Deficit hysteria in Québec:Facts versus Fictions, Net debt to GDP based on accumulated deficits 33%


Let’s compare Québec’s debt with the debt of the other governments in Canada,
by using the two main debt concepts. The headline number which is largely meaningless because it ignores the value of government financial and non financial assets and the net debt number based on first subtracting from the debt the value of financial assets and then subtracting from that first net debt number the value of non financial assets held by the government. The figure that is arrived at “debt representing accumulated deficits less accumulated surpluses expressed as a percentage of the GDP is the most meaningful statistic on government indebtedness particularly when we take into account to whom the debt is owed , how it is financed and the rate of interest it is financed at. Once we do this much if not all of the hysteria generated by the government’s barrage of propaganda about indebtedness should dissipate. Note Quebec’s debt to GDP calculated accurately in this way is 33 %, a significant figure but very far from a catastrophe.Its sister province Ontario has a ratio of 24.8 %. These deficits are largely the result of the the elevated unemployment and economic slowdown that Quebec has suffered from since the financial panic of 2008-09.Trying to eliminate them in a year or two as the Quebec government appears to be doing through austerity is simply bad policy.Note that B.C. at -0.6 %,Saskatchewan at -3.1% and Alberta at -17.6 % are all running surpluses due to the resources boom and their lower unemployment rates.

Gross debt and debt representing accumulated deficits as at March 31, 2013 (as a percentage of GDP)

Gross Debt 53.6% 49.0 44.0 38.7 36.8 32.9 31.8 29.8 25.9 15.1 6.0%

Debt representing 33.0% 33.1 24.8 22.1 10.2 8.9 13.1 18.2 -0.6 -3.1 -17.3%
accumulated deficits.

(1) A negative entry means that the government has an accumulated surplus.
Sources : Governments’ public accounts, Statistics Canada and Ministère des Finances du Québec.

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An insightful piece on Manitoba’s political crisis and the problem with sales taxes :see T.C.Norris on blogger.

My original home province of Manitoba is currently embroiled in considerable political controversy over a broken election promise not to increase the sales tax and the fate of its NDP Premier Greg Selinger . As T.C. Norris aka Paul Barber points out its a big mistake in politics to promise not to increase taxes and then break your promise even if you say it only once during an election campaign. Premier Greg Selinger has made that mistake and now appears to be paying the price for it in terms of a decline in party poll numbers and a mass resignation of five members of his cabinet. The NDP has been the government of Manitoba for more than a decade and its been a popular competent government. But it appears to be in serious trouble these days. On the other hand the Conservative opposition has no honest answers when it comes to explaining how it will pay for necessary flood protection infrastructure if it rolls back the sales tax increase which it is promising to do. Once again if we had a program for infrastructure finance backed by the Bank of Canada there would be more sensible options. In any case have a read of Paul Barber’s post . It is excellent.

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Historical data on US unemployment:75 months ago unemployment was 5.8 %

One of the most important features of a recession is the length of time it takes for the unemployment rate once elevated to return to its pre recession lows. The US Bureau of Labor statistics fortunately keeps an excellent time series on monthly unemployment percentages that makes the task of data discovery easy..When we consult this series we see that the last time unemployment was as low as 5.8 % was July 2008. 75 months earlier.So the lasting lesson from a recession is that you should do everything possible to avoid them because the negative impact from them lasts a long time. If we compare the more than four years prior to July 2008 we can also see that the unemployment rate was below 5.8 %, in many months well below it for most of that period. One has to go back from July 2008 to March 2004 to find unemployment again as high as 5.8 %. So if things are to go well then the unemployment rate needs to drop below 5.0 % and stay there for an extended period of time to heal the economy further.For the entire period 1980 to October 2014 a period of 418 months there have been 76 months where unemployment was below 5 %.(Note to the reader if for some reason the link does not work simply go to the US bureau of Labour stats and request the historical time series for monthly unemployment 1980 to 2014.I reproduce it here below courtesy of the US bureau of Labour Statistics)

Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Annual
1980 6.3 6.3 6.3 6.9 7.5 7.6 7.8 7.7 7.5 7.5 7.5 7.2
1981 7.5 7.4 7.4 7.2 7.5 7.5 7.2 7.4 7.6 7.9 8.3 8.5
1982 8.6 8.9 9.0 9.3 9.4 9.6 9.8 9.8 10.1 10.4 10.8 10.8
1983 10.4 10.4 10.3 10.2 10.1 10.1 9.4 9.5 9.2 8.8 8.5 8.3
1984 8.0 7.8 7.8 7.7 7.4 7.2 7.5 7.5 7.3 7.4 7.2 7.3
1985 7.3 7.2 7.2 7.3 7.2 7.4 7.4 7.1 7.1 7.1 7.0 7.0
1986 6.7 7.2 7.2 7.1 7.2 7.2 7.0 6.9 7.0 7.0 6.9 6.6
1987 6.6 6.6 6.6 6.3 6.3 6.2 6.1 6.0 5.9 6.0 5.8 5.7
1988 5.7 5.7 5.7 5.4 5.6 5.4 5.4 5.6 5.4 5.4 5.3 5.3
1989 5.4 5.2 5.0 5.2 5.2 5.3 5.2 5.2 5.3 5.3 5.4 5.4
1990 5.4 5.3 5.2 5.4 5.4 5.2 5.5 5.7 5.9 5.9 6.2 6.3
1991 6.4 6.6 6.8 6.7 6.9 6.9 6.8 6.9 6.9 7.0 7.0 7.3
1992 7.3 7.4 7.4 7.4 7.6 7.8 7.7 7.6 7.6 7.3 7.4 7.4
1993 7.3 7.1 7.0 7.1 7.1 7.0 6.9 6.8 6.7 6.8 6.6 6.5
1994 6.6 6.6 6.5 6.4 6.1 6.1 6.1 6.0 5.9 5.8 5.6 5.5
1995 5.6 5.4 5.4 5.8 5.6 5.6 5.7 5.7 5.6 5.5 5.6 5.6
1996 5.6 5.5 5.5 5.6 5.6 5.3 5.5 5.1 5.2 5.2 5.4 5.4
1997 5.3 5.2 5.2 5.1 4.9 5.0 4.9 4.8 4.9 4.7 4.6 4.7
1998 4.6 4.6 4.7 4.3 4.4 4.5 4.5 4.5 4.6 4.5 4.4 4.4
1999 4.3 4.4 4.2 4.3 4.2 4.3 4.3 4.2 4.2 4.1 4.1 4.0
2000 4.0 4.1 4.0 3.8 4.0 4.0 4.0 4.1 3.9 3.9 3.9 3.9
2001 4.2 4.2 4.3 4.4 4.3 4.5 4.6 4.9 5.0 5.3 5.5 5.7
2002 5.7 5.7 5.7 5.9 5.8 5.8 5.8 5.7 5.7 5.7 5.9 6.0
2003 5.8 5.9 5.9 6.0 6.1 6.3 6.2 6.1 6.1 6.0 5.8 5.7
2004 5.7 5.6 5.8 5.6 5.6 5.6 5.5 5.4 5.4 5.5 5.4 5.4
2005 5.3 5.4 5.2 5.2 5.1 5.0 5.0 4.9 5.0 5.0 5.0 4.9
2006 4.7 4.8 4.7 4.7 4.6 4.6 4.7 4.7 4.5 4.4 4.5 4.4
2007 4.6 4.5 4.4 4.5 4.4 4.6 4.7 4.6 4.7 4.7 4.7 5.0
2008 5.0 4.9 5.1 5.0 5.4 5.6 5.8 6.1 6.1 6.5 6.8 7.3
2009 7.8 8.3 8.7 9.0 9.4 9.5 9.5 9.6 9.8 10.0 9.9 9.9
2010 9.7 9.8 9.9 9.9 9.6 9.4 9.5 9.5 9.5 9.5 9.8 9.4
2011 9.1 9.0 9.0 9.1 9.0 9.1 9.0 9.0 9.0 8.8 8.6 8.5
2012 8.2 8.3 8.2 8.2 8.2 8.2 8.2 8.1 7.8 7.8 7.8 7.9
2013 7.9 7.7 7.5 7.5 7.5 7.5 7.3 7.2 7.2 7.2 7.0 6.7
2014 6.6 6.7 6.7 6.3 6.3 6.1 6.2 6.1 5.9 5.8

