This was originally published on 11/01/2009 on my former blog, Worth the Fee to Read It. As the jockeying leading up to a budget in March unfolds, I think these words are as relevant today (now that we’ve racked up a one year deficit of over $56 billion Federally, $24 billion in Ontario and a few billion in Toronto … and, on the global scale, all of this is chump change compared to the overspending in other countries.)
Conventional wisdom has it that governments must spend, spend and spend some more to dig the country — and the globe — out of the current downturn. (That having been done, the spending “cannot stop”.)
Conventional wisdom is dead wrong. All of this deficit spending will barely — if at all — make a difference in the near-term, and it will pile up problems not for the long-term, but for the medium-term: years in the middle of the next decade, at best.
A Little Bit Pregnant
First, let me say that I am not a deficit fanatic. I would like my government(s) to run balanced budgets: budgets that they expect to come in close to break even. Perhaps they have a good year and tax receipts are higher than expected? Then we have a surplus. Perhaps it was a tough year and receipts were lower? Then we have a slight deficit: exactly the same as the commissioned sales person or self-employed contractor who draws the same amount month after month for living expenses and could either end up with money left over as savings at year’s end, or has to dip into his savings to balance the books.
So a little red ink, from time to time, doesn’t worry me. In fact, it worries me far less than do massive surpluses because every line item, every department, every program has had contingency funds up the yin-yang. These are a recipe for bad decisions at the end of the fiscal year, otherwise known as utter waste, within the departments — and sloppy handouts, ill-thought-out programs and the like in the hands of politicians.
On the other hand, structural deficits — situations where the budget is planned to be in deficit annually (and where, as in the mess inherited from Trudeau and Turner by Mulroney, the deficit deepens annually as the interest pile up takes over everything) — are an incredibly stupid idea, on the same plane and of about the same moral quality as liar loans being written to create fees knowing they can’t be repaid.
Now, to be even-handed about this, none of our politicians are calling for a return to permanent structural deficit. No, all of them claim that we just have a crisis to solve now: we run up serious amounts of red ink for just a few years, and then we can return to fiscal prudence. So they say. (Already the promises have begun to spend money we don’t have — not to mention the whinges about attempts to cut, anywhere.)
But when was the last time a government program was terminated, its workers fired, its office leases broken, with not one penny more to be spent on that again, ever? I can’t recall one. I can recall occasional shrinkages — rare moments, those — but in general, once a department or Ministry has a mandate, it never gives it up, and it never stops funding it.
For every dollar of “stimulus”, some civil servant handles it. Someone else supervises them. Someone else manages them. Someone else develops policy for the effective use of the money — and they have supervisors, managers, directors, too. Someone else audits them, supports them technically, prepares their briefs to Treasury Board, procures their supplies. All of these have management chains, too. Every one of these increments becomes permanent, because pay grades are based on the number of people — and number of dollars under administration — associated with a job. So every new initiative does two things: it adds to the pile of spending that is “Ottawa”, “Victoria”, etc., never to be removed — and it siphons 20¢ of every dollar spent off the top to pay for itself (on average).
Now do you see why I believe any planned deficit is an almost automatic route to structural deficits? At the risk of offending people, the planned “stimulus” deficit is like getting pregnant. The plan is to abort the pregnancy. Instead everyone delays — there are so many reasons not to act — and the child comes to term.
You can’t be a little bit pregnant. You either are — or you’re not. When it comes to the dangers of structural deficits, “not” — don’t spend, by intention, beyond your means — is the best public policy course.
Deficits Avoid Decisions
Governments that say they’re making the hard decision to forgo all the hard work of sweating down the last structural deficit and to take action “as it’s needed now” miss the point. Choosing to run a deficit is avoiding the decisions that do need to be taken.
How many old programs — all those civil servants and their management trees, chasing ever smaller returns in their program areas — could be outright eliminated to find the funds required for your “stimulus”, if, indeed, it is needed. (That’s a separate question that has as much to do with vote buying as anything else. Another day, perhaps.) Yes, that’s the harder decision, for almost every one of those programs has some advocate in the country who will scream bloody murder if it’s touched in any way.
Nevertheless, MPs and MLAs are elected for the express purpose of making decisions. If you don’t want the job, resign. (Regardless of party, voting your party line likewise is avoiding a decision. Each MP has a personal moral responsibility to decide issues on their merits. The House and Senate need far more Chuck Cadmans and far fewer trained seals.)
It would have been nice if we’d had a cap in place on spending ages ago: something along the lines of “Federal spending is, by law, not to exceed $5,000 per capita”. Budget growth then becomes a function of population growth. Otherwise, to start something new, you have to wind up something old. Perhaps the people who point at Olympic Gold Medals and demand more spending on amateur sport would be upset if the whole Department of Amateur Sport & Fitness (or whatever bureaucratic monicker it is using today) was summarily axed, along with all its spending, because GM and Chrysler need the money. But a cap would have trained our politicians to cut, and to do so regularly. At the moment they don’t have the habit trained. So they reach for deficits. It’s easier.
Why This Deficit Matters More than Previous Ones
There are many opinions out there today about what the future holds, and I’m not going to chew through all of them now. Suffice it to say there are three things on the immediate horizon that make running deficits a bad idea now — as I think you see, I think Trudeau-era deficits were an equal problem, but we had the time to fix that problem, and at the moment it doesn’t look good for the “ability to fix” this one out in the 2010s or 2020s.
You might remember Canada was the only G7 country running surpluses, and the only one retiring its national debt. This — and the price to get there was higher than it needed to be because of so many previous bad decisions (and so many bad ones made in reversing our disastrous structural deficit course) — was a benefit that would have made the 2010s and 2020s truly “easy street” for Canadians relative to other parts of the world. (Having given this up — and we wiped out all the gains of the past fifteen years in one year’s orgy of “stimulus” — we’re going to dig the hole deeper just trying to scrabble our way back up to balance, then live with that hole eating a hole in our pockets for years to come just to undo the damage of 2009.)
The three worries I have for the future are:
- Demographics
- The demographic bulge of the Baby Boomer generation is coming to “retirement”, and even with them continuing to work that work is likely to be part-time, both for personal reasons and as employers seek to reduce labour costs and revitalise their workforces. This reduces income tax receipts and employment tax receipts at the same time as pension demands increase. In other words, this was why we were working so hard to reduce the debt, knowing we were about to have a hole knocked permanently in government revenues. (Everyone who will work and pay taxes in Canada in the next twenty years is already alive, and we are singularly inept at maximising the return on our investment in immigration, aka “doctors and engineers driving cabs for a minimal income”.)
- Liveable Infrastructure
- This refers to the complex effects of energy costs on transportation, delivery, work and schooling, effectiveness of the housing stock, etc. Our current city-sprawl and choice to have goods — such as food — shipped thousands of kilometres so that we can enjoy the same diet year round is a infrastructure for living that probably is unsustainable into the future. That, in turn, implies spending a great deal of money to retrofit our human environment to deal with issues of affordability and cost, for it would be even more expensive to abandon what we have and build anew. What will be needed isn’t altogether clear yet, nor is how much of this must be done privately, what must be public:private in partnership, and where government intervention might be helpful. That it will need doing, though, is at the same level of clarity as a long-range winter forecast for cold and snow just about everywhere in Canada.
- Unsustainable Program Transitions
- This last refers to the entitlement programs already in effect in Canada — some federal, some provincial — that are slowly but surely eating us out of house and home. The public medical system in Canada, for instance, is in decay in most provinces, while simultaneously chewing through one dollar in two of the provincial budget (or more). Eventually the combination of decay, delisting of procedures and reductions in service capability that have been the norm ever since the provinces restricted medical school enrolment coupled with Paul Martin’s balancing of the Federal budget by slashing transfers to the provinces in the 1990s will bring the system teetering to the point of collapse. Throwing more money at these systems is probably not the answer; figuring out how to restructure the entire system is — but the longer we wait to tackle these hard questions, the fewer options we’ll have and the more likely we’ll toss money we don’t have at the time at the problem. After all, the auto makers wouldn’t have “needed” a handout now if they’d tackled their problems a decade ago.
All three of these argue that at some point in the next few years the Government’s freedom of manoeuvre will be deeply curtailed. Balanced budgets en route to that point would ensure we continued to hold the line on interest expenditures (which, as with our own personal budgets — a $10.00 pizza bought on a credit card at 24% interest and paid off by minimum payments turns into an over $220.00 pizza by the time it is discharged — is a pure waste of money). Practice at real decision making rather than sloughing the problem off into deficit spending would prepare the way for much harder decisions to come.
Oh, and I haven’t yet noted that the next years are likely not to be growth years. Indeed, except for the twentieth century, the norm in economic life is a balance of inflationary (growth) and deflationary (consolidation) years. After a sixty year continuous inflation, we should reasonably expect at least a decade-long deflationary consolidation. Instead, central bankers and politicians around the world think just slopping cash around in as many forms as possible will allow us to escape back to the abnormal conditions from 1945 to 2008. Bad thinking, at least from this student of economic history’s point of view.
So there you have it. These are the arguments for not going into deficit. Such a move robs our future, impoverishes our children, and probably is like standing, in the grand tradition of Canute, in the way of the tide. But there are few moral thinkers in Parliament today. Instead, I expect the calculation of votes, the bribing of we citizens with our own money, the unrighteous indignation of most days in the Commons and the subordination of the strategic to the tactical to continue.
Remember all of this as you whinge. You are robbing your children and your grandchildren of their future. How you will face them depends a lot on whether you’re willing to make hard decisions now — and insist your MP and MLA do the same.
Ingeneral I agree, but there is actually strong empirical evidence that Keynes is correct on many points and the Chicago school chaps wrong. That said, you are right that there is a high risk that any stimulus becomes structural and we are indeed seeing that happen. You are also right that we desperately need to balance the budget and that we are not doing that. The acutal deficit is much worse than it appears if one factors in your points on demographics, liveable infrastructure and programme tranisitons. Yikes. So two questions. (i) Can the current Conservative government manage finances to bring the budget back into balance? (ii) Can a minority government balance the budget or are there too many competing pressures?
Two great questions you pose there, Steven.
Keynes’ position, of course, has only been half taken up. Everyone jumped on the “government as stimulator in recessions” part, and forgot the other part: “government must pull back on spending, repay the debts run up, and prepare for the inevitable next downturn”. The long-term effects of that is what gave the Chicago monetarists their opening as the stagflation of the 1970s had to be dealt with (and even then incompletely and inappropriately, given that the underlying problem was one of the end of an engine of growth as finance replaced industry in the wake of North America peaking on energy production, transferring control of costs overseas).
So, to your questions:
(1) Can this government manage finances to rebalance our budget? The evidence of 2006-2009 suggests the answer is “no”. Stephen Harper’s governments have been profligate beyond the craziest spending splurges of all who have gone before him. I do not believe things would have been materially different had the Conservative Governments been majorities: the spending prior to 2009 was all about occupying the “political centre” in Canada and I think would have happened anyway.
(2) Can a minority government balance the budget? I also think this is highly unlikely, simply because the votes to pass said budget have to come from somewhere.
The problem is, simply, that Paul Martin didn’t “balance” the budget, either: he merely shifted the problem under a different shell in the shell game, destroying provincial finances to make Ottawa’s look good. (In the USA, states must generally close their gaps [although they use every trick in the book to avoid the day of reckoning, North Dakota aside]: they do not have the borrowing power provinces do.) Shifting the problem to the provinces made the Federal numbers better, especially in international comparisons, but a realistic accounting would have said the national profile included lower tiers of government as well. Then, having stripped transfers without removing mandates, excess was slopped into contingency “slush” funds and used to launch new programs and structural spending — only 1/3 went to deficit reduction and then debt repayment. As a result, provincial services suffered while, meanwhile, we were grossly overtaxed Federally.
