Liberals propose progressive major investments in infrastructure financed by appropriate temporary deficit spending

Finally there has been an important Keynesian proposal that breaks with the  obsessive misguided fiscal orthodoxy of the other two leading parties in Canada’s federal election.Both the Conservatives and the NDP insist they will not in any circumstances run deficits to finance important job creating and growth sustaining investments in infrastructure in the coming year.

They take this position despite there being considerable evidence of slow and possibly even negative growth in the Canadian economy over the past six months. The Liberals led by Justin Trudeau have now courageously committed themselves to be ready to undertake major investments, some 10 billion dollars over the next three years on transit improvements in Canadian cities and social and green infrastructure across the country. The Liberals plan to increase infrastructure spending by 60 billion over the next decade and expect to be able to balance the budget over a longer term cycle . Now given that the Canadian economy has a GDP of $ 2.o trillion, 60 billion over ten years is still a very modest amount of money out of the Federal government’s annual spending budget of $289 billion.

Nevertheless it is a step in the right direction and far more sensible than the dogmatic insistence of  both Mr. Harper and Mr. Mulcair that deficits are out of the question. Intergenerational burdens that Mr.Mulcair speaks about are an illusion since future generations inherit all the non consumed assets of previous generations like stocks, bonds and real estate as well as the public assets created by investments in infrastructure.They are also harmed by any neglect in infrastructure spending and environmental damage brought about by this neglect and social problems that flow from higher unemployment and  social capital investment neglect. It is quite false to argue otherwise.

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Stock market turbulence and financial instability once more in play: Irrational behaviour at the core

As party leaders in Canada fall over themselves to pledge their fiscal conservatism, with the possible exception in certain respects of Liberal leader Justin Trudeau global markets have gone through a crushing drop of 1000 points in the Dow on opening yesterday after huge losses in  the Asian markets and a sell off in Europe. The final drop was over 550 points on Wall street and todays market as of this afternoon has rallied back some 300 of those points on the Dow. I should point out I have a small retirement fund that is invested in the market so readers should not misconstrue my remarks as offering any sort of advice.

I believe along with other Keynesians and post Keynesians that markets in stocks and commodities and financial instruments are fundamentally capable of huge irrational panic driven swings. After all how else can we have a Dow fall 1000 points on opening yesterday driven by futures speculators trading on bad news from China and a day later rising 250 points ? Which is the right price, Friday’s price before the crash,Monday mornings’ price after or todays mid afternoon price that the market has rationally yielded ?

As I have written in my long paper on the origins of quantitative easing and the roots of the 2008 crash(After the crash,Rediscovering Keynes and the Origins of Quantitative Easing) throughout its history there have been many such irrational panics and speculative bubbles bursting. That is why the well being of the economy is too important to leave to the supposed wisdom of the financial markets. It is too soon to conclude that all will be well since the market has recovered some of its losses today so far. We shall see. The Chinese have cut their interest rates which may help their markets which in any case are prone to wild speculation akin to a casino. So what about our politicians. It is long overdue for them to understand that the role of the central bank and the Government through the application of fiscal and monetary policy is to moderate the irrational swings which the financial markets can transmit to the overall economy in order to foster solid real growth and low unemployment and moderately low inflation. At the moment there is no risk of inflation. The risk in a world of falling commodity prices is in fact the opposite too low an inflation rate .

The supposed wisdom of financial markets about appropriate fiscal policy and always balancing the books should be ignored since the financial markets are quick to call for government intervention to bail them out whenever their excessive behaviour gets them into trouble. If the turbulence continues and damages the real economy then governments need to be prepared to invest in infrastructure, education and social services  financed by deficits if necessary to stimulate and stabilize the economy. These expenditures should be separated out from the current expenditure account and  should be financed over a longer time period so that they are balanced over the longer cycle. The financial markets are neither wise nor rational but they are a central part of modern capitalism so they must be properly understood by policy makers. Simply repeating the ” balance the books” mantra will not do.

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Who pays the corporate income tax ? Shareholders or Workers ?