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Good news:Unemployment falls to 6.5 % in Canada,5.8% in United States

The U.S. Bureau of Statistics and Statistics Canada released the unemployment numbers and their respective monthly labour force surveys this morning and the results are good. Its a pity the American electorate didn’t see the numbers before the mid term elections as they would have confirmed that the Obama stimulus and Federal reserve policies had worked, albeit imperfectly just as Canadians can see that keeping interest rates low and increasing deficit spending after the crash have also contributed to economic recovery in Canada.In the U.S. the participation rate is still on the low side not reaching the level that prevailed in 2007 , perhaps because in part of demographic factors and real wages are still not growing fast enough but the headline rate is now down to 5.8 % and the broader measure U6 is down to the 11.5 % range. There is more work to be down but the developments are positive and the Fed and the Obama government deserve credit for this.In Canada unemployment remains elevated at 7.7% in Québec which is foolishly implementing austerity. But Ontario’s rate has fallen to 6.5 % which is good for both Ontario and the national economy.

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Japan increases its use of Quantitative Easing in effort to overcome deflation:stocks rise in response,Keynes on front cover of Business Week

The Governor of the Bank of Japan(BOJ) several days ago announced that the Bank would greatly increase its purchase of government debt financing bonds and expand its asset base and thereby its monetary base in a major effort to reverse deflation and restore inflation targeted at 2 %. At the same time the Government pension investment fund announced it would increase its buying of stocks and decrease its holding of government bonds . The BOJ will increase its purchase of both government debt and stock based Nikkei ETFs. Doing the latter is regarded as qualitative easing because it adds riskier equity assets as opposed to government bonds which finance the national debt. It has an immediate impact along with the decision by the pension investment fund to expand equity purchases on stock market values.So Japan continues on this QE supplemented Keynesian course. We shall see what the outcome is over the next year. Meanwhile John Maynard Keynes is featured on the cover of Business Week magazine for a major story reviewing Keynes and advocating a return to his policies of defict financed spending to push the global economy away from recession and toward more rapid growth. The article is well worth reading particularly for readers who would like an introduction to Keynes in non technical language.

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The technique of deficit finance and the multiplier reviewed

I am republishing below a post I wrote trying to explain the multiplier as an effective policy tool embedded in Keynesian deficit finance. It first appeared in my older blog on blogspot Harold Chorney political economist in the middle of the financial crisis.Alongside my post on my current blog on the multiplier it is I think a useful guide.It was posted here on haroldchorneyeconomist as Some notes on the multiplier, April 4, 2012.

The technique of deficit finance
January 17, 2008 11:30 pm

The stimulus package being discussed in Washington will temporarily increase the American federal government deficit in order to inject a positive fiscal impulse to the economy. There seems to be, perhaps understandably, a fair bit of confusion about how such a stimulus can work to counter the recessionary forces now underway in the American manufacturing, housing and financial sectors of the American economy. First one should understand the assumptions that lie behind the theory of deficit finance as well as some statistical facts about the history of deficits and surpluses and the business cycle in the US.
First of all, whenever the government spends on programs or transfer payments more than it takes in in revenues the government will run a deficit. This deficit can be measured and financed in a variety of ways and it can be spent on a variety of programs or tax reductions.In terms of measurement it seems sensible to view expenditures on infrastructure as long term investments and treat them accordingly in the public accounts.

In addition most economists who advocate deficit finance to counter an economic downturn assume that for every dollar spent directly there will be at least another dollar or possibly $.66 of additional spending that will be induced by the original expenditure. Some economists would suggest that the multiplier would be larger others that it would be smaller.

This multiplier is bound up with what is called the Keynesian or more accurately Kahnian multiplier(named after the brilliant British Jewish economist R.F.Kahn who was a very close colleague of Keynes at Cambridge , one of the first economists to develop the idea and who made a major contribution to the General Theory.)

