American Politicians Should Copy Canada’s Leftist Government of the 1990s and Cap Spending
Since I’ve written before about Canada’s remarkable period of fiscal restraint during the 1990s, I was very pleased to see that the establishment press is finally giving some attention to what our northern neighbors did to reduce the burden of government spending.
Here are some key passages from a Reuters story.
“Everyone wants to know how we did it,” said political economist Brian Lee Crowley, head of the Ottawa-based think tank Macdonald-Laurier Institute, who has examined the lessons of the 1990s. But to win its budget wars, Canada first had to realize how dire its situation was and then dramatically shrink the size of government rather than just limit the pace of spending growth. It would eventually oversee the biggest reduction in Canadian government spending since demobilization after World War Two. …The turnaround began with Chretien’s arrival as prime minister in November 1993, when his Liberal Party – in some ways Canada’s equivalent of the Democrats in the U.S. – swept to victory with a strong majority. The new government took one look at the dreadful state of the books and decided to act. “I said to myself, I will do it. I might be prime minister for only one term, but I will do it,” said Chretien. …The Liberals thought their first, rushed budget – delivered in February 1994, three months after taking office, was tough. It reformed unemployment insurance entitlements, and cut defense and foreign aid… The upstart Reform Party, then the main national opposition party, had campaigned on “zero-in-three” – balance the budget in three years. “We were always trying to go faster,” said Reform’s leader at the time, Preston Manning. …The Liberals were stung by the criticism and, at first reluctantly but then with gusto, they got out the chain saws. …Cutting government spending programs went against the Liberal grain. Contrary to the Reform Party, the Liberals saw a more important role for government. Paul Martin now has a lasting reputation as the finance minister who slayed Canada’s deficit, but the conversion from spender to cutter was painful. His father, also called Paul, had helped create Medicare, Canada’s publicly funded health care system, and suddenly here was Paul Junior contemplating massive cuts.
This is a remarkable story. My only real quibble is that the fiscal restraint actually started the year before the Liberal Party took power, as the chart illustrates.
But the key thing to understand is that Canada enjoyed a five-year period when government spending increased by an average of only 1 percent each year.
There are more good passages in the story. Can anybody imagine Obama doing this?
At one 1994 cabinet meeting, Martin announced a spending freeze. A minister put forward a project that needed funding but Chretien cut him off, reminding him of Martin’s freeze. A second minister raised his hand to ask for funding, and a testy Chretien told the cabinet that the next minister to ask for new money would see his whole budget cut by 20 percent. …The ratio of spending cuts to tax hikes was seven-to-one. Asked why, Chretien said simply: “There was more need on one side than the other.” …Cuts ranged from five percent to 65 percent of departmental budgets.
By the way, while there were a few tax hikes implemented, they were trivial. Tax revenue as a share of GDP rose from 44.2 percent of GDP to 44.5 percent a GDP, an increase that probably was going to happen anyhow as Canada’s economy recovered.
So what were the results of Canada’s spending freeze?
The following passage has some numbers, but the second chart shows that the burden of government spending in Canada (right axis) fell from 53 percent of GDP to 44 percent of GDP in just five years. And red ink (left axis) completely disappeared.
The deficit disappeared by 1997 and the debt-to-GDP ratio began a rapid decline – it is now at about 34 percent. …After wrestling the deficit to the ground, Canada enjoyed what Crowley calls the payoff decade, outperforming the rest of the G7 on growth, job creation and inward investment. From 1997 to 2007, it averaged 3.3 percent economic growth. while U.S. growth averaged 2.9 percent.
The most important thing to understand is that Canada’s economy improved because the burden of government spending was reduced. Moreover, because the underlying disease was being treated, this meant two of the symptoms of excessive government – deficits and debt – also became less of a problem.
Last but not least, there are rewards for good policy. Just as Reagan enjoyed a landslide in 1984 after sticking to his guns, Canada’s Liberal Party also reaped the benefits of doing the right thing.
