Further notes on Keynes, monetary policy and Debt Management.

Monetizing part of the debt which I began writing about in 1983 as a strategy to make Keynesian stimulus more effective is as I have often pointed out something which Keynes himself advocated as early as 1933. In a letter to newly elected President Franklin Roosevelt, Keynes makes it clear that he understood the concept and in certain circumstances advocated its use.Writing of the best approach to take to get out of a slump he writes “Individuals must be induced to spend more out of their existing incomes; or the business world must be induced, either by increased confidence in the prospects or by a lower rate of interest, to create additional current incomes in the hands of their employees, which is what happens when either the working or the fixed capital of the country is being increased; or public authority must be called in aid to create additional current incomes through the expenditure of borrowed or printed money.

Later in the General Theory he reiterates this point that the method of financing can vary. Dudley Dillard later coined the term income creating finance as an alternative and more positive term for deficit financed spending.(See D.Dillard The Economics of John Maynard Keynes,NYC:Prentice Hall 1948 p.109 In Keynes’s preliminary draft of what later became his General Theory but at the time in 1932 what he called The Parameters of a Monetary Economy, Volume xiii Collected Works The General Theory and After Part 1, Preparation. p.405 Keynes wrote “The task of the monetary authority is to adjust to the best of its ability the quantity of money to changes in other parameters, so as to maintain as nearly as possible, an optimum level of output. we shall see..that the optimum level of output depends on the maintenance of an optimum level of investment , so that we can re-express the task of the monetary authority as being to maintain a rate of interest which leads to an optimum level of investment” So as early as 1932 Keynes was well aware of the importance using to the full monetary policy.

Dillard in his 1948 work The Economics of John Maynard Keynes discusses the various methods of loan finance from issuing bonds and selling them to private savers to selling them to the banks to having the Treasury issue non interest bearing notes to the Federal reserve banks “with instructions to increase the government deposit to the extent of the value of the notes. The government could then spend its balances in the usual fashion for public works and other expenditures.To ensure there is no danger of inflation from this strategy Dillard explains it should only be used when the economy is in a slump and output far below its potential and unemployment elevated.” (p114)

But he also points out that if inflation were to result it is not because of the method of financing but because of inappropriate and excessive monetary expansion. Dillard also makes the important point that when you are operating the economy at elevated unemployment rates and well below your potential output the cost of increasing output is essentially minimal. He states the case as follows.

” Obviously , it is not very convincing to tell an unemployed (person) that society cannot afford to burden (their) future by building them a house in which to live even though (they and their) fellow workers are doing nothing with their time and skill. The staunch advocates of annually balanced budgets are perhaps so accustomed to thinking in terms of the financial principles appropriate to an economy of full employment that they do not see the implications for public finance of an economy with widespread unemployment. When there is full employment, the real cost of hiring a (person) is what they produced in the job they give up in order to accept a new position.When there is unemployment the real cost of hiring an unemployed person is nothing, because nothing is sacrificed by the employment of their labour.This fundamental principle is not altered when money is brought into the picture in order to finance the employment “(Dillard, p.105)

These ideas and insights should not be forgotten in the debates to come over deficits, debt management, monetary and fiscal policy and the restoration of lower unemployment.

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Horrendous Act of Terror in Paris: Policy Review May Be Needed

We mourn for the people who have been murdered.Our heartfelt condolences to all of the families and friends of the victims and to the Government of France and the French people who have been affected by these evil deeds. Paris is the capital of European enlightenment. It is the city of light the city of liberty, fraternity and equality. It is the city of love and beauty, poetry, architecture and music. It is the city of Picasso, Baudelaire,Matisse,Delauney, Soutine,Claudel, Rodin,Sartre,de Beauvoir,Victor Hugo, Emile Zola, Walter Benjamin and Charles De Gaulle. It must not be a city of fear blighted by terror.

France is one of our two mother countries. Its culture is part of our culture. More than seven million of our people speak its language on a daily basis,(ten million know how to speak it) consult its newspapers and magazines and enjoy its wines and cuisine.Canadian troops helped to liberate France from the grip of the Nazis in World War 2.The French are our close allies. Our new Prime Minister and his cabinet is committed to ending our participation in the bombing campaign of ISIS We need to carefully consider the decision and ensure that our alternative role contributes as much and more positively to the campaign to defeat terror. Secondly the government is committed to bringing to Canada 25,000 refugees from the war in Iraq and Syria as soon as possible. But heightened security now obliges us even more than before to thoroughly identify these refugees to ensure they are who they claim to be and whom the U.N. and our own security has approved as genuine refugees. We should take more time if necessary to do the job thoroughly, without retreating from our position to provide safe refuge.