The way that the multiplier works is derived from the mathematical formula for summing up the total of a geometric series. For example let us assume that the series is 1+ v + v(v) + v(v)(v) +….= 1/(1-v) if -1 is less than v and v is less than 1.
(see Robert Barro, Macroeconomics, p.508)

The formula for the multiplier is then 1/1-mpc where mpc is the marginal propensity to consume equivalent to v in the above geometric progression.

In other words the percentage of the last additional dollar you receive that you spend. It also matters where you spend the money. If you spend it on goods and services produced in the country the multiplier is much larger than on goods and services produced elsewhere but sold in the country by a local sales staff. These leakages plus monies received which are not spent but either saved or hoarded are subtractions from the overall multiplier impact.

So lets begin with some statistical facts. The current American deficit is about 1.7 % of the US GDP. The GDP is 13.97 trillion dollars( as of the end of the third quarter 2007) so the deficit is around 244 billion dollars. A 1 % stimulus package would increase the deficit by a further 140 billion, a 2 % package by 280 billion a 3 % package by 420 billion. During the war years 1943, 44 and 45 the deficit rose above 15% of the GDP peaking at over 31 % in 1943. A 3-5 % deficit is very modest indeed in comparison.

If we assumed a multiplier effect of secondary increases in expenditures traceable to the initial injection of 140 billion and a multiplier of 1.5(not all economists would agree that it would be that large, others might suggest it would be larger) the total impact of a one time injection would be $210 billion .

Total accumulated gross Federal debt of 9196.5 billion is currently(the net product of previous deficits and surpluses) 65.7 % of the GDP. During the war years 1942-45 this ratio reached 119 %of the GDP.

To finance this without raising interest rates the Fed Reserve can either buy bonds originally issued by the Treasury but currently held by individuals or financial houses for some of this additional amount thereby creating high powered money that partly offsets the sale of bonds by the Treasury which finances the deficit and then sell some of these bonds to the general community of investors or it can simply expand the money stock. If it does the former however and the financial markets resist the interest rate that the bonds are offered at, the Fed will have to purchase an equivalent further offsetting amount and or inject further high powered money into the system.Later as the economy recovers it can and should withdraw some of the stimulus by selling these bonds back to the investing markets.

(For a thorough discussion of these techniques and the operations of the Fed and the treasury see the work of Robert Eisner , a former president of the American Economics Association and late Professor of Economics at Northwestern University in Chicago where he taught macroeconomics. I had the pleasure of discussing these themes with Eisner in person in Montreal when I brought him to lecture to my students in 1988. Robert Eisner, How Real is the Federal Deficit, pp.131-135.New York;The Free Press, 1986. Eisner’s research and his book was supported by research grants from the National Science Foundation.)

The point is that true Keynesian stimulus involves the scissors effect of a fiscal stimulus financed by by a supportive monetary policy. This is why monetarists like Karl Brunner insist that Keynesianism would only work with the creation of high powered money. But that is a debate for another time.

In the current environment in the financial markets I would think that these bonds will be viewed as highly desirable investments. The more that the Fed purchases the bonds the greater the stimulus however. Strict monetarists will argue that this will also lead to higher inflation in the medium to long run.

Keynesians would not necessarily agree arguing that with a slowing economy and higher unemployment the stimulus will increase largely output rather than prices. Later as unemployment drops some of the stimulus will be transferred to the price side of (P.O i.e.average prices times units of output) at which time the Fed can sell more of the debt to the market.

Once the money is spent on tax rebates, infrastructure projects, food stamps and environmental projects it is received as income by both taxpayers and employees who are hired to work in these projects or who are hired by the private sector who because of the stimulus project have experienced a greater demand for their products or services and have changed their mood from pessimistic contraction to optimistic expansion.

The additional money injected circulates in the economy. Much of it depending on the average marginal propensity to consume will be spent again and recirculate throughout the economy changing expectations from pessimistic ones to optimistic ones.