I expect nothing different with a change of government in Ottawa — the Liberals, NDP, Bloc and (were they to ever elect an MP) Greens are all, from a policy point of view and inclination, high tax, high redistribution parties. The Conservatives have now proven themselves to be the same.
Spending other peoples’ money, and money you don’t have (yet), are drugs, and our political system is rife with it. If you (like me) support living within our means and making choices about what to spend on — and, like me, believe that when times are good or other circumstances suggest this isn’t a “recession” (a temporary setback) but a permanent condition of lower output expected to be sustained for years, you have to take up Keynes’ second point and pay off the “temporary” deficit spending plus debt that ensued. There is no party running on that in Canada, or in any province, not even Alberta’s new Wild Rose Alliance.
(Incidentally, monetarists decide to put inflation into the game as a permanent “tax” on those who accumulate wealth of any sort, since their “targets” are all in aid of maintaining moderate inflation and increasing personal and corporate debt levels [the velocity of money]. This is a perversion of the Austrian economic school’s insistence on money as a true store of value over time and the Chicago crowd — the heart of much of central bank theory even though Keynes Part 1 has been recently employed — have pushed this fraud for three decades now.)
This is why my answer to your questions would be to pass a law with two (and only two) parts:
1. Set a maximum per capita financial take. That is all that the government can take in. This combined taxes and fees: if you pay $85 for a passport this year (for instance) you take that off your tax payable in full. Taxes paid at lower levels of government are deducted at higher levels in full the same way (this is the way The Netherlands does things). You want a carbon tax? It comes out of the per capita allotment. You want a VAT? It comes out of the allotment.
2. Require that the government may not spend — regardless of cause — more than 5% above that per capita number in any year, nor may they run a deficit for more than two in five. The other three years they must repay all deficit monies and some of our outstanding debt (until it reaches zero).
(I’d love to see the same rules at the provincial level, but I’m not holding my breath.)
Please note the per capita regime does not require a flat tax. This merely sets a dollar amount to limit spending: it can be collected in any suitable way decided by our politicians. I would require some form of super-majority to raise that limit (if we said 2/3 of the House and 3/5 of the Senate the odds are that at any point in time at least one Opposition Party would have to support the Government in making such a change) but a simple majority to lower it (as if that would happen: besides, this is a ceiling, so there is no requirement to collect monies to the ceiling if a party wanted to offer “a break”).
As we’re unlikely to do — as is done in a few of the Swiss Cantons — a public referendum setting the tax take or to change it, we need a structural impediment. This is serious constitutional reform: it needs to be as entrenched as is equalization. Without it, the government will continue to overspend, overtax, and accelerate the impoverishment of the country, regardless of which party is in power.
Don’t worry guys, with Stockwell Day in charge of the Treasury portfolio now we’ll be just fine . . . on a good day he can’t count past 20
Ah, Bob, I can count on you. Now go back and take a good long look at the post about political name-calling, eh?
Bruce, I share your distaste for deficits. And since you’ve highlighted healthcare to some extent I’ll contribute my $0.02 on the topic
Having worked in the healthcare IT sector I’ve seen vast amounts of money thrown at various nonsense. A complete strata of mid-level managers that do nothing but attend endless series of meetings, a team of imported consultants on a multi-year engagement able to parlay their accommodation allotment into a real estate purchase in the most expensive market in Canada (so we paid them and then we really paid them); all while the health authority went further and further into the red.
Unfortunately much of the healthcare system is run by nurses and doctors who are sincerely the most wonderful people if you’re needing care but almost uniformly inept at running businesses. Health authorities should be run by professional business people. Healthcare professionals should focus exclusively on the delivery of care and hold the business side responsible for resolving anything that gets in the way of providing quality care.
Of course, this is akin to suggesting that academics not be allowed to run universities and will never fly. Don’t even get my started on waste at post-secondary institutes.
“Any sufficiently large organization is indistinguishable from any other sufficiently large organization.” Despite many protests over the years from clients, colleagues and friends, this has been my observation over the years.