We need each of us as Paris has always done to light a candle
against the darkness and illuminate the night . As le
crépuscule (dusk) leads to night l’aube (dawn) follows

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So Far So Good:New Liberal Canadian Government Stands Behind Its Stimulus Infrastructure Plan

It was good to see Minister of Immigration John McCallum who is an economist and the Minister of Finance Bill Morneau defend the Keynesian Liberal plan to use much needed new  investment infrastructure to promote economic growth, employment and innovation in the Canadian economy as a counter cyclical force to the slower economic growth that is emerging and that is predicted to accelerate by the parliamentary budget office and the IMF. As McCallum explained the slower growth is precisely why one needs to invest and it provides even greater justification for deficit financed investment in infrastructure. Mr. Morneau concurred in this judgement. The amount currently spoken of some 10 billion dollars in the first year is modest in relation to the GDP of 1.98 trillion Canadian dollars. The current anticipated deficit is 0.2 % of the GDP. It will initially rise by a small amount but as the employment created by these investment circulates throughout the economy affecting other proposed investments and states of confidence the impact will be multiplied modestly and the increase in the deficit even in the medium run will be lessened.In any case the parliamentary budget office is projecting a falling debt to GDP ratio which at the present is still historically quite low.It projects the debt to GDP ration falling from 31% to 26.1%. The strategy combined with the tax cut for the middle class should help diminish currently unspent quasi hoarded cash balances in the private and corporate sector and restore optimism  in expectations of private consumers and business investors.If the economy slows a great deal further and faster one might want to spend more of the allocated amount faster by front loading it  and consider expanding the program.

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New Cabinet a Good mixture of Talent, Regional Roots and Values and Beliefs:Keystone XL rejection,TPP details obliges government to come up with a policy rethink particularly if economy should slow down in coming months

The gradually emerging details of the T.P.P. trade deal and the decision of President Obama to reject the proposed Keystone XL pipeline presents the new Liberal government with both a challenge and an opportunity to rethink its policy agenda. This will become more urgent if oil prices continue to slump and if Canada’s manufacturing base particularly in heartland Ontario is damaged by low wage auto parts competition from Asia and Latin America.The new Government is interested in creating a more sustainable energy strategy. But to successfully do so the country from an employment point of view requires a more robust and competitive manufacturing centre which may well need greater short term protection from low wage competition from Asia than is on offer in the TPP.Apparently the Americans negotiated thirty years protection whereas our Harper government settled for only five years. There are a number of questions to be answered with respect to ensuring sustainable energy supply and management of our natural resources.Simply refining more of the oil in Canada is an intriguing possibility but this still would mean drawing on carbon heavy oil as the NYT diplomatically puts it. What about China and the proposed pipeline to the west coast? If no pipeline is built what about rail transportation? Already the Lac Megantic tragedy shows us the kind of problems that can arise.

The new Trudeau Liberal Government has got off to a good start with a very interesting mixture of old and new cabinet talent united behind a firm Prime Ministerial commitment to restore respectful debate and service to the Government of Canada and to be a progressive centrist government. All of the choices made by the new prime minister are good ones and introduce a very fresh face to the government . The choice of Bill Morneau as the new Finance minister is a very intriguing one since Mr.Morneau is a very successful Bay street executive with a substantial amount of family wealth and an annual income that makes him one of the richest politicians in the cabinet since Paul Martin. But this business success does not disqualify him from acting as an enlightened  reformer of the taxation system should he want to be and an excellent pragmatic  Keynesian leaning finance minister committed to investing in the infrastructure of the economy while being at the same time a prudent manager of operating expenditures seeking to balance the infrastructure budget over the medium to long term but the operating budget in the short term. This approach will work well so long as the economic slowdown currently underway does not worsen too much.