The final lesson is that you can impose painful spending cuts and still win elections. Chretien went on to win two more back-to-back to form majority governments, a rare feat. ,,,Drummond, who later moved to the private sector and is now an advisor helping the Ontario provincial government slash its deficit, noted that governments on the right and left in Saskatchewan, Alberta and Ontario won more voter support after their own budget cuts in the 1990s.
Here’s a video I narrated that looks at the Canadian experience, as well as similar good reforms in New Zealand, Ireland, and Slovakia.
Last but not least, let’s put all of this in context. As demonstrated here, the U.S. would enjoy a balanced budget in just eight years if politicians could be convinced to limit spending so that it increased by 1 percent each year.
Did Canada Steal Our Tenth Amendment?
Under the U.S. Constitution, the federal government was assigned specific limited powers, and most government functions were left to the states. To ensure that people understood the limits on federal power, the Framers added the Tenth Amendment: “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” Those delegated powers are “few and defined,” noted James Madison.
But the Tenth Amendment has disappeared. No one has seen it in recent decades. But I’ve found some statistics that make me very suspicious that the Canadians stole the Tenth. Look at the pie charts below. The top pie shows that 71 percent of total government spending in the United States is federal, while 29 percent is state/local. (See BEA tables 3.1, 3.2, 3.3 for 2010 data).
Back when we still had the Tenth, that ratio was the other way around—like how the bottom chart looks for Canada today. In Canada, federal spending accounts for just 38 percent of total government spending, while provincial/local spending accounts for 62 percent. (See Canada Yearbook for 2010/11 data.)
Actually, the real culprit for the missing Tenth is not the Canadians, but the U.S. Congress. In recent decades, Congress has undertaken many activities that were traditionally reserved to state and local governments. A primary method has been through “grants-in-aid.” These are federal subsidies combined with regulatory controls that micromanage state and local affairs. In United States, federal grants are about 4.1 percent of GDP (in fiscal 2011), while in Canada they are about 3.3 percent of GDP.
Even more striking: while we’ve got a complex mess of more than 1,000 state grant programs, Canada seems to have just a handful, and they are simple block grants. As I understand it, Canada’s federal grants to lower governments mainly just include:
- A health care block grant
- A social services block grant
- An “equalization” block grant to help the poor provinces.
There is a smattering of other aid, but that’s just about it. There are no federal subsidies for K-12 education in Canada, for example. There are a few large block grants and not much else.
On October 27, I’m on an Urban/Brookings panel looking at “What Can the United States Learn from Canada.” Perhaps we can learn how to get our decentralized federation back. While we’re at it, we could get some tips on how to cut government spending, as the Canadians did in the 1990s.
New CBO Numbers Confirm – Once Again – that Modest Spending Restraint Can Balance the Budget
The Congressional Budget Office has just released the update to its Economic and Budget Outlook.
There are several things from this new report that probably deserve commentary, including a new estimate that unemployment will “remain above 8 percent until 2014.”
This certainly doesn’t reflect well on the Obama White House, which claimed that flushing $800 billion down the Washington rathole would prevent the joblessness rate from ever climbing above 8 percent.
Not that I have any faith in CBO estimates. After all, those bureaucrats still embrace Keynesian economics.
But this post is not about the backwards economics at CBO. Instead, I want to look at the new budget forecast and see what degree of fiscal discipline is necessary to get rid of red ink.
The first thing I did was to look at CBO’s revenue forecast, which can be found in table 1-2. But CBO assumes the 2001 and 2003 tax cuts will expire at the end of 2012, as well as other automatic tax hikes for 2013. So I went to table 1-8 and got the projections for those tax provisions and backed them out of the baseline forecast.
That gave me a no-tax-hike forecast for the next 10 years, which shows that revenues will grow, on average, slightly faster than 6.6 percent annually. Or, for those who like actual numbers, revenues will climb from a bit over $2.3 trillion this year to almost $4.4 trillion in 2021.
Conservatives Win, Socialists Up, Liberals Down, Separatists Out
The conventional wisdom is that the United States is a center-right country while Canada is a center-left one. Yet, even as the most-left-wing president in history occupies the White House, last night the Conservative Party of Canada — which had already been steering its ship of state in a fiscally prudent direction despite only having a plurality of seats in Parliament – won a decisive victory. Prime Minister Stephen Harper will thus lead the first first majority government by any party since 2004 (after the first election creating a majority government since 2000).
