to say there would be no federal deficit. However, I fully expect one for a number of reasons. Clearly we have job losses in Ontario as well as a big reduction in the price of oil. Plus Canadians aren’t spending as much leading toward Christmas. This means less tax revenue for our federal government.
However, that’s not the end of the story. You might call it the re-education of Prime Minister Stephen Harper at the G-20. He’s come back from that meeting clearly ready to spend money to create a stimulus. That might mean a lot of things, a new Canadian icebreaker, new roads and bridges, and maybe new tax incentives to get Canadians to spend. Needless to say, at the end of the day he’ll be running a deficit.
Are you recoiled in horror? I wouldn’t be. Why should the government be expected to not borrow more money at a time when Canadians are losing their jobs and our economy is set to contract? Sure that deficit will grow and our federal debt will go back up, but it should be a temporary measure at best. In this economic environment, you have to try something.
Saying you know what is right in this situation is the quintessential flyer. I certainly don’t know and I’m not alone. Just ask Alan Greenspan. He’s still surprised this sub-prime mortgage thing had legs. That’s the kicker here. The G-20 came away recommending a typical “Keynesian solution”. All you have to do is get government spending, create a stimulus and watch the economic activity roll. However, nobody knows if it will really work and if it doesn’t we’ll be in worse shape and that much more in debt.
Of course nobody wants to go there. Needless to say, I’m sure as the throne speech is read on Wednesday, there will be some big spending program to help jump start Ontario and Quebec. There may even be some type of massive assistance for the Canadian auto industry. I’d like to say it’d be a new day for the economy. However, I’d be guessing. The economic road ahead will surely be a challenge.