One of the hot topics sure to come up during the election campaign and the debates is the issue of taxation. The two opposition parties both are proposing increases in taxation .But their plans differ. The Liberals want to increase taxes on the top one percent of income earners, those earning above $200,000  through  an increase in the marginal rate of taxation for those earning above this level. This idea arises out of the work of inequality experts like Thomas Piketty who argue controversially that the normal capital accumulation process inevitably will lead to growing inequality unless there is a conscious policy of countering the tendency.

The New Democrats, on the other hand , surprisingly don’t address the issue of wealth directly. Instead they propose an increase in the rate of corporate income tax from the current historically low federal rate of 15 % down from over 25 % a few years ago. The combined rate for Ontario is now 26.5% versus 39% in the U.S. They haven’t specified the exact rate they want to raise the rate to but from comments by their leader Mr.Mulcair it would be somewhere close to 18 %. For purposes of comparison we should note that the U.S. rate is much higher.

Mr. Harper will argue that this increase in the rate will kill jobs and slow growth losing corporate directed investment to our competitors. Mr. Mulcair will respond by pointing out that this proposed rate increase will still leave the rate well below what it was when Mr. Harper came to power.

Furthermore ,most shareholders are well off. These well off shareholders have done very well this past decade unlike the vast majority of Canadian workers.In addition there are many loopholes in the tax act by which corporations can legally shelter income by moving their head offices to a low tax jurisdiction.

But who pays the tax ? The fact is there is no scientific consensus on the precise answer to the question. Some economists argue that the tax is largely paid by the shareholders of the corporation who receive smaller after tax dividends and capital appreciation in order that the tax can be paid. Other economists argue that while shareholders pay as much as 80 % of the tax, the workers pay as much as 18 % in the form of lower wages due to lowered productivity because of the slower growth of capital and investment in technology. There is also the argument that the tax can be largely shifted to the final consumer of the product. But here we have to pay attention to degree of oligopoly power the firm has which determines its ability to increase prices without losing more sales than its worth to competitors. If it lacks this oligopoly power it cannot shift the tax forward to consumers very easily.

So the final judgement is up in the air. Increasing taxes may well yield additional revenues from the corporations and shareholders but will it lose revenues from workers whose wages and job opportunities grow more slowly. Its a complex question that needs careful thought and research to answer. We will see if in the debates the leaders address any of these complexities or simply resort to vague slogans and sweeping claims.

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Canadian election underway:Close race according to polls; deficit hysteria plagues all three of the major parties

Conservative Prime Minister Stephen Harper visited the Governor General on Sunday requesting Parliament be dissolved and a general election called for Oct 19. This unleashed what will be a 78 day campaign the longest in history since the nineteenth century. Initially this will allow the Conservatives to outspend their rivals by a substantial margin since they have been more effective in raising campaign contributions which are 50 % covered by taxpayers. The longer campaign raises the ceiling on allowable expenses and the Conservatives having much more money to spend will take full advantage of this. Critics of Mr.Harper including a number of political leaders called this action cynical. Time will tell if the electorate shares that view.

Mr.Harper launched his campaign on two themes security and the economy. This is a curious choice given that there are signs that the collapse in oil prices and the turmoil in in European capital markets and the slowdown in China suggest the strong possibility that the first quarter of negative growth will continue in the second quarter with the result being announced in the middle of the election. This emphasis upon Conservative strength in running the economy  in dangerous times may backfire if the electorate decides that tough times are getting worse and the government is responsible.

Each of the three major parties have displayed deliberate politically cynical ignorance in discussing the issue of deficits and the economy. For starters Mr. Harper accused the New Democrat leader Thomas Mulcair of advocating reckless spending programs which would result in Greek like debt and deficits.This is clearly a blatant falsehood. As the economy slows increased public spending is a good idea not a bad one.Mr. Harper who is a trained economist knows this. Indeed despite his preference for fiscally conservative policy after the crash under pressure from the opposition parties he undertook a substantial stimulative deficit which helped  protect Canada from the full shock of global economic collapse. This is to his credit and ought to have cured him from his case of deficit hysteria. Regrettably it appears not to have.