You cited universities and health care. I’d add large banks, insurance companies, giant retailers, broadcasters and research advisory firms to the mix. Not to mention government departments themselves!
In all these cases, the common thread is that they are mismanaged, wasteful, filled with little empires and villages that are more concerned with their own affairs than the health and well-being of the organization whose name is on each person’s paycheque … this makes me think the problem is one of beliefs (on the part of people in the organization), scale (in terms of size), too much being “forced to fit” in an effort to “breed efficiency”, and the like.
For this reason I am as convinced that organizations of all types require basic ground rules not easily gotten around for their own health and continued ability to perform as I am convinced nations and provinces require them. There isn’t a professional (academic, doctor, etc.) or manager in the world that doesn’t truly believe, deep down, that the answer is “just spend the bloody money, already”.
If, for instance, corporate managers were barred from having SG&A (sales, general and administrative expense) exceed 20% of revenues (just to pull a number out of thin air), IT requirements alone would start to push sales and office staff out of the mix. (In 1974 SG&A across the S&P 500 of the time was about 12% on average; by 2005 it had become about 40%. The three big changes in that period were [1] the inclusion of IT in everyday work, [2] equity, inclusiveness and other HR “mandates” from government and [3] the shift from sales to marketing. [Some would add a fourth: a society intent on litigating everything leading to massive corporate legal & M&A groups.])
Having a limit would force real decision-making to the fore, rather than just assuming “growth” would solve the problem (and that sourcing, combining, etc. would handle periods “without growth”).
Management is betting with a busted flush. It is a set of techniques that aren’t really working. In some ways I’d rather set some basic ground rules and say to doctors and nurses “run it your way”. In other cases I’d develop specific managerial capabilities for health-care (no, one management role is not functionally equivalent to another, despite the mantra of the business schools). I don’t know that it would work better (certainly today’s combination doesn’t!) but we are going to have to try new things in many domains, for “management is management”, “best practices”, “cookie-cutter HR”, “the answer’s the package, what’s your question about IT again?” and “the purpose of legal is not to get things done but to ‘guarantee’ that there are no risks anywhere” have created a bankrupt society.
This is why every time I hear “bring business thinking” to the public sector I shudder. Put a hard cap on the public sector and shrink it, but don’t try to run it as a business. Instead, run it as a public service: something that worked well in the past before we started thinking “the answer’s government help” for every problem and pseudo-problem and created monstrously large and inept public sector organizations.
I tend to agree with you about ‘no single management role being the equivalent of another’ but health authorities have had a ‘run it your way’ license and rules in place for years about not operating at a deficit . . . Clearly this approach hasn’t worked and we’re now faced with rising healthcare demand and reduced ability to ‘throw money’ in hope of a solution. Something needs to change.
Having said that however, I’ve also managed teams large and small in the banking, academia and healthcare sectors. There are some parallels when it comes to management practice.
I, of course, like you have managed in multiple industries — and there is some commonality. It is the “management is just management” theory that I reject, because it leads to the automatic assumption that professionals are incapable of managing as professionals (in other words, as professionals, they shouldn’t be managers).
The problem with health care in Canada in my view is that the institutions are the wrong size. Let a hospital manage itself. (Let new small hospitals and special-function clinics emerge as they will.) Let doctors practice as they will — with two small changes.
1. You don’t need a referral to see a specialist or order a test.
2. The province or medical association don’t limit numbers.
France, for instance, has this system. It spends less on health care than we do. It has no queueing. Doctors are not overpaid as in the US as there is sufficient competition both as GPs and as specialists.
There is no free ride, however. Although the government does pay for health care, the citizen pays first for specialist consultations, drugs and tests such as radiology, etc. — and is reimbursed. This makes the citizen think carefully about the cost of a test “just in case” as their money is tied up waiting for reimbursement. That seems to be more than enough to limit demands.
No place is perfect, but that, to me, makes more sense than our rationing system, our layers of management in massive authority structures, and a provincial system that starts with insufficient monies for change, but lots for executive termination packages, recruitment packages, etc.