How can this be?
The answer comes down to three main factors:
- Electoral system. Canada has a multi-party first-past-the-post parliamentary system that currently features one united center-right party and an opposition split among two major left-wing parties, Quebec separatists, and a not-inconsequential Green Party. Thus, the Tories’ 40% of the popular vote (up 2% since the 2008 election) translated to 166 of the 305 seats in Parliament (a gain of 23). Recall that John McCain won 45.7% of the vote in the 2008 presidential campaign.
- Timing of terms of office. If President Obama had run for re-election yesterday — well, maybe not yesterday, the day after announcing the end of Osama bin Laden — he might very well have lost (depending on the vagaries of the electoral college and who the GOP ran against him). As it was, of course, the Republicans did win big in the 2010 midterms and stand to do so again in 2012 regardless of the result of the presidential election. Also, one of the themes of this year’s Canadian election was that the opposition forced an election that Canadians “did not want” and considered to be a waste of money.
- Leadership/personality. Barack Obama was a singular individual at a unique time (financial collapse, Bush fatigue, etc.). The leader of the Liberal Party of Canada, meanwhile, former Oxford and Harvard professor Michael Ignatieff, who hadn’t lived in the country for 30 years before entering Parliament in 2006 (see the Conservatives’ hilarious and devastating attack ads), was a wooden campaigner who failed to connect with the average voter.
And so, even as 60% of Canadians voted for a party other than the Conservatives — 31% New Democrats (socialist/labor), 19% Liberal, 6% Bloc Quebecois (separatists), 4% Green – they will have a Tory majority government until (probably) October 2015. Given that social issues don’t play much of a role in Canadian public affairs, this is generally a good result for friends of liberty. Now that he has his majority, we’ll see how much more Prime Minister Harper moves in the free-market direction he has long said he would if given the opportunity.
For those interested in more than that basic synopsis and US/Canada comparison, read on below the fold.
What’s Wrong with Imported Oil?
In a speech today at Georgetown University, President Obama called for a goal of cutting America’s oil imports by one-third within a decade. Like all efforts to wean Americans from big, bad imports, such a policy will mean we will all pay more than we need to for the energy that helps to power our economy.
I’ll leave it to my able Cato colleagues to dissect the president’s proposal in terms of energy policy, but in terms of trade policy, this is about as bad as it gets.
We Americans benefit tremendously from our relatively free trade in petroleum products. Like all forms of trade, the importation of oil produced abroad allows us to acquire it at a price far lower than we would pay if we had to rely more heavily on domestic oil supplies.
The money we save buying oil more cheaply on global markets allows our whole economy to operate more efficiently. Oil is the ultimate upstream input that virtually all U.S. producers use to make their final products, either in the product itself or for shipping. If U.S. manufacturers and other sectors are forced to pay sharply higher prices for petroleum products because of import restrictions, their final goods will cost more and will be less competitive in global markets. If households are forced to pay more for gasoline and heating oil, consumer will have less to spend on domestic goods and services.
The president talked in the speech about the goal of not being “dependent” on foreign suppliers, but most of our oil imports come from countries that are either friendly or at least not in any way an adversary. According to the U.S. Department of Commerce, one third of our oil imports in 2010 came from our two closest neighbors and NAFTA partners, Canada and Mexico. Another third came from the problematic providers in the Arab Middle East and Venezuela (none from Iran, less than one-third of 1 percent from Libya.) The rest came from places such as Nigeria, Angola, Colombia, Brazil, Russia, Ecuador and Great Britain.
Even if, by the force of government, we could reduce our imports by a third, there is no reason to expect that the reduction would be concentrated in the problematic providers. In fact, oil is generally cheaper to extract in the Middle East, so a blanket reduction would probably tilt our imports away from our friends and toward our real and potential adversaries.
In one speech, the president has managed to state a policy goal that is bad trade policy, bad security policy, and bad foreign policy.