Mr.Mulcair for his part foolishly criticized Harper and his government for running these necessary deficits when he ought to know and certainly some NDP insiders know as there are among them some of my former students that the crash and recession was the worst since the great depression and the data on jobs lost, spike in unemployment and public finances will reflect these facts.

Mr. Trudeau the Liberal leader is not an economists but has economists on his team who know full well that balancing the  operating budget over the cycle is desirable but one must not obsess over a given year particularly when the economy is in decline and expenditures are rising and revenues falling. One should also separate the capital infrastructure budget from the current operating budget. So rather than trying to make electoral points on living within our means Mr. Trudeau ought to avoid Mulcair’s blunder as much as possible.

I remain cautiously optimistic  that if the journalists do their job in the questions they pose about the facts of the last decade this election will diminish deficit hysteria rather than inflame it.

The latest poll of polls has the NDP with 33.2%, the Conservatives with 30.9 % and the Liberals with 25.9 % The Bloc Québecois 4.7 % the Greens 4.7 % and others 0.7 % But it is a long way to October 19.

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High employment deficit or surplus key to understanding how deficit finance can work to promote growth and lower unemployment: How to escape deficit hysteria .

The orthodox dogma about deficits is that they are “always very bad witness Greece”. This is the claim of the austerity obsessed fiscal conservatives. But what a lot of the advocates of this position seem to ignore is that this austerity free market approach is identical to what was foolishly followed during the great depression of the 1930s and which led to a much worse depression, the rise of fascism and eventually to world war.It is remarkable how little the establishment has learned from history. There is a scientific rebuttal of this argument available in the literature going back to Abba Lerner and John Maynard Keynes. More recently economists like myself, Robert Eisner, Ruben Bellan and other Keynesians have tried to explain this logic to both professional economists and  the general public. But apparently to no avail. So I am republishing below a post from 2011 on exactly this subject. Much misery can be avoided by the use of reason instead of ideologically driven ignorance in solving our economic problems. But it takes courage to do so.

One of the best Keynesian economists in the U.S. was the late Robert Eisner who taught for many years at Northwestern University and who was at one time president of the American Economics Association. I had the pleasure of spending a day with Eisner when he came to Montreal at my invitation in the late 1980s to speak to my students about Keynes and macro policy. His book How Real is the Federal Deficit (1986)is still an essential text in understanding this theoretical and policy question.

Around the same time a much less well known Canadian economist who taught for most of his career at the University of Manitoba Ruben Bellan had published in Canada a work on lowering unemployment through stimulus and appropriate monetary and fiscal policy with the apt title The Unnecessary Evil:An Answer to Canada’s High Unemployment(1986). Bellan also approached the issue from a Keynesian perspective and grounded his argument in the success of the wartime policies of full employment through investment and government expenditure that had successfully ended the great depression in Canada. I had published my monograph The Deficit and Debt Management :An Alternative to Monetarism in 1984 that made quite similar arguments to both Bellan and Eisner but Eisner because of his prominence received considerable attention from both the New York Times and the Wall Street Journal as I recall but after a brief flurry of interest his argument was forgotten.

Bellan was subject to several nasty dismissive reviews in the conservative business press and my own work received some attention most of it critical and like the others relegated to obscurity. The fact was and remains so all three of us were largely correct in what we had argued. It is now 25 years later and the time long overdue to reconsider the arguments in detail so as to help perhaps prevent another great depression from coming about due to the triumph of ignorance and ideological bias over rational inquiry.

Bellan put the issue rather well in the opening paragraphs of his book.

