As you are well aware, our governments are capable of running deficits, surpluses and debt.
Many believe it is the government’s job to strive for surpluses and to minimize our debt, such that our children are not paying for our spending habits.
With this piece I want to explain the positives and negatives of both deficits and surpluses; how they have an effect on our lives and what we should do about them.
The first thing I want to address is the effects money has on our way of life. When government gives money to departments, to administer social programs, funds are given to people, education, and infrastructure in the forms of schooling, hospitals, roads, and defense. When government gives money back to its citizens through tax cuts; funds again are used for goods, services all requiring people, education, and infrastructure.
Our economy as a whole is highly dependent on growth, investment and maintenance of those important factors; people, education, and infrastructure. Trying to reduce funding of these essential areas will have a significant impact on people’s lives. This is the main reason I condemn policies used to stop deficit spending (see Clinton, Harris), as it will have no effect other than creating sub-par education, medical care, over taxation, and other infrastructure in times of recession. Much like bull economies are cyclical, people’s livelihoods will become cyclical as well. Over time, as long as our country’s wealth, productivity, and quality of life increase; and our debt to gdp ratio goes down, there should be no reason to worry about temporal effects of deficits and surpluses.
Now lets fast forward to today. Canada currently has record surpluses, just had its 8th consecutive year in the black and is touted as a shining light of fiscal balance in the first world. The US on the other hand is in the red with record deficits and is seen by people around the world as being in serious fiscal trouble. Just the sound of these two assessments alone it seems Canada is ahead of the game.
Looking closer, Canada as a whole has a debt to gdp ratio of 67%, compared to the US’s 65%, EU’s 76%, and Japan’s 164%. This means that the US is generating wealth at a far greater rate than its debt accumulation; interestingly, with all the deficits the US has posted over the years, the debt to gdp ratio has been declining as the nation invests more money in people, education, and infrastructure. Another aspect one must consider is the US’s phenomenal GDP growth; over the last 5 years, the economy has been growing at a pace of 2 to 5%. The Canadian economy on the other hand has been largely stagnant besides the increase in Oil prices from $20 to $60 in the same time period. This shift in economic focus is easily seen in the recent elimination of the Albertan debt, and the large fiscal deficits in Canada’s manufacturing regions.
It’s easy to compare the US to Canada; but in the end, Canada is the most overtaxed nation in the first world, our surpluses are creating a stagnant economy due to our lack of investment and our surpluses are will make it more difficult to generate wealth and raise our standard of living over the long term. Don’t get me wrong, large deficits can really hurt an economy, but the long term benefits can significantly outweigh the satisfaction of having money in the bank for a rainy day. Our government is really putting a stranglehold on our struggling manufacturing sector and denying hardworking people the ability to be productive individuals.
For those obsessed by the US deficit, and want to know how much too much is, there really is no answer to that. What I can do is show different country’s deficits (-) and surplus (+) relative to their productivity; Canada +0.7%, US -2.7%, UK -3.5%, France -4.3%, Germany -4.2%, Italy -3.1%, Japan -9.3%. As you can see, even though the US has a ‘massive’ deficit, it is in no more fiscal trouble than many other first world countries.
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on Sunday, November 6 at 8:45 p.m..
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6 comments:
Posted by
Conclusion: The whole damn system is going down the drain... deficit financing will crash the global economy... the total collapse of society can't be that far behind... : )
Hey, how come we only get to hear about deficits, politics, etc. We want more news on what jon's actually doing... Later,
Posted by
With regards to running a deficit, it is important to remember that there is future costs associated with incurring that debt; you have to pay it back with interest and the longer you wait to pay it all back the more interest you will pay. Running a deficit for a couple of years may not have a major effect but extended deficits will cause a large accumulation of debt and the cost of servicing the debt can be a real damper on a countries economy. By paying down debt balances you free up capital for future consumption. I think its important to stress that running deficits and borrowing can be very beneficial if the deficit spending was done in the right places and as well that a country will at some point have to run surpluses in order to pay for previous deficits (concept of “future losers and winners”) which is accomplished in two basic ways increase taxes (more money in) or decrease spending (more money out). Good post, the message that borrowing to invest is not a bad policy is important, but I add the caviat that it must be spend in the right places. Also a key outcome is that current deficits create the need for future surpluses.
Posted by
Good post Lumo, nice to see a friend interested in politico-economic issues!
My main issue with your comment is the reference to investing in areas in hopes of generating a future surplus. While this is ideal, in reality this doesn't matter. These days it's not one country owing another country, it's Japan buying huge amounts of US debt and the US buying huge amounts of Japanese debt. All countries are inherently going to have debt, this is accepted, they did when we were born, and they will when we die.
The only thing countries have to worry about is their debt to GDP ratios, as long as they are generating more money relative to their debt load, there is absolutely nothing wrong with that.
To use an example, say i have a mortgage on my house (start with a debt), i borrow against my house's credit and buy an apartment building. This means I am spending more than I make, adding more debt, but also gain the money from tennants renting, allowing for a greater revenue stream. Now imagine I continue spending that money on more and more housing units. I would be running a deficit and spending money on interest on the loans. This is an example how running a deficit can be a good thing, and how paying down debt may not be the best idea. (the opportunities are not houses but healthy public, defense/proteection, jobs, education, etc.) Could we pay off all the debt? sure! but there are far better investments, and as long as we are always investing the debt will have no effect.
Posted by
True, But the GDP/debt ratio is a representation of our ability to pay, so as long as it is increasing or staying the same its okay. My concern is that maintaining an increasing GDP/debt ratio is not going to be possible if you are always borrowing. When you are saying the GDP/debt ratio is increasing when you’re borrowing you are assuming that the investments are making a profit which is not always the case. There are also other issues associated with prolonged borrowing as well. First, people in other countries need to have enough capital to continue lending to you, which I concede is not a major issue, but eventually it would be a consideration. Next when a country as large as the US continues to borrow the world interest rate will begin to rise meaning the cost of capital rises, so continued to borrowing becomes more and more expensive and thus you make less and less on the investments made with borrowed capital. I reiterate that how the deficit is being spend is also important to consider, deficits are not usually run for strict investment purposes, they can be run because of misestimating costs of services, paying entrenched benefits, etc (spending on consumption rather then investment). In closing, I agree running a deficit can be beneficial if financial leverage is used correctly and that spending on social programs is a good idea for the future, but we can’t “live beyond our means”, ie. continue to borrow indefinitely because eventually the accrued debt will catch up with us, example look at the 1970’s in Canada, continued deficit lead to high interest rates and servicing the debt became a major expense, the government eventually realized that continuing debt accumulation was not a feasible long term plan.
Posted by
The US's debt to gdp ratio is slowly declining...even in a deficit situation.
I think you and I are on the same page at least, my point is deficits can be sustainable, as deficits don't have to mean more debt burden. Monetary policy is not as simple as balancing the chequebooks at home.
Posted by
Allocation is still an important point, and eventually things have to balance out. GDP is not always going to positively benefit from a deficit.
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