http://www.nytimes.com/2015/10/23/opinion/keynes-comes-to-canada.html
Keynes Comes to Canada
OCT. 23, 2015
Canada has a reputation for dullness. Back in the 1980s The New Republic
famously declared “Worthwhile Canadian Initiative” the world’s most
boring headline. Yet when it comes to economic policy the reputation is
undeserved: Canada has surprisingly often been the place where the
future happens first.
And it’s happening again. On Monday, Canadian voters swept the ruling
Conservatives out of power, delivering a stunning victory to the
center-left Liberals. And while there are many interesting things about
the Liberal platform, what strikes me most is its clear rejection of the
deficit-obsessed austerity orthodoxy that has dominated political
discourse across the Western world. The Liberals ran on a frankly,
openly Keynesian vision, and won big.
Before I get into the implications, let’s talk about Canada’s long
history of quiet economic unorthodoxy, especially on currency policy.
In the 1950s, everyone considered it essential to peg their currency to
the U.S. dollar, at whatever cost — everyone except Canada, which let
its own dollar fluctuate, and discovered that a floating exchange rate
actually worked pretty well. Later, when European nations were
scrambling to join the euro — amid predictions that any country refusing
to adopt the common currency would pay a severe price — Canada showed
that it’s feasible to keep your own money despite close economic ties to
a giant neighbor.
Oh, and Canadians were less caught up than the rest of us in the
ideology of bank deregulation. As a result, Canada was spared the worst
of the 2008 financial crisis.
Which brings us to the issue of deficits and public investment. Here’s
what the Liberal Party of Canada platform had to say on the subject:
“Interest rates are at historic lows, our current infrastructure is
aging rapidly, and our economy is stuck in neutral. Now is the time to
invest.”
Does that sound reasonable? It should, because it is. We’re living in a
world awash with savings that the private sector doesn’t want to invest,
and is eager to lend to governments at very low interest rates. It’s
obviously a good idea to borrow at those low, low rates, putting those
excess savings, not to mention the workers unemployed due to weak
demand, to use building things that will improve our future.
Strange to say, however, that hasn’t been happening. Across the advanced
world, the modest-size fiscal stimulus programs introduced in 2009 have
long since faded away. Since 2010 public investment has been falling as
a share of G.D.P. in both Europe and the United States, and it’s now
well below pre-crisis levels. Why?
The answer is that in 2010 elite opinion somehow coalesced around the
view that deficits, not high unemployment and weak growth, were the
great problem facing policy makers. There was never any evidence for
this view; after all, those low interest rates showed that markets
weren’t at all worried about debt. But never mind — it was what all the
important people were saying, and all that you read in much of the
financial press. And few politicians were willing to challenge this
orthodoxy.
Most notably, those who should have stood up for public spending
suffered a striking failure of nerve. Britain’s Labour Party, in
particular, essentially accepted Conservative claims that the nation was
facing a fiscal crisis, and was reduced to arguing at the margin about
what form austerity should take. Even President Obama temporarily began
echoing Republican rhetoric about the need to tighten the government’s belt.
And having bought into deficit panic, center-left parties found
themselves in an extremely weak position. Austerity rhetoric comes
naturally to right-wing politicians, who are always arguing that we
can’t afford to help the poor and unlucky (although somehow we’re able
to afford tax cuts for the rich). Center-left politicians who endorse
austerity, however, find themselves reduced to arguing that they won’t
inflict quite as much pain. It’s a losing proposition, politically as
well as economically.
Now come Justin Trudeau’s Liberals, who are finally willing to say what
sensible economists (even at places like the International Monetary
Fund) have been saying all along. And they weren’t punished politically
— on the contrary, they won a stunning victory.
So will the Liberals put their platform into practice? They should.
Interest rates remain incredibly low: Canada can borrow for 10 years at
only 1½ percent, and its 30-year inflation-protected bonds yield less
than 1 percent. Furthermore, Canada is probably facing an extended
period of weak private demand, thanks to low oil prices and the likely
deflation of a housing bubble.
Let’s hope, then, that Mr. Trudeau stays with the program. He has an
opportunity to show the world what truly responsible fiscal policy looks
like.
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