His tenure as finance minister and the pressure he will come under to be more fiscally conservative(which he should resist) will bear watching in the months to come. The appointment of Stephane Dion as Canada’s foreign minister should work well and offer important challenges to Dion who is a solid Québec intellectual. Dominic LeBlanc as house leader and chair of six cabinet sub committees is also an important choice. LeBlanc is close to Trudeau and will provide excellent backing to the Prime Minister. John McCallum is a very interesting choice as the new Minister of Immigration tasked with the top priority of admitting 25,000 refugees in the next short period of time. This will be a major challenge which will tax McCallums administrative and political abilities. But given his personal history and long experience in Ottawa I expect he will succeed. Ralph Goodale another veteran of previous Liberal cabinets is Minister of public safety tasked with among other things revising Bill C51 so that there is a better balance in the law between legitimate security concerns and protection of Canadian values and civil liberties. All of the new faces in the cabinet and the veterans are people of substance who begin their jobs with a large amount of goodwill from much of the Canadian electorate. But as the excitement of a new government wanes and the pressure of tough decisions in tough times grows Canadians will be watching to see if promises are kept and the government’s welcome idealism is maintained. The appointment of 15 women alongside 15 men is a progressive step forward. Many of these women face important challenges in their portfolios right from the get go. This is very true of Chrystia Freeland who has to grapple with the T.P.P. and its potential negative consequence for employment and Canadian control of our economy, Jody Wilson Raybould with the key justice dossier and restoring a more balanced policy to criminal justice, and Maryam Monsef the reform of the electoral system, and Carolyn Bennett Indigenous and Northern affairs

The Conservatives have made a very intriguing choice for their interim leader Ms Rona Ambrose is an articulate multilingual right wing experienced former cabinet minister who I think will make a very effective leader. It also positions the party progressively on the issue of women in politics. Only the Liberals at the Federal level have yet to have had a women leading the party something the Conservatives like the New Democrats can now boast about, each having had two.

The NDP for its part still needs to conduct its inquest into what went wrong and think again about its leadership.

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Elections Canada reports final election results

With 99.8 % of the polls counted the results are as follows:

Liberals 184 seats 6,930,136 votes 54% of seats and 39.4% of the votes

Conservatives 99 seats 5,600,496 votes 29.3% seats and 31.9% of votes

New Democratic Party 44 seats 3,461,262 votes 13 % seats and 19.7% of votes

Bloc Québécois 10seats 818,652 votes 3% of seats 4.7 % of votes

Green party 1 seat 605,864 votes 3.4 % of votes 0.3 % of the seats

Total votes cast 17,559,353
Total eligible registered voters 25,368,379 voter turn out 68.4% does not include voters who registered on election day. There were 19 other parties, as well as independents, who ran in the election who with the exception of the independents 40,000 votes, Libertarians 37,407, and the Christian Heritage Party 15,284 received fewer than 10,000 votes each.

The results show a clear Liberal victory but one which the first past the post system exaggerates and unfairly penalizes three, of the leading opposition parties the NDP, the BQ and the Greens. The Conservatives had a very efficient vote distribution winning in seats close to their share of the popular vote.In a proportional system they would have had 108 seats rather than 99. The Greens with 3.4 % of the vote in a proportional system would have got 11-12 seats rather than one. The NDP with 19.7% would have got 66-7 seats rather than 44 and the Liberals would have received 133-4 seats rather than their 184. The BQ would have elected 16 seats rather than the ten they received.

The Liberals were awarded one seat for every 37,663 votes; the Conservatives one for every 56,570 votes; the NDP one for every 78,665 votes, BQ one for every  81,865 votes and the Greens, 605,864 votes for only one seat.

Let us now see what this Parliament does about reforming our voting system to strengthen its democratic efficacy since the new Governing Liberal party has committed itself during the election to studying and implementing a reform of the system.

If we also examine the change in vote from 2011 it is striking to note that the Liberal party increased its vote from 2011 by 4,1156,961 votes. The New Democrats lost 1,047,212 votes compared to 2011 while the Conservatives only lost 231,905 votes compared to 2011. The total of votes cast rose to 17,559,353 as compared to over 14.6 million votes cast in 2011. This means that most of these new votes went to the Liberals along with the most of the lost NDP and Conservative votes from 2011. Some voters from 2011 have passed on or did not vote as well.So the Liberals were very successful in bringing out new voters. The New Democrats were very unsuccessful in holding on to their vote from 2011.

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Liberals win unexpected solid majority in Canadian election: 184 seats to 99 for Harper Conservatives , 44 for Mulcair’s New Democrats , to 10 for Duceppe’s Bloc québécois with 1 for May’s Greens.