” for the entire decade of the 1930s the Canadian economy wallowed in the worst depression in history. the unemployment rate averaged about 15 %; in 1932 it was a catastrophic 22%. World War II…brought a dramatic transformation. By 1941, once the war effort had reached high gear, severe unemployment was replaced by a critical labour shortage…This galvanization of the Canadian economy from sluggishness to hyperactivity was achieved by the federal government’s enormous spending…The government could have spent money on this scale previously; war did not provide it with financial capability that it had not possessed in peacetime. It had refrained, however, forbidden by an economic orthodoxy that warned both that it was impossible and that the results would be catastrophic. first declared the experts, Canada simply didn’t have the money; it would have to be obtained from foreign sources-and they would no doubt refuse to supply it. secondly, a large addition to the country’s monetary circulation would inevitably cause a ruinous inflation. finally, the burden of debt assumed by the government in borrowing the money would oppress the country ever after.” (pp 9-10)

Bellan goes on to detail how the experts of the day insisted that only private sector activity and new investment could do the job and how it would be” ruinous folly” for the government to undertake public spending to accomplish the task.

It is quite simply amazing how all of these discredited arguments have come back in contemporary times. Bellan concluded the opening chapter of his book with a plea for a ”more humane -and less wasteful-economic policy” and pointed out that he had ”greater respect for the free enterprise system than did those champions of free enterprise who insist it is incapable of providing useful employment for all …who seek it.” (p.11)

Eisner would not have disagreed with the thrust of Bellan’s argument . Because he was much more of an econometrician and macro theorist he established his argument in a different more theoretical fashion. One of the key tools in his approach to crunching the data to prove his case was the concept of the high employment budgetary deficit(or surplus) which he defined as follows;

”it is calculated from a budget that presents estimates of what expenditures and receipts and hence the deficit would be if the economy were at a level of activity independent of cyclical variations in employment, output and income. Since the cyclical variations in output and income are closely associated with those of employment and unemployment the budget has usually been defined for a constant rate of unemployment.” (p.83)

That rate of high employment was originally defined as 4 % unemployment but was raised over time in stages to 5.1 % by 1975.(See Eisner, appendix C, section E p 215). Once one makes this adjustment in the data Eisner shows that deficits have a strong positive impact on the economy. What this approach also shows is that nominal deficits once adjusted for the cyclical component often turn into surpluses which explains the mystery of why a cyclically induced deficit not sufficiently treated with stimulative fiscal policy can accompany high unemployment and not appear to work to cure the problem. This is so because the apparent deficit is actually a contractionary high employment surplus or a much smaller deficit than is necessary to overcome the cyclical downturn’s impact on employment and growth.

To use deficit finance properly you need to have a high employment deficit when you are suffering from excessive unemployment.

All too often the deficit that prevails is the consequence of the rise in unemployment rather than deliberate counter cyclical spending. This cannot correct the problem ,particularly if most of the automatic stabilizers have been damaged or diminished by years of neo-con policy.


Ruben Bellan, The Unnecessary Evil:An Answer to Canada’s High Unemployment, Toronto:McClelland & Stewart, 1986.

Harold Chorney, The Deficit and Debt Management:An Alternative to Monetarism, Ottawa:The Canadian Centre for Policy Alternatives, 1984.

Robert Eisner, How Real is the Federal Deficit,New York: Free Press ,Macmillan, 1986.

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The new imperial order in Europe: financial gunboat diplomacy and the decline of European civilization

The diktat imposed by Germany and its neo-con vassal states upon Greece in these recent hours conjures up correctly I think the days of imperial excesses in Asia in the nineteenth and twentieth century by the western powers where servitude to the imperial powers was delivered quite literally on the barrels of the British and American gunboats that penetrated these waters.This time the gunboats have been replaced by the abstract but very real weapons of the financial asphyxiation powers of the ECB and its ability to destroy the Greek banking system and it must be said the lack of proper preparation on the Greek side to launch and defend a parallel currency as a viable alternative to what has transpired.

