Monday, 20 August 2012

"Fiscal conservative" should be a dirty word

The government must, at least in bust years, invest
money to keep aggregate demand afloat.

Modern Monetary Theorists (MMT) are a bit more radical,
but this one the right idea in this economic context.

Image Source: MMT Wiki
The major reason Howard Pawley is hated is for doing the economically responsible thing and increasing spending during a downturn. It's seen nowadays as "irresponsible" and "imprudent" to run deficits under any circumstance, especially if one leads a party of the left. "Fiscally conservative" is a much valued praise word, with many modern politicos going out of their way to identify themselves as "socially progressive and fiscally conservative". Hell, I even know someone who's said "I'm fiscally conservative in politics because I'm fiscally conservative with my own finances".

The problem is that the government budget is not a personal or household budget.
It's spending decisions can affect the overall economy. In a downturn, government deficits rise because tax revenues fall (businesses/individuals make less money during downturns and so pay less into the government, furthermore sometimes taxes are deliberately cut to stimulate the economy - though this is generally less effective than direct public investment via spending). In some particularly bad cases, cutting government spending can worsen the budget balance by hurting economic growth so much that tax revenues fall further.

Prime Minister Harper.

As Leader of the Official Opposition,
he argued against budget surpluses during
the boom years - claiming they were
overtaxing Canadians.

He's cutting programs in a global
downturn under the notion his government
can't afford them. Perhaps boom year
surpluses would've been useful, eh?

Image source: Wikipedia
"Fiscal conservatives", however, never pay attention to such nuances. To them, government deficits everywhere and always indicate "reckless spending" (though, surprisingly, they seldom seem to argue that this indicates under-taxation - except when arguing that the poor are under-taxed). To them, the budget should be balanced every year - usually by slashing public social investments rather than cutting corporate welfare or tax breaks for the rich.

The correct fiscal policy is a counter-cyclical fiscal policy: running deficits in bust years and moving towards surpluses during the booms. This is not, however, the fiscal policy of "fiscal conservatives".

Rightwing Republican former US President George W. Bush claimed that the Clinton surplus, generated in the boom years, showed that Americans were "overcharged" and deserved a "refund". Dubya's tax cuts, of course, were very generous to the rich.

Stephen Harper himself argued against the Paul Martin surpluses, generated in boom years, as being "overtaxation".

The government [Paul Martin Liberal Gov't of 2005] continues to overtax Canadians and run multi-billion dollar surpluses...

("QUESTIONING INCOME TRUSTS PUTS SENIORS AT RISK." Stephen Harper (October 26, 2005). National Post.)
Is it any wonder why the Federal Government - which has a lot greater fiscal capacity than the provinces - claims to be in such a pinch? Our PM starved the government of revenue in the boom years and is failing its job to help the jobless in the bust years. Macroeconomic context doesn't matter to fiscal cons, the government mustn't "overtax" (generate surpluses) or "overspend" (generate deficits) ever, even if the health of the economy depends on it.

Fiscal conservatism has always been a shallow political buzzword. It's meant to draw parallels between "conservative" in politics (i.e. pro-plutocracy policies that favour the rich with tax cuts and corporate welfare) and "conservative" in household finances (cautious, prudent). There is, however, no such connection.

"Fiscal conservatism" has always been context-blind fiscal stupidity. It's bad policy and deserves to be a dirty word.


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1 comment:

  1. Deficit spending programs, like any well meaning social program, can be badly managed. Long term loan payments cut deeply into monies available for social programs in the future unless they are paid off quickly in the 'good years'.

    "Pay down the debt" was once a popular platform item. We knew (and maybe still know?) that we need to pay the bill, not our children. This knowledge is not exclusive to a faction, but rather seems to generalize amongst us all (99% all).

    Perhaps the contract needs to be explicit, meaning, if we borrow then we aggressively repay during good times (with increased taxes), on a schedule that cannot be broken. Perhaps that should be a pillar upon which the borrowing argument rest. Then 1% whining can be more properly ignored.

    Just musing....

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