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Matthew Lau: COVID-style deficits are no longer necessary

Commentary

What year is this? The calendar says 2022, but judging from the fiscal balances in the federal and provincial government budgets over the past two months, some politicians apparently think we’re still in 2020.

Sizable budget deficits, of course, made some sense two years ago—the pandemic made necessary some extraordinary public health expenditures including compensation for business owners and other lockdown victims. Moreover, the recession reduced revenues and made some programs (employment insurance, for example) more expensive. To be sure, there’s a good case to be made that governments overspent in 2020 and that the deficits were too large. Nevertheless, the idea that governments should run deficits during a pandemic was completely reasonable.

But it’s now—to repeat—the year 2022. The pandemic is largely behind us, the recession is over, and government deficits are now not so reasonable.Do Budget Deficits Matter? Essays on the Implications of Government Deficits and Debt https://www.fraserinstitute.org/studies/do-budget-deficits-matter-essays-on-the-implications-of-government-deficits-and-debt To their credit, the New Brunswick and Alberta governments tabled balanced budgets this year. The federal and other provincial governments, alas, are less responsible.High spending and more borrowing common theme across Canada https://www.fraserinstitute.org/blogs/high-spending-and-more-borrowing-common-theme-across-canada The federal budget calls for a $52.8 billion deficit this year, driven by continued elevated spending levels, and no balanced budgets in its five-year plan. The Ontario government plans a $19.9 billion deficit this year and continued deficits until 2027-28, the British Columbia government a $5.5 billion deficit this year and no balanced budgets in its three-year plan, and the other provinces’ ongoing deficits of varying sizes, in some cases with no timeline to reach budget balance.

In selling their ambitious spending programs to the public, politicians like to use the word “invest” a lot. Government doesn’t spend our money, it only “invests” it. The Trudeau government’s budget, for example, has a section titled “Investing in a Green Transition That Will Support Jobs and Growth,” followed by a section on “Investing in Our Economic Capacity and Security” and then “Investing in an Inclusive Workforce.”

But the word “investing” shouldn’t fool anyone.

This is consumption spending, not investment. And to the extent that any real investment is taking place, it bears little responsibility for this year’s deficit. When governments invest in capital assets, such as physical infrastructure, the cost of the asset is capitalized and amortized over the life of the asset, and only the amortization expense is reflected in the annual deficit.

Politicians also often attempt to justify spending by claiming it stimulates the economy. The phrase “stimulus spending” does not actually appear in the latest federal budget but it appeared in the 2021 budget, to the tune of $100 billion and even referenced a “fiscal multiplier,” which is a measure of how much stimulus spending actually stimulates the economy. A multiplier above 1.0 suggests the spending stimulates private-sector activity; a multiplier below 1.0 suggests it crowds out private activity. Much of the debate about multipliers took place in 2009-10 as governments around the world enacted significant stimulus programs, with the preponderance of the evidence contradicting the theory that such spending is beneficial.

“The fiscal stimulus package,” Harvard economist Robert Barro wrote of a possible U.S. stimulus package in 2010 to follow the one already implemented in 2009, “is a way to get an extra $600 billion of public spending at the cost of $900 billion in private expenditure. That is a bad deal.” While some economists claimed the government spending multiplier was 1.57, other economists objected to their “highly questionable” assumptions, and using newer models, concluded that “the multipliers are less than one as consumption and investment are crowded out. The impact in the first year is very small” and in later years “the multipliers turn negative.” International Monetary Fund economists similarly estimatedThe Administration and the IMF on the Multiplier https://www.hoover.org/research/administration-and-imf-multiplier a multiplier that begins at 0.7 and fades over time to around 0.1, and later studies also found multipliers well below one.Government Spending Multipliers in Good Times and in Bad: Evidence from US Historical Data https://econweb.ucsd.edu/~vramey/research/Ramey_Zubairy_JPE_published.pdf

Government spends other people’s money less wisely than people spend their own money, and today’s deficit-spending discourages productive economic activity. Canadian governments that continue to spend and run deficits, in consequence, are doing economic harm. Deficits, though perhaps not of the magnitude that many governments incurred, made some sense in 2020. This year, however, deficits are unjustified and the federal plan, in particular, to continue with indefinite deficits appears reckless.

Patrick Luciani: For Russians, the comfort of security outweighs the desire for truth

Commentary

When countries criticize each other, they always make a distinction between the people and their government. It’s not the people they attack but the country’s rulers. In the case of Russia, this thinking is changing with the invasion of Ukraine. 

A recent survey conducted by RIWI, a Canadian research firm, found that 48 percent of Russians believe that people should support their country even if they know their nation’s actions are wrong.Half of Russians Believe That People Should Support Their Country Even If Its Actions Are Wrong, According to RIWI’s New Cold War II Index https://www.newsfilecorp.com/release/121083 This support compares with 35 percent in China and 32 percent in the United States. After the 2014 invasion and annexation of Crimea, public support for a total invasion of Ukraine went to 75 percent. Putin took note of his success in rousing public support and was confident he had the people behind him.