The former Greek Syriza finance minister, a professional economist has described the terms of surrender to Germany as another punitive crushing treaty of Versailles The Slovak finance minister has admitted that the terms are designed to crush the popular democratic uprising in Greece. Economists of many stripes concur that the crushing terms can only destroy the Greek economy and ultimately greatly discredit German leadership of the EU. Germany has behaved in a shameful manner which raises very serious questions about the viability of the Euro zone and the spectre of the collapse of the European project. When Robert Schumman,Jean Monnet and the early pioneers of the European Coal and Steel Community envisaged Europe and the common currency they had in mind an idealistic project that would replace Prussian and Teutonic authoritarianism and militarism by a peaceful movement meant to enhance the European values of humanism and mutual aid. They would be appalled by what has transpired. The immoral and amoral members of the governing councils of Europe and of the institutions like the European Central Bank and the IMF have betrayed the principles on which the original union was predicated. Greece and its poor will be wrecked further by these measures and the stain on European history will be large.The extremists in Greece of the neo-Nazi kind will be emboldened and strengthened. Sparta not Athens may emerge triumphant.

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The Terrible Return of Financial Authoritarianism:US and Canada have a role to play in Overcoming It.

It may well be that a third “bailout” pact will be successfully negotiated over the weekend with Berlin and the European conservatives as usual calling the shots forcing the Syriza Government to discredit itself in the eyes of its voters by accepting another austerity oriented package but with the promise that in future there will be consideration to restructuring some of the debt in order to make it more sustainable over the long haul . It may also contain some legitimate reforms with respect to diminishing corruption and clientelism in Greece.Nevertheless if the press rumours are correct it also involves a larger austerity package than was rejected by the Greek electorate in the recent referendum which will meet with great disillusionment and anger in Greece already wrecked by the earlier austerity loaded packages. Joseph Stiglitz has pointed out that contrary to the economic analysis that was contained in the earlier bailouts and predicted the opposite ( which it should be stressed were largely designed to rescue the Greek banks and their German and French creditors and did not transfer funds for use in Greece for Greek citizens) the GDP shrank by 25 %. Prior to the crisis Greek GDP had been growing at 3.4 % per year versus a 2.4 % growth rate for the EU as a whole. Some analysts argue that the Greek debt is sustainable since the average interest on the debt is 2 %  and if austerity were lifted and stimulus substituted a growth rate of more than 2 % could easily be accomplished which would shrink the debt to GDP ratio over time considerably. The Belgian economist Paul De Grauwe who teaches at the LSE argues this position. Greece is solvent but illiqid 

The illiquidity comes about because of the policies of the ECB which has artificially and possibly illegally restricted the normal central bank function of  a bank of last resort in helping a member bank deal with a bank run. There is over 26,ooo million euros in coin and cash in circulation in Greece but because of the fear that has been spread on account of the ECB’s restrictions on supply and the capital controls the cash is being hoarded in households and businesses. The normal velocity of circulation in Greece appears to be too low to sustain the economy in such circumstances. But because of the fear people’s behaviour has altered. Some wealthier persons have been trying to spend their cash and acquire alternative stores of value in jewelry, appliances, automobiles etc because they fear a bail in of part of their bank accounts as occurred in Cyprus.  De Grauwe may well be right but unfortunately the Germans and other northern Europeans remain obsessed by the necessity of austerity despite all the scientific evidence to the contrary.

What can we North Americans do to help Greece. Well many of us live in colder northern climates and holidays in sunny Greece surrounded by classical antiquities , tavernas and music have a strong appeal. Stiglitz suggests in the absence of a more generous deal the US offer a swap line on debt to the Greek central bank to enable it to meet the needs of its clients Canada could do the same with a smaller ceiling than the US.In return perhaps both countries could qualify for more attractive holiday packages in the sun for all of our citizens.

If Greece is unable to get a reasonable deal there is a lot at stake in Europe with the danger of the rise of extremist parties .North Americans have had to rescue the Europeans once before in history at a terrible cost in lives and treasure. Indeed Germany who has been so tight fisted in its demands ought to recall the huge debt forgiveness and aid it received from the U.S after the second world war something which both Stiglitz and Piketty have pointed out. In addition to this sort of central bank help we should call an international  conference on reconsidering austerity versus stimulus as a response to crises . For Greece itself it should consider very carefully the cost involved in hanging on to the euro and weigh that against the possibility of an orderly transition to a parallel currency that allows it to escape from the suffocating  hand of austerity.

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