Like The Hub?
Join our community.
Join

Vincent Geloso: The federal government is relying on wishful thinking to rationalize federal deficits

Commentary

The prime minister and his finance minister routinely take to the media to justify federal spending and the deficit, expected to exceed $40 billion despite a surge in revenues. When they’re not attacking (as the prime minister recently did on Quebec’s most-watched talk show) people who argue for fiscal restraint as proponents of “austerity,” they invoke the idea of “crowding in.” 

But this is pure political chicanery. There’s no chance the current deficit will generate “crowding in,” despite what the prime minister says.  

So, what is crowding in? Generally, economists agree that budget deficits cause interest rates to increase. This makes private investment costlier—a process known as “crowding out.” But this comes with the assumption that the deficits are incurred for regular operating expenses. Things are different if the deficit is meant to finance expenses for uniquely productive projects that are complementary to what the private sector does such as X, Y, and Z. When this happens, economists speak of crowding in that might partially or completely offset the crowding out effect. Simply put, if governments pick the right projects and the right companies, they can attract and generate additional private-sector activity that would otherwise not occur, thus growing the economy. 

These uniquely productive projects must be goods and services that private producers could not profit from because there’s no way to charge consumers for using them. These are known as public goods. Historical examples include lighthouses, weather information services, postal services, roads, policing, national defence, and flood controls. Deficits to finance investments in these goods and services can actually help the private sector grow. 

Another way a deficit could be beneficial is if it generates a good with “spillovers.” A classic example would be a piece of military technology that’s repurposed by private providers. As such, if the government can again pick the right technologies, it could crowd in investments by the private sector. 

These are the two main ways that crowding in could theoretically happen. The problem is that crowding in practically rarely occurs. Economists have gone to blackboard and posited that private industry could never produce certain goods. However, when other economists went on the ground or to the archives to study historical cases, they found that private entrepreneurs were often able to produce these goods and services in highly creative and efficient ways (sometimes more efficiently than the state). As such, the list of things deemed “public goods” has been narrowed and contested. Governments already provide most things that are widely agreed upon—national defence, courts, policing. Moreover, a large share of the current deficit—for items such as $13 billion for dental care and increases in the Canada student grants—fail to even remotely qualify as public goods. 

With regard to spillovers, the case is even weaker. The heroic assumption is that governments can pick the right technologies and right companies to invest in—but in reality, governments appear ill-equipped to do so. Indeed, empirical studies on the effect of business subsidies or targeted support to technological adoption seem to find that government spending reduces this type of economic activity and sometimes deters further innovation

This inability to pick winners is also apparent in the types of programs—clean technology adoption, for example—that the federal government announced in its latest budget. Assessments of government efforts to fund green energies (and their adoption) both in the United States and Canada generally find that taxpayers were (on net) left worse off as most of the projects picked by governments ended up failing. It’s hard to imagine why the current plan to pick winners would work better than in the past. 

This is why empirical studies that attempt empirical generalizations regarding the importance of crowding in relative to crowding out tend to find that the latter dominates the former, especially in countries that already have large governments. In other words, when governments run deficits to try to finance projects to enhance the private sector, the almost inevitable result is that (on net) they compete away funds from private firms, which means less business investment.

So, the theoretical case rarely materializes in the real world. Relying upon it to wish away adverse consequences of deficit spending is really just that—wishful thinking. Don’t fall for it. 

Franklyn Griffiths: Our big-city leaders need a serious plan to deal with increasing urban violence

Commentary

Living near the Art Gallery of Ontario, I greatly enjoy walking in the neighbourhood and viewing the scene. Not long ago, standing at the corner of Phoebe Street and Spadina, I saw a down-and-out young man turn onto Phoebe and start to flail about in what looked to be a fury. He was twisting, bending, and pounding down on an imaginary person hard enough to pulverize him. 

After a while he looked up and noticed me. Crossing the street, he approached and, a few metres away, said, “I am going to kill you.” There was no time to think and I replied, “Go ahead. Kill me.” He stopped for a moment, shook his head, and said, “No, that wouldn’t be good. I can’t do that.” I reacted, “Those are good ideas. You should hold on to them.” He then turned slowly, shuffled away, and left me to consider what had just happened.

A totally unexpected death threat concentrates the mind and leaves a vivid memory. 

A feeling of relief came first. Being in my late eighties and in no position to fight or flee, it seemed I had talked my way out of a disaster. Then it struck me that in talking to an on-coming assailant I had acted instinctively. I didn’t know what I was doing. I had disrupted an attack by weirdly supporting the attacker’s intention, daring him to kill me, and implying he was a good person. Somehow deflating the bubble he was in, I had deflated a threat that could have been lethal. The outcome was good, but I had taken a big and unnecessary risk. 

These days in Toronto we can be stabbed to death while sitting on a subway bench. In my case the attacker might have been carrying a knife. He could have taken my words as a challenge and tipped into dead-set determination to kill. More aware of possibilities such as these, I might have started shouting, making a scene, and scaring him off. But my personal inclination in dealing with opposition is to begin by negotiating, if I can. So, I spoke normally when I should also have considered trying to freak him out.

How then are Torontonians to protect themselves from random killing in public places?

The question should be answered by citizens aided by professionals. As a professional who happens to know something about security, I believe that effective responses are more likely when we identify and get at the underlying forces and factors. These are the harmful variables that produce unpredictable death, wounding, the suffering that follows, and the decline we all experience in the quality of life in this city. They are best dealt with not in instant individual reaction but in collective proaction based on public understanding and engagement.

Right now, we are in the midst of a mayoral election. Our would-be leaders ought to tell us not only what should be done to increase personal security in Toronto, but how they would build a coalition to make it happen if elected. To demonstrate a capacity for coalition-building, they should consult with constituents and get together in a public commitment to create a city panel on harms control, once the mayor is chosen.

By harms control I mean collaboration to reduce the likelihood of urban violence, its severity should it occur, and the costs of living with it. Policing plays a part but not the leading part here. Rather than take threats of violence as givens and seek to suppress them, a harms control panel should generate consensual knowledge both of the situations that gives rise to violence and of best practices in lessening them.

Is the overall situation one that has us on a slope leading to big-city massacres as in the United States? If so, how do we change direction? If not, how do we guard what works and make it better? Random violence is not the only peril or deprivation we face. But in singling it out and dealing with it we can enhance our ability as a community to deal strategically with all the rest.

We need to think as well as talk together.