Russians can be forgiven for not answering surveys truthfully, given the threat of long prison terms if anyone criticizes the war in Ukraine. But support for the war seems intuitively true. Some put the support for the war at 80 percent.Putin’s war will destroy Russia https://www.theglobeandmail.com/opinion/article-putins-war-will-destroy-russia/

Russians believe the West intends to destroy their country and a fascist government runs Ukraine, thanks to a steady beat of anti-American propaganda by state-controlled media.  Russians feel they are the victims of fake Western news and believe the war—or special military operation—was provoked by Ukrainian Nazis killing innocent Russian-speaking Ukrainians. The atrocities in Bucha and the sinking of their great battleship Moskva destroyed by Ukrainian drone missiles are fabrications by the West. Russians don’t even believe their Ukrainian relatives about the horrific crimes committed by Russian soldiers.

In our post-truth world, facts are malleable, and Putin took advantage with a vengeance. How has Putin’s Big Lie worked while the people’s voices remained muffled and mute?

One reason is that lies proliferate in a system that stifles the media. Joshua Yaffa, a correspondent in Moscow for The New Yorker, explains the deep denial of many Russians in his book, Between Two Fires: Truth, Ambition, and Compromise in Putin’s Russia. The citizen accommodates himself to the realities of the state’s power and manages to get along where bravery takes the form of passive resistance. The book helps to explain how the Kremlin maintains control and how talented Russians are making their way in Putinland. Between Two Fires begins with the work of Yuri Levada, a respected Russian sociologist who calls this new accommodating citizen the “wily man.” 

Levada hoped that a new citizen would emerge with the gradual decline of a totalitarian state. Perestroika—reform of the economic and political system—gave some hope that communism hadn’t destroyed the capacity to resist state controls; that dream was short-lived with the fall of Mikhail Gorbachev in 1991. Under Putin, the “wily man” continues to tolerate deception with the desire to be deceived. 

Instead of reform, people reverted to their old fears and subservience to the state. It was a step too far for a people subjected to communist rule for over 70 years. Even though there was a desire for many Soviet citizens for freedom, the comfort of security won out. When communism collapsed, the average citizen was now caught between the world of Stalin and Steve Jobs. Putin came along and brought the state back under the direct control of a strongman “responsive to his whims,” controlling the economy, civil society, the law, and the legislature. He even has the support of Moscow’s Patriarch of the Russian Orthodox Church for a war that has already taken tens of thousands of lives with soldiers marauding and killing at will.Russian Orthodox leader backs war in Ukraine, divides faith https://www.washingtonpost.com/world/2022/04/18/russian-orthodox-church-ukraine-war/ 

And yet the Patriarch remains silent while Russians act perplexed about why they can’t take vacations in the south of France. Many shrug their shoulders and instead head for the beaches in Turkey, where they still welcome Russian tourists. For most, this feels more like the return of order where the Russian people have rid themselves of the responsibility to govern.  

Second, Putin had the good fortune to govern when high energy prices brought billions for himself and tripled average incomes. This happy coincidence kept Putin’s security forces busy killing and stifling his political and media critics, consolidating his power while citizens shopped. The economy was good, and citizens weren’t going to start asking too many questions. Besides, they liked a leader showing the world that Russia was punching back at the arrogant and decadent West.

Citizens long forgot the days when Solzhenitsyn’s book One Day in the Life of Ivan Denisovich shocked the conscience of the average Russian. Twenty-five years after the collapse of the USSR, Russians no longer feel guilty about their country. Here Yaffa quotes Lev Gudkov, Levada’s successor: “the personality type born in that period has proven remarkably stable—a system of consciousness easy to manipulate, yet difficult to change.”  

Putin was now in complete control, interested in only power and profit, trapping 145 million in a “cage welded shut by propaganda and repression.” What surprised Yaffa was how many intelligent ordinary Russians acquiesced and accepted their situation as neither good nor bad. Russians tolerated even the unbelievable corruption by Putin and his oligarchs. When the Moskva warship sank, it was a $750 million (USD) loss to Russia, almost the exact cost of Putin’s private yacht now docked in Italy.Moskva Warship’s Sinking a $750 Million Loss for Russian Military: Report https://www.newsweek.com/moskva-warships-sinking-750-million-loss-russian-military-report-1698163 

The third explanation is Russian reverence for their military. May 9 is a sacred day for Russians when they remember the deaths of 27 million Soviets killed fighting in WWII. The Russian army is deeply beloved and held in the highest esteem throughout the country, and any criticism is taken as a harsh betrayal. Even the great scientist and Nobel Peace winner Andrei Sakharov was attacked for daring to criticize the army’s war crimes in Afghanistan. Russians can’t imagine their soldiers other than heroic. Putin is now usurping and betraying love for Russia’s military to justify his war of aggression, claiming victory will be ours as in 1945. 

Where were the defenders of democracy of August 1991 when millions of Soviet and Russian citizens took to the streets to denounce and stifle the right-wing coup led by the KGB? Where are the people now when the country needs them? This is not the nation of Chekhov or Tolstoy. This war in Ukraine is damaging Russia’s reputation. Its culture and image are at stake, sweeping up brave Russians against the war and isolating its artists, athletes, businesses, and students. Russians must stop believing that Putin will save world Christianity, or Foreign Minister Sergei Lavrov’s outrageous claim that Hitler had Jewish blood insinuates Ukraine’s president can be both a Jew and a Nazi. 

Putin is responsible for the war in Ukraine. But the longer the war continues, the Russians can no longer make excuses for a leader ruining their economy and international rank as a great country. They must see the truth or be as guilty as their leader.