Spending Restraint Works: Examples from Around the World
America faces a fiscal crisis. The burden of federal spending has doubled during the Bush-Obama years, a $2 trillion increase in just 10 years. But that’s just the tip of the proverbial iceberg. Because of demographic changes and poorly designed entitlement programs, the federal budget is going to consume larger and larger shares of America’s economic output in coming decades.
For all intents and purposes, the United States appears doomed to become a bankrupt welfare state like Greece.
But we can save ourselves. A previous video showed how both Ronald Reagan and Bill Clinton achieved positive fiscal changes by limiting the growth of federal spending, with particular emphasis on reductions in the burden of domestic spending. This new video from the Center for Freedom and Prosperity provides examples from other nations to show that good fiscal policy is possible if politicians simply limit the growth of government.
Cutting Government the Canadian Way
I blogged about how Canadian government spending cuts since the mid-1990s coincided with strong economic growth.
Let’s take a closer look at the spending cuts. The chart shows Canadian federal spending from 1984 to 2009 in actual, or nominal, dollars. Spending includes all “discretionary” and “entitlement” programs, as we would call them, but excludes interest payments. (Data are here).
Spending peaked in the early 1990s, and it relied on massive deficit finance. As a result, interest costs were spiralling out of control. The prime minister and his finance minister–members of the center-left Liberal Party–decided to reverse course and start cutting.
They cut spending from $123 billion in in 1995 to $111 billion in 1997, a 10 percent reduction. Then they held spending at roughly the lower level for another three years. With the Canadian economy growing–due to pro-market reforms such as free trade with the United States–this amount of restraint was enough to start a virtuous cycle of falling interest costs and a shrinking government as a share of GDP.
Cutting total non-interest spending by 10 percent would be like cutting President Obama’s 2011 annual budget by $360 billion. Cato analysts could do that pretty easily, but for some reason American politicians–even of the conservative variety–so far seem to be alot more spineless than the politicians elected by Celine Dion and Anne Murray.
Canadian spending did grow during the past decade, but much less than U.S. government spending. Between 2000 and 2009, total Canadian federal spending increased 47 percent, but total U.S. federal spending rose 97 percent.
From a libertarian point of view, Canada’s spending cuts were modest. But the Canadian experience illustrates that a lot of progress can made if even modest cuts are made and then spending is constrained to grow at a slower rate than the overall economy.
For more on the Canadian fiscal reforms, see The Canadian Century by Brian Lee Crowley, Jason Clemens, and Niels Veldhuis.
“Either the Most Honest Politician in the World or the Most Opportunistic”
Paul Waldie at Toronto’s Globe and Mail reports on the case of Mike Reilly, who (unsuccessfully so far) has sought to write off as tax expenses the costs of campaigning for local office in a suburb of Vancouver. Reilly told a tax court that there was nothing idealistic about his quest for government office: he wanted “to earn a good salary and promote his business,” raising the visibility of his development company. Lawyers for the Canada Revenue Agency insisted that Reilly wouldn’t have gone to the trouble of running unless he had cared about at least some public issues, but he disputed that:
“You know, I don’t recall being passionate about any issues other than seizing an opportunity to step in and develop a better profile for myself,” Mr. Reilly replied. “No. It was strictly business for me.”
The tax judge ruled against Reilly based on accounting issues but accepted his general contention that he “was not passionate about any issue except increasing his own profile and earning the salary of mayor,” noting that the candidate “did not listen to the citizens of Delta and did not appear to have much interest in their concerns.” If all politicians had to tell the truth, how many similar confessions might we hear?
The Welfare State, Taken to Its Logical Conclusion
The economic tragedy unfolding in Greece is the welfare state taken to its logical conclusion. When groups of people use the state to live at the expense of others, the feedback loop about the costs of those transfers is attenuated — often by design. The welfare state therefore makes commitments that it cannot honor. By the time creditors or taxpayers say, “Enough,” the welfare state has created a clash between expectations and means that leads to unrest and hardship — a clash that never had to occur.