Investments once postponed will be considered again and a number of them undertaken. As unemployment drops the economy moves from recession to steady growth again.The newly employed both spend their money on goods and service and pay taxes to government. Some of what was spent, but not all, returns to the Federal Government in new tax revenues. As the economy grows larger the debt to GDP ratio provided the interest rates are kept lower than the growth rate in the economy begins to fall.

A little later the actual deficit may well shrink as well.Excess savings that would have subtracted from total aggregate demand because they could not find suitable safe and attractive investment opportunities will now be effectively channelled into attractive investment opportunities.

The stock market beset by uncertainty and insecurity will also begin to experience bullish sentiments. The unemployment rates will drop perhaps by as much as 1 % point as over a million and a half new jobs
are added to the labour force. If the jobs pay on average 40-50,000 dollars the federal and state governments will reap substantial additional tax revenues to help reduce the cost of the stimulus package.

The stimulus package will have done its work.

What might go wrong ? Well the multiplier might be smaller because of leakages to foreign imports. Recipients of the tax rebates might decide not to spend their rebates trying to save them instead, less likely if the rebates disproportionately target moderate and low income people. The Fed may cause interest rates to rise by trying finance the deficit too quickly in the bond markets.

Financial journalist might write influential articles that convince people that the stimulus package won’t work and that interest rates will rise and inflation will result.

Here the collective wisdom of the public which is somewhat more Keynesian than the financial journalists will cancel out most of this kind of negative journalism.

Keynesian rational expectations rather than monetarist ones should prevail !

But for the moment if the members of Congress seize the day and the President co-operates and the package is large enough to do the job, the US can once again demonstrate western leadership in economic policy making that will have far reaching positive consequences.

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Monetized government Debt as a percentage of the broadly defined money supply and the rate of inflation Canada 1950 to 1989

I am reproducing the following table of data because of its importance in showing that there is no necessary correlation between the percentage of debt that is monetized as a proportion of the broadly defined money stock
and the rate of inflation, contrary to the conventional wisdom. There were years when the central bank held a much smaller proportion of the debt in relation to the money stock and the rate of inflation was higher and there were years when the proportion monetized was much greater and the rate of inflation was very low. My motivation in researching this relationship was wanting to show that Keynesian deficits would not necessarily result in interest rate crowding out as many monetarists claimed and to ensure that this would not happen the central bank had the power and the policy room to keep rates low to allow fiscal stimulus to do its work in reducing unemployment. I first wrote about the issue in 1984 and published the table in the beginning of the 1990s. Our recent experience in the U.S. with a large rise in the percentage of the debt that is monetized through quantitative easing and the stability of low inflation should reinforce the argument that there is no necessary connection provided the level of monetization is within certain limits. Inflation is not a black box experience. Rather it like unemployment is a complex phenomenon in which the structure of markets, the degree of oligopoly power and the strength of trade union wage negotiating power all must be factored in.

Table 3:
Monetized government Debt as a percentage of the broadly defined money supply and the rate of inflation Canada 1950 to 1989.
Rate of inflation
Source: Calculated from the Bank of Canada Monthly Review and the Canadian Department of Finance Quarterly and Annual reviews 1950 to 1989. The table first appears in Harold Chorney ‘’A Regional Approach to Monetary and Fiscal Policy’’ in J.McCrorie and M.Macdonald, The constitutional future of the Prairie and Atlantic Regions of Canada, Canadian Plains Research Centre, University of Regina, 1992. It is also discussed and reproduced in Harold Chorney ‘Debts, Deficits and Full Employment’’ in D.Drache and R.Boyer, States against Markets:The Limits of Globalization, Routledge, 1996  and the approach as a policy tool in The Deficit:Hysteria and the Current Crisis, The Canadian Centre for Policy Alternatives, Ottawa: 1984, which is largely reproduced in my collection of essays with P.Hansen, Toward A Humanist Political Economy, Montréal&N.Y. Black Rose Press,1992.
My colleagues the late John Hotson of Waterloo and Mario Seccareccia of the Université d’Ottawa also co-authored one of the publications, a pamphlet which sought to popularize the argument entitled The Deficit Made Me Do It.
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