Economists to Parliament: fiscal policy must remain flexible, government cuts can't go too far, caution is the key word

Yesterday, economists of various persuasions and professional background sat before Canada's Parliamentary Standing Committee on Finance to give their views on the current economic context and the upcoming challenges facing the Canadian and world economies.

It is important to emphasize that not one of these economists advised Canada's federal government to accelerate its objective of reducing and cutting public expenditures.

The first economist to share his views was post-Keynesian economist Marc Lavoie, professor of Economics at the University of Ottawa. According to Lavoie, there is no doubt that the world is heading for another recession or, at the very least, several years of zero growth. Here are a few excerpts from Prof. Lavoie's submission:

"We are witnessing the Japanization of western economies...The Eurozone has structural deficiencies that make it impossible to avoid a crisis...There will be an earthquake in Europe, and North-America will be hit like a tsunami...Canada will not be able to magically escape from this economic crisis...The Canadian government must not introduce spending cuts. The government must implement a new recovery plan for infrastructure and renounce its objective of trying to achieve budgetary balance."

If you tend to agree with the above prognosis, Prof. Lavoie's submission is a must see (His submission begins at 1:55 and ends at 8:00 minutes). See here:

mms://hocca.wmod.llnwd.net/a4502/e1/2011/2011-09/0002340d.wmv

A truth for our times: without improvements in employment there is no true recovery

From Classic Indeed:

Boehner, Cantor & Associates' understanding of basic economic realities is unreliable and incomprehensible for that level of leadership. They should simply acknowledge that without employment there is no spending and there are no sources of Treasury revenue; and without revenue sources, there is no deficit reduction. If they persist on professing that deficit myth: that deficits matter for the US economy, they will make matters worse. They should recognize their own shortage of viable solutions, and grasp the moment to support fiscal spending programs. As for Rating Agency downgrades, they don't matter at this moment. Recently, they have been shrugged off by all sovereign levels.

Unless the US economy is activated, and this won't happen as a result of Federal Reserve monetary policy, the global economy will remain in a state of stagnation for a long time. It is obvious that any solution must come out of Washington. (my emphasis)

I agree entirely. I would also add that what the GOP needs to understand is that if the US federal government tries to sharply reduce spending to reduce its fiscal deficit, it will most likely run massive deficits anyway. In other words, the GOP's plan to cut spending is just self-defeating.

Now, it's obvious that this is bad economics. However, I would argue that this is also very bad politics. How can the GOP believe that its strategy will prove politically beneficial? Surely, at some point the American public will start to realize that the GOP's preferred approach to the economy will have been completely ineffectual. With employment levels poised to stay the same for several more years, the GOP should see that there is little, if any, currency in continuing to propagate such ideas.

Canadian household debt-to-GDP reaches record high

Canada's National Balance Sheet Accounts for 2011 Q2 were released today. Here is a good summary, courtesy of Statistics Canada.

For my part, the most important piece of information that I retain from these accounts is that Canada's personal debt-to-GDP has reached a new record high of 94.08 percent.

Another interesting development is that real estate as a percentage of personal disposable income has jumped to 296.37 percent, the second highest level on record. For those who see trouble ahead in Canada's economy and, more specifically, its real estate market, such figures are not encouraging.

One thing is for sure, there's nothing in these accounts to reassure federal policymakers who, since the fall of 2010, have been raising concerns about Canada's increasing household indebtedness levels.

The proposed American Infrastructure Financing Authority: Not the way to go

I've been critical of the idea of an American Infrastructure Financial Authority (AIFA) since before President Obama included it in his jobs plan last week. Here is an excerpt of a post I wrote in March on the proposed AIFA and, more specifically, its objective of seeking to direct private capital toward the funding of publicly-oriented infrastructure projects that are both commercially viable and socially beneficial:

In one way, the idea would be a good one if the US economy was riding somewhere mid-point along the business cycle. But the economy is nowhere near such a point. Rather, with real long-term interest rates (i.e. interest rates on inflation-protected bonds) as low as they are today, the US should simply be borrowing massively and investing the amounts on growth-inducing projects, such as building or improving infrastructure, as well as in areas such as education and energy-efficient technologies.

Also, I want to add a word on this notion that the funds be limited to "commercially viable" projects. Let's not forget that the private sector is rarely compelled to invest in projects resulting in positive externalities (i.e. benefits that everyone can enjoy). Governments, however, are much better positioned to do so given that governments can count as profits these types of widely-shared, collective benefits associated with large, public infrastructure projects.

Since Obama gave his jobs speech last Thursday, I've read several commentaries expressing doubt about the necessity and merits of the proposed infrastructure bank. But none are as forceful as this excellent article from the author of the Reuters MuniLand column. Here are some excerpts from the article describing the problems associated with the proposal to establish the AIFA and the role it might play in accelerating the pace of privatization of US public assets:

Currently almost all American infrastructure is funded either through municipal bonds or federal funding. Even as federal funding has been constrained, municipal bond issuance has been very low this year, running at about half of last year’s rate. There is plenty of capacity to fund infrastructure with municipal bonds. From a funding standpoint it’s not clear why we need an infrastructure bank, especially a paygo infrastructure bank. [...]

There is no question that private money is interested in being used for loans to infrastructure projects and guaranteed by the federal government and taxpayers. It’s almost identical to senior bondholders who loaned money to too-big-to-fail banks. It’s the best setup for private money because there is no loss. [...]

[I]t’s a pity that a project dressed as job creator will really be a vehicle to create privatized public assets. Our nation was founded and grew strong on the basis of our shared public infrastructure. It’s a shame that the American Infrastructure Financing Authority will be the agency in which ownership of public assets becomes private. (emphasis added)

I agree that it's a shame. Actually, if the public interest is truly the goal driving such an initiative, US policymakers should stick with a plan that involves borrowing massively and investing into employment-enhancing and growth-inducing public infrastructure projects. Now is exactly the right time to be undertaking such initiatives. As you can see from the chart below, the cost of borrowing for the US government is currently at record lows.*

10-year Treasury Inflation-Indexed Security, Constant Maturity (Source: Federal Reserve)

* Rates on inflation-protected bonds rates are a good measure of the private cost of borrowing to start new businesses or expand existing ones