Reuters reports that this tragedy is playing itself out in Canada, where the Medicare system is straining the budgets of taxpayers and provincial governments — even as Canada remains infamous for providing inadequate access to care. According to Reuters, the provincial government in populous Ontario predicts that “health care could eat up 70 percent of its budget in 12 years, if all these costs are left unchecked.” Toronto-Dominion Bank senior economist at Derek Burleton remarks:
There’s got to be some change to the status quo…We can’t continually see health spending growing above and beyond the growth rate in the economy because, at some point, it means crowding out of all the other government services. At some stage we’re going to hit a breaking point.
The provinces are contemplating measures that would further reduce access, such as ratcheting government price controls downward, “health taxes” on medical services, and (gasp!) charging patients. (Speaking of feedback loops, an economist at Scotia Capital reasons that patients “will use the services more wisely if they know how much it’s costing…If it’s absolutely free with no information on the cost and the information of an alternative that would be have been more practical, then how can we expect the public to wisely use the service?”)
The Greek and Canadian dramas are a preview of what the welfare state, aided by its most recent expansion, will provoke here in the United States. Again, Reuters:
Canada, fretting over budget strains, wants to prune its system, while the United States, worrying about an army of uninsured, aims to create a state-backed safety net.
Burleton captures the problem nicely:
[F]rom an economist’s standpoint, we point to the fact that sometimes Canadians in the short term may not realize the cost.
Indeed, that’s the very essence of the welfare state, and why its logical outcome is crisis.
Filed under: Cato Publications; General; Government and Politics; Health Care
Free Speech in Canada
Free speech isn’t exactly free in Canada, and even Glenn Greenwald and Mark Steyn agree on this point. When conservative commentator Ann Coulter (who can be uncivil, but shouldn’t be muzzled by the state for it) tried to give a speech at the University of Ottawa, she was warned by the political correctness police not to hurt anyone’s feelings:
I would, however, like to inform you, or perhaps remind you, that our domestic laws, both provincial and federal, delineate freedom of expression (or “free speech”) in a manner that is somewhat different than the approach taken in the United States. I therefore encourage you to educate yourself, if need be, as to what is acceptable in Canada and to do so before your planned visit here.
You will realize that Canadian law puts reasonable limits on the freedom of expression. For example, promoting hatred against any identifiable group would not only be considered inappropriate, but could in fact lead to criminal charges. Outside of the criminal realm, Canadian defamation laws also limit freedom of expression and may differ somewhat from those to which you are accustomed. I therefore ask you, while you are a guest on our campus, to weigh your words with respect and civility in mind. . . .
So much for inalienable rights.
Steyn highlights the view of the lead investigator of Canada’s “Human Rights” Commission: “Freedom of speech is an American concept, so I don’t give it any value.”
I would offer a rebuke, but Ezra Levant has done it better than I ever could. Crank your volume up, sit back, and enjoy:
Obama Right on “Don’t Ask, Don’t Tell”
Secretary Gates’s new guidelines for “don’t ask, don’t tell” are consistent with the Obama administration’s plan to alter—and eventually reverse—the misguided policy. Both the guidelines and their ultimate goal deserve broad public support.
In the nearly 17 years since it was enacted, DADT has impeded military effectiveness by prohibiting motivated and well-qualified individuals from serving their country.
A new generation of military leaders, both officers and enlisted, has seen the harm and injustice done by this policy, and is ready for change. As this cohort advances through the ranks, and as an earlier generation that was not willing to change retires from service, we should anticipate a relatively smooth transition to a policy that has been adopted in many other countries, including Australia, Canada, France, Israel, and the United Kingdom. But the strong leadership shown by President Obama, Secretary Gates, and Chairman Mullen on this issue will likely prove the essential final ingredient to ensuring that DADT dies.
Click the player below for more about why it is time to scrap the policy:
Weekend Links
- Jack of all trades and master of none: What happens when the government gets so big that it fails to fulfill its most important role.
- The hard truth about end-of-life care in America.
- If current trends continue, the U.S. government will soon spend a greater portion of GDP on Medicare and Medicaid than Canada now spends on its entire single-payer government-run system. Here’s a way to fix that.
- How about a little honesty from time to time in the tobacco policy debate?
- More drug-related chaos along the Mexican border.
- Go North Young Man! Will Wilkinson becomes “forever Canadian.”
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