The Canadian election delivered a stunning majority Liberal Government much to the surprise of many Canadian pollsters and pundits. There were two final polls conducted on the Sunday before the election which accurately predicted the vote split among the top three parties but didn’t fully capture the extent of the seat sweep for the Liberals. Mr.Harper’s Conservatives were the biggest losers of the night falling from 166 seats to a mere 99 seats after the dust had cleared. The Liberals captured 184 seats and 39.5 % of the popular vote while the Opposition New Democrats who had hoped to improve their seat total of 104 were heavily defeated in both Québec and Ontario winning only 44 seats in total, of which only 16 remained in Québec and 8 in Ontario . They previously had held 59 in Québec and 22 in Ontario. The NDP won a total of  14 seats in B.C. and added two in Manitoba and one in Alberta and 2 in Saskatchewan. They were totally shut out in the Atlantic region where the Liberals swept all 32 of the seats.The Liberals won 40 seats in Quebec and 80 in Ontario plus 17 in BC and 14 in Manitoba and Saskatchewan. They clearly benefited from the widespread desire to defeat the Harper government, and from the progressive nature of their platform including its Keynesian infrastructure investment proposals as well as the attractive personal campaign of their leader Justin Trudeau who against all the odds had fought an excellent campaign and triumphed over the nasty  Tory attack ads.As the fog cleared from the election campaign and Canadians could see the results a large majority of Canadians breathed a sigh of relief that the long election campaign was over, that the Harper conservatives had lost power and that we had a new youthful prime minister dedicated to restoring Canada’s place in the world and fighting unemployment and austerity and restoring better and fairer economic growth in a more environmentally sound way. Except for our conservative friends and neighbours it was a good way to begin the week. Conservatives and New Democrats will need a period of reflection about how and why they lost as badly as they did and then set about the task of rebuilding their parties. Conservatives and democratic socialist New Democrats should remember that Keynes’s ideas were never antithetical to their basic beliefs since Keynes although a Liberal also was happy to give advice to the Labour party and his publisher was Harold Macmillan a future Conservative Prime Minister of Great Britain. (See Ewen Green, The Conservative Party and Keynes, in H.H.Green&D.M.Turner, The Strange Survival of Liberal England:Political Leaders,Moral Values and the Reception of Economic Debate, Cambridge University Press, 2007, p.198.)

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If the Canadian election delivers a minority government parties need to consider a post election strategy in terms of forming a government no matter who captures the largest number of seats well short of a majority.

The Canadian election appears to be a very close race with no party appearing to have an overwhelming lead. Both the leader of the New Democrats and the leader of the Liberals have made it clear they will not support a minority government led by Stephen Harper.As Mr. Mulcair colorfully put it there wasn’t a snowball’s chance in hell that he would support a Harper minority government. Mr . Trudeau has more or less said the same thing. At the same time he has indicated he does not want to form a coalition with a government led by Mr.Mulcair but has indicated on a case by case basis he might be able to co-operate with other progressive members of Parliament. Mr.Mulcair has indicated he would not mind co-operating but that the Liberal party has rejected his overtures. Much will depend on the actual results. But at this point in time with the election one day from now it is time to start thinking about how the parties might co-operate to form a non conservative government after the election should the Conservatives not win a majority of the seats.

Clearly a lot depends on the numbers but it ought to be possible to envisage some terms of co-operation to permit a co-operative NDP Liberal or Liberal NDP non Conservative government or even a Liberal NDP Green progressive conservative government. If either the Liberals or the NDP end up with the largest number of seats but not a majority on their own that ought to be relatively easy to negotiate in the spirit of serving the interests of a likely close to 70% of the electorate that want a change in direction. If Mr.Haper’s party wins the largest number of seats but not a majority he can try to hang on forming a government and facing a confidence motion. If the NDP and the Liberals and the Greens immediately move and vote non confidence the Governor General will be obligated to call on the leader of the second largest party to try to form a government backed by a majority of MPs also drawn from the other parties.The Conservative party may well wish to replace Mr.Harper or he may wish to resign in the event he is defeated in Parliament but that should not be allowed to stand in the way of an alternative government being formed.Similarly if Mr.Harper resigned before Parliament met Parliament should be convened to test its will with respect to a continued Conservative government or an alternative government without extended delay.

This then would be the way forward, perfectly constitutional and democratic. Under no circumstances should any party leader be allowed to form a government and be defeated in parliament after only a very short period in office and then allowed to call an election without first permitting one of the alternative parties to form a government first.At least in the first 18 to 24 months after this election that should be the understanding.If your party has come second or perhaps even a close third you still have the constitutional possibility of forming a government so long as the government so formed can win the confidence of parliament.

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