Tuesday, July 10, 2012

The shape of things to come

Francie, a regular reader of this blog, asked for some clarification of ideas I expressed in my recent post, A cautionary tale.

Specifically, she wanted to know whether I was "saying that the present economic situation is the fault of the politicians, the unions and the workers."

I hope the following explanation clarifies my point of view.

The current "economic situation" is complex, but it has two main components --- low levels of economic activity, which causes joblessness, reduced tax revenue, etc., and high levels of debt, which hampers governments' efforts to spur economic recovery.

The recession was triggered by insufficient regulation of, and massive abuses by, large banks and other players in the financial markets, internationally. This put the global economy at risk, and required huge bailouts by governments.

High levels of public debt (owed by governments at all levels, in most countries), now make it extremely difficult to stimulate economies, as the borrowing required to do that would increase debt and its associated interest payments.

Some make a credible case for such stimulus by government on the basis that it is necessary to re-start the failing recovery, but that strategy is currently out of favour. The counter argument is that taxes can not be raised to pay the additional interest costs, because higher taxes would leave less for spending by consumers on the things that business produces, and less for investment by business that would create jobs. Result: even lower levels of economic activity, and the possibility of a downward spiral.

Some countries (e.g. Greece) have lost the ability to borrow, as lenders have cut them off or are demanding very high interest rates that reflect the risk of default. Their unpalatable alternatives are:
1. Complete collapse, civil strife, decades of political turmoil, and the destruction of their economies.

or

2. Subjecting themselves to the harsh management of their affairs by the International Monetary Fund (IMF) and the European Union (EU) in return for loans to keep them afloat.
This kind of thing scares the shit out of politicians. Around the world, and in our own backyard, we are now seeing them announce austerity programs. Governments are reducing staff, bargaining hard with public service unions, cutting programs, and so on, in their attempts to balance their budgets.

The point in my earlier post was that politicians, in general, have been poor stewards of our national and local economies over five decades, as they often acted irresponsibly and allowed these debts to accumulate. But we are also complicit because we voted for them, and sat idly by as they did these things.

It was a golden age when it seemed that everything could be afforded, but we now realize we were living beyond our means, and the bills have come due.

Now, as to Francie's question about who is to blame --- With regard to unions and their members, I do not fault them for bargaining hard for higher wages and benefits.

I do fault governments for agreeing to demands that could not be supported in the long run by tax revenues, and therefore required borrowing. Interest payments on those debts now crowds out valuable programs and services that contribute to our quality of life.

I also fault myself, and voters everywhere who supported the running up of public debt to unsustainable levels in good times when we should have been paying down those obligations.

In short, failure to be prudent in good times will make austerity inevitable in bad times, which is just when you don't want it.

To quote from the Ontario Ministry of Finance's own website, "the cost of servicing Ontario’s debt is approximately $10 billion, the third-largest annual expense behind health care and education. To put this in perspective, Ontario spends more money on interest each year than on colleges and universities."

As commentator Tom Friedman says, since World War II, leadership was mostly about giving things away, but it's now about taking things away.

The debate will now be about which programs and services are taken away, and we all need to be involved in the discussion and decisions that will shape our society for decades to come.

1 comment:

  1. Thanks so much, Doug, for taking the time to explain. You make everything so clear.

    It would certainly be better if we could all get involved in the discussions and decisions. It would, however, take brutally honest politicians from all parties working together.

    And somebody has to ring the alarm bell in Canada. Very, very loud.

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