To whittle down federal deficit, Canada needs bold new solution

Time to consider `The Chicago Plan,'

The COVID-19 pandemic has exacerbated the uneven fiscal capacity among levels of government in Canada, while the federal budget deficit has reached unprecedented levels. Spare capacity to face future policy problems is shrinking, at a time when the possibility of future problems — from disease to social inequality to climate change — may actually be increasing.

With new COVID-19 variants emerging, the hoped-for economic recovery could take years. There could even be an entirely new pandemic. We have been able ( just barely) to manage this pandemic and have stayed (mostly) responsible and kind. What if we need to do it all over again? Could we afford it?

Given these pressures, why do we weaken ourselves unnecessarily by pretending that during financial crises and recovery, the federal government needs to borrow money and incur debt to finance its programs?

True, the Parliamentary Budget Officer (PBO) says the federal fiscal policy is sustainable. If the economy is growing and interest rates remain lower than growth rates, debt will diminish as a percentage of GDP over time and can be carried indefinitely.

But the dogs of deficit reduction are already barking at the gates of Rideau Hall. It may not be possible to ignore them forever.

The Bank of Canada's efforts to maintain low interest rates and high demand for government bonds means they are buying federal securities on the secondary market, effectively increasing wealth inequality in Canada. The PBO also has stated that current deficits are not sustainable for all subnational governments. Even for the federal government, sustainability as envisioned by the PBO requires a 75-year off-ramp to a safe landing, with consistent economic growth, no new programs — and no future pandemics. That's not a future we can assume we'll get.

The dogs of deficit reduction are already barking at the gates of Rideau Hall.

There is, of course, a different way. In 2012, M. Kumhof and J. Benes published an IMF working paper on monetary policy called “The Chicago Plan Revisited.” In our current monetary system, private financial institutions create the vast majority of our money supply out of nothing and loan it into existence, making a profit on the debt created. In the Chicago Plan, a democratically elected government (or its designated public body) would be the only organization with the authority to create the money supply, debt-free. The government would spend that money into existence through programs that help address some of the difficult policy problems we face.

Variations of the Chicago Plan have been supported at different times by economists as diverse as the giant of neoclassical economics Milton Friedman, and the giant of ecological economics (and World Bank economist) Herman Daly.

The Chicago Plan is not Sovereign Money, Quantitative Easing, helicopter money, or Modern Money Theory, all of which have significant issues. Economic modelling has shown that the Chicago Plan could be adopted with no negative effects on inflation. Instead, it would transform our options. It would make our economy more stable. It would significantly reduce private and public debt, assist the provinces, and free up funding for the policy issues that matter most to us. The Chicago Plan is more direