The recent election of an anti-austerity government in
Greece and its stubborn “negotiation” with the European Union is only one
example of a tendency among politicians to pretend that government debts and
deficits do not matter—or, at least, are of secondary importance. In this post
I make the case that, from both a Christian and an economic perspective government
debts and deficits (whether national, provincial/state or municipal) do matter. Political-economics as God’s Steward includes
a stewardly use of governments’ financial resources.
Deficits,
of course, occur whenever a government’s revenues (tax receipts) are greater
than its expenditures—when they spend more that they receive. The debt is the accumulation of past deficits[1]—the
total amount of outstanding government borrowing. Deficits can be reduced and
eliminated by cutting spending (austerity) or by raising taxes—neither of which
go over well with voters (if they have not first been convinced of the
necessity). In a growing economy, tax receipts will automatically increase as
incomes and business profits increase; if government expenditures are at the
same time restrained, deficits will be automatically eliminated—the hope and
promise of most politicians!
The Problem
The
problem for Greece has been that this hoped for growth has not materialized.
Rather, it (along with its Southern European neighbours-Italy, Spain, Portugal)
has been an economic disaster zone[2]
with high inflation, slow economic growth, stifling regulations and wasteful
government ownership of industries. Politicians, for decades, granted excessive
wages and benefits to overstaffed bureaucracies and employees of nationalized
industries[3].
They subsidized failing companies and overregulated to protect high incomes
from domestic and foreign competition. Government deficits were financed by
“printing money”—borrowing from the central bank, creating massive inflation
(averaging 17% a year from 1973-98) .
Joining the EU temporarily solved the problems and at least prevented
politicians from further financing the deficits through “printing money”.
By 2008,
the world-wide recession, it became clear that through various creative
accounting techniques, the size of the actual deficits had been hidden and few
of the reforms agreed to as condition for joining the EU, had been
implemented. In 2008, the EU and global
financial institutions agreed to provide massive financial assistance
(bailouts) but the payments were to be made in installments depending on
adoption of specified reforms—including reducing the deficits. Since 2008
modest economic reforms were instituted and deficits reduced trough spending
cuts and tax increases.
Implementation
of reforms, however, brought demonstrators into the streets to protest
necessary cuts. Moreover, a left-wing government was recently elected on the (economically
impossible-to-keep) promise to reverse the trend—to reverse spending cuts and
other measures agreed to with its debtors.[4]
The new government, however, has collided with northern European politicians
led by the German Angela Merkel who, not unreasonably, expect Greece to keep
its promises! In Greece, politicians, who want to be elected, can, apparently,
not take prudent financial action—particularly when the people have been
brought up to believe that deficits don’t matter. Somehow, the people have been
led to believe that it is the lenders—rather than former governments-- that
have caused Greece to face hardship.
At the federal level, the opposition is tending to downplay the importance of a balanced budget. Liberal finance critic Scott Brison said the Conservative pledge to balance the budget in the coming year is "a political imperative, not an economic one.. It's pure politics.”[7] Neither, he or the Liberal Leader, Justin Trudeau, would say what they would actually do about the deficit. The NDP’s, Thomas Mulcair would also not clarify his position on deficit reduction.[8] The position that “ the battle to slay the deficit was all about political optics, not economics” is also pushed by left-wing economists such as Jim Stanford, an economist with Unifor, Canada’s largest private-sector trade union and frequent panelist on the CBC. Canada’s deficits and debt, he argues, were among the lowest in the world.[9]
Meanwhile,
in the U.S., although president Obama has managed to reduce the federal budget
to its lowest level since his first year in office, it still stood at $486
billion. Even, a budget proposed by the Republicans aims to reach balance only
by 2024 while its authors claim the Obama budget process would still leave $700
billion by that year.[10]
Even the Republican proposal deferring a budget balance for another ten years,
further illustrates a “does not matter” attitude to deficits.
In the
rest of this post, I will seek to show that for Christians such a cavalier
attitude to debt and deficits is unacceptable.
