All their economic roads lead to more spending

screen-shot-2017-01-06-at-2-34-12-pmIn commenting against our recent study exposing talk of “austerity” in Atlantic Canada as alarmist, Jordan Brennan’s prescriptions are misguided. Brennan himself recently published a paper with the Canadian Center for Policy Alternatives that depicts as austerity measures the modest attempts to keep government spending under control in Nova Scotia.

However, Brennan’s comment is useful in that it draws attention to an economic worldview that no one endorses, save those who profit from it. That view offers government growth and the hiring of more civil servants as the response to both a succeeding and a failing economy:

  1. If the economy is contracting, their standard recipe is that growing government and hiring more public sector workers serves as an economic stimulus and will prevent deeper recessionary troubles.  This suggests spending one’s way out of recessions, as British economist John Maynard Keynes proposed.
  2. If the economy is growing, Brennan thinks that governments ought to hire more public sector workers in order for government growth to keep up in proportion to overall economic growth. This suggests spending one’s way through economic booms (It means little that this is the opposite logic of point 1, and the contrary to what Keynes prescribed).

Brennan goes on to taunt the productive sectors of the economy in near-zero growth: “Nova Scotia’s public sector is giving a boost to overall employment growth when the private sector has not stepped up to do its part.”

Apart from the contradicting issues, the vicious circularity of the last point is lost on me.  Taxed more and more in order to pay for the bloated public sector in Nova Scotia, the productive sector is less able to hire additional workers.

It is not a shock to see that for those who over time profit most handsomely and most directly from greater and greater government spending, the only solution to every type of economic situation is more government spending.

 Editor’s Note: This blog entry is the final part in a series of four blog posts related to our recent paper “Measuring Austerity in Atlantic Canada” by Patrick Webber. Following misdirected comments and criticism of the study, we compiled this series to clarify misconceptions and to underscore its findings. Read part one here. Read part two here. Read part three here.

Missing the point

screen-shot-2017-01-06-at-2-34-12-pm

By Jackson Doughart, Policy Analyst

Unifor economist Jordan Brennan has criticized AIMS’s study Measuring Austerity in Atlantic Canada. In this blog series, my colleagues examined the arguments he presents and responded to his criticisms of our methodology here and here. I add a note on how Brennan seems to have missed the purpose of our research.

Brennan writes, fairly, that there a lacks precise definition for “significant cuts” in public expenditure and “difficult economic conditions,” the two components that report author Patrick Webber includes in his description of austerity. That there are competing academic definitions in the literature is a point that Webber acknowledges in his introduction, with the general description being sufficient for the purposes of the study.

Webber included European cases of austere economic conditions for context – giving the reader some idea of the magnitude of budget cuts in places where government has implemented austerity policies. However significant cuts must be to qualify as austerity, the fact is that Atlantic Canadian governments have been growing their program spending regimes, not cutting them.

For his part, Brennan equates austerity with any cut in the level of spending when he writes: “Atlantic Canada governments face choices about how to govern. They can choose expansionary policies or contractionary (‘austerity’) policies.”

This rather supports Patrick Webber’s point. The entry of “austerity” as a meme of popular political lexicon is very much informed by the European experience since the Great Recession. It may well be, as Brennan writes, that Greece is an extreme case of austerity, not the archetypal one.

But that’s not how the public understands it, which is why Webber’s study is an important contribution. It is irresponsible for the proponents of ever-growing government to misrepresent all calls to limit spending as a campaign to replicate the conditions of Portugal, Ireland, Greece and Spain.

What we need is more moderate rhetoric, one that can consider the merits (or demerits) of more restrained government without the exaggeration and falsehood that this proposal is extreme. Throwing around words like austerity in the context of Atlantic Canada amounts to crying wolf.

Neither Patrick Webber nor AIMS can be fairly characterized as “Austerian.” Nowhere do we advocate that Atlantic governments should emulate the slash and burn ethic of Europe. Our upshot is that the provinces need to be more responsible with public funds now, so that the hard choices of austere conditions will not face them in the years ahead.

Editor’s Note: This blog entry is Part 3 in a series of four blog posts related to our recent paper “Measuring Austerity in Atlantic Canada” by Patrick Webber. Following misdirected comments and criticism of the study, we compiled this series to clarify misconceptions and to underscore its findings. Read part one here. Read part two here.

An unsustainable proposition

screen-shot-2017-01-06-at-2-34-12-pm

By Alex Whalen, Operations Manager

My colleague Patrick Webber has already touched on why government spending versus GDP growth is a bad measure for austerity. Here, I will expand on that argument and shed light on another part of the equation not within the scope of the paper but intrinsically a part of our discussion: debt.

The notion that government spending should grow along with the economy, as Brennan suggests, is problematic for a few reasons: e.g. economies of scale, decreasing marginal costs, and practical concerns about limiting the role of the state. However, it is also wrong to suggest that growing along with the economy is what has happened. While it is true that government spending has grown at or about the rate of GDP, rapidly rising provincial debt – not greater revenue – is fueling that spending.

To understand why this is a problem, look at the relationship between spending and revenue. Nineteen of the last 20 provincial budgets in Atlantic Canada (i.e. all budgets in the four provinces over the last five years) have delivered deficits, meaning the government spent more money than it took in. This has led to a significant accumulation of debt.

Critics of our paper would likely agree this is a problem, but would suggest it can be fixed with more revenue, i.e. higher taxes. The problem with that logic is twofold. First, we’re already among the highest taxed jurisdictions in the country – just how much more governments can squeeze out of their populations is dubious. Second, taxing at relatively higher rates has an effect on competitiveness. A government cannot raise taxes to solve every deficit problem: at some point rational economic actors will relocate to more competitive jurisdictions.

In a region trying to create more and better paying jobs, and to retain young people (not to mention labour and capital being more mobile than ever), we must stop seeing deficits as a revenue problem.

Provincial governments have become trained to increase spending yearly without restraint, and perhaps that is why the most modest of cuts seem like austerity.

The other problem with looking at government spending as a share of GDP is the distinct nature of the two items and how they grow. As GDP grows, more wealth is created and people are relatively better off. However, government growth at the same rate has a different set of effects.

There is no theoretical limit to how much GDP a province might want, while there most certainly is a limit on the number of civil servants, provincial departments, etc. Government is not an endless good like wealth. It has limits, and while we may argue over what those limits are, it is nonsensical to suggest that government should grow in an unlimited sense, as we would wish for the economy.

In fact, long-term GDP growth combined with a flat population should demand that government spending go down as a percentage of GDP: the same population receiving the same services and more overall economic activity should be precisely the formula through which government gets leaner and more efficient, not the opposite.

Taking the argument to the full extent, let us say that Nova Scotia was able to drastically increase its GDP. We know that a large chunk of government spending goes toward employing people. If spending grew with GDP, holding population constant, an increasing number of people would work for the government, until everyone did. And if everyone worked for the government, where then would the wealth come from to support such employment?

Ultimately, there is a limit to what government can do, what services it can provide, etc. Growing it in tandem is both ill advised and unsustainable. Growing it with consistent deficit spending, as is being increasingly done, is one sure way to bring on real austerity in the future.

Editor’s Note: This blog entry is Part 2 in a series of four blog posts related to our recent paper “Measuring Austerity in Atlantic Canada” by Patrick Webber. Following misdirected comments and criticism of the study, we compiled this series to clarify misconceptions and to underscore its findings. Read part one here.