Indebtedness is a rejection of God's blessing
As a starting point, we should
reflect on Deut. 15:6 where God promised the people of Israel that,
"the Lord your God will bless
you as He has promised, and you will lend to many nations but will borrow from
none"
To be free of national debt can, therefore, be
seen as an indication of God's blessing. If we, as a nation, can live free of
debt, are we not wilfully rejecting God's blessing by running continuous
deficits and accumulating debt? Certainly, that applies to debt owed to
foreigners. The Greek situation, with the government being dictated to by the
European Union and the International Monetary Fund is an example of how
dangerous being beholden to others is.
Increasing debt is robbing our children.
The Greek situation also shows that
running continual deficits simply means that the payment of our current
extravagances is being deferred to future generations. For years, politicians
(and the citizens) lived beyond their means and an unwilling next generation is
now called upon to pay the debt. Is that not in contradiction of the eight
commandment? Prov. 13:22 teaches us that "A good man leaves an inheritance
for his children's children". Would this word of wisdom not imply that it
is unacceptable to leave one's children with a negative inheritance of
outstanding debt?
That concern for future generations
can also be derived from our stewardship role. John Calvin's explanation of
Genesis 2, drew this conclusion:
Let him who possesses a field, so participate of its yearly fruits, that
he may not suffer the ground to be injured by his negligence; but let him
endeavour to hand it down to posterity as he received it, or even
better cultivated.[11]
Surely that would imply that we should leave
our country not only as good or better than we received it but that we should
not burden it with a greater mortgage!
Debt increases unemployment
Although many have suggested that we
face a choice between fighting unemployment and reducing the deficit, economic
reality is not that simple. Rather, high national debt may, in fact, be one of
the major causes of unemployment. In the first place, government borrowing may
"crowd-out" business borrowing. Secondly, the threat of future tax increases
affects profit expectations. Both factors discourage business expansion and the
ability to create long-term productive jobs. Which properly run business would
voluntarily invest in Greece right now?
Government borrowing increases the
demand for money and will, eventually, increase interest rates. Increasing
rates will reduce business investment in new factories and equipment since some
potential projects will no longer be profitable if they have to be financed at
the higher rates. That is, government borrowing "crowds out" business
borrowing. As a result, fewer new jobs are created. Moreover, since interest is
a significant cost of doing business, domestic firms will, if they have to pay
higher rates, be at a competitive disadvantage with their foreign
competitors--again affecting job prospects. A reduction in real interest rates
(after considering inflation), has significant potential for generating
business expansion. On the other hand, if deficits go unchecked, the
probability of continuing government deficits will tend to keep interest rates
high.
In addition, large deficits imply
the threat of large tax increases in the future since--voluntarily or under
pressure from international markets-- a government will, sooner or later, have
to remedy the situation. Potential tax increases make both businesses and
individuals wary. Businesses remain cautious about expanding--since higher future
tax rates may make currently attractive investments unprofitable. Consumers
remain careful in making long-term spending commitments since future tax
increases are likely to reduce their incomes or even cause them to lose their
jobs as businesses adjust to the tax impact.Removing the threat of future tax increases and
high interest rates by rapid reduction of the deficit, improves business and
consumer confidence. In turn, that confidence leads to increased spending and job
creation. While the speed and extent of such a reaction cannot be predicted, it
is clear that reducing deficits can encourage the private sector to
create more jobs.
Furthermore,
a precarious financial situation also severely restricts the government's
ability to fight unemployment directly. Although there is now, in general, a
well-founded skepticism concerning the ability of governments to
"fine-tune" the economy, continuing large deficits make the available
economic tools even more ineffective. In disaster economies such as Greece, the
levels of existing debt make stimulus spending impossible. Not saving for a
rainy day in good times (running surpluses) means that hard times will be
longer and carry a heavier cost.
Thus, although the fight to reduce unemployment
is critical, the Christian must simultaneously be concerned about the national
debt and deficit.
Debt restricts our ability to deal with other serious problems
Not
only is our ability to fight unemployment hampered by past deficit spending, but
so is our ability to deal with other serious problems. To meet our obligation
to care for the weak in society, action is required to reduce poverty in Canada
and the rest of the world. In Canada, we, especially, need to resolve the land
claims and economic problems of our native population. Poverty in the Third
World remains a major challenge--which continues to increase due to regional
and tribal wars around the world and the massive refugee problem resulting from
that. Moreover, preservation of God's creation requires action to improve our
polluted environment.
Finally, national debt has been a
major contributor to past inflation problems and has hampered our ability
counter it. In a period when prices are already rising, government deficits
increase total demand in the economy and cause more inflation. Moreover, the
threat of future deficits maintains inflationary expectations and leads to
higher nominal interest rates as savers seek to protect themselves from future
inflation. In inflationary periods, proper fiscal policy should have removed
purchasing power by increasing taxes or cutting government spending. Failure to
do so, however, left monetary policy--increasing interest rates--as the only
tool to fight inflation. Consequently, the Bank of Canada--the central bank
charged with maintaining price stability--had to maintain an inflation fighting
stance much longer and stronger than would otherwise have been necessary--with
a significant negative impact on jobs[12].
Conclusion
It should be clear from the above,
that deficits do matter. Christians should support
those who take seriously the reduction of deficits. That, however, does not
mean that we should seek to balance the budget in every year. I hope to address that in the next post.
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RELATED POSTS
Choice of Economic Systems: A Conditional Preference for the Market—what does that mean?
[1]
When deficits are measured on a comprehensive basis. For this post, we ignore
the current movement among provinces to focus on an “operational deficit” which
excludes “capital” spending.
[2]
See e.g. Herbert Gruble, “In defense of the euro and Merkel”, National Post, Feb. 19,2015, FP11. And Peter
Schiff, “Borrower’s bravado”, National Post, Deb. 6, 2015, FP7
[3] Much of this, particularly, the excessive nationalized industries, is, of course, contrary to the preference for the market which is my underlying theme, see Choice of Economic Systems: A Conditional Preference for the Market—what does that mean? Nationalized (state-owned) industries are inefficient. Their losses are covered by the government and, therefore, there is less incentive to employ only those who are really needed, etc.
[4]
The Grecian situation is complicated by its membership of the Euro. With a
free-floating currency, the Greek currency would drop in value in the face of
the country’s economic disaster. The drop in value would encourage exports and
attract tourists and thus create jobs. However, Gruble (note 2) predicts that
in the long run Greece would again become a disaster zone, Like Argentina, it
will “suffer perpetual inflation, deficits, devaluations, economic stagnation
and deep political division.
[5]
William Watson, “Quebexit”, National Post, Feb. 25,2015, p. FP9
[6] National
Post, “Moody’s cool on Ontario’s debt plan”, Financial Post,p.9
[7] http://www.ctvnews.ca/politics/trudeau-dodges-question-on-running-deficits-1.2199217
re Trudeau’s speech in London, Jan 21,2015
[8] “Mulcair unveils NDP plan to goose the sputtering economy”, http://news.nationalpost.com/2015/01/27/mulcair-unveils-ndp-plan-to-goose-the-sputtering-economy-tax-cuts-for-small-business-and-manufacturers/
[9] Jim Stanford,“Canada’s deficit drama is all theatre” ,The Globe and Mail, Jan. 29 2015,[10] Paul Kane and Reid Wilson “GOP budget sets up fight between deficit hawks and defense” Washington Post, Mar. 17, 2015, hawkshttp://www.washingtonpost.com/politics/house-republicans-try-to-rally-caucus-to-pass-fiscal-outline/
[11].John
Calvin, Commentaries on the First Book of Moses called Genesis,
translation by J. King, Eerdmans, Grand Rapids, 1948, p.125.
[12].The
OECD in its 1990/1991 survey of Canada, for instance, noted "Although a
stringent monetary policy was unavoidable...upward pressure on interest
rates...might have been less strong, had the fiscal stance been more supportive
of the Central Bank's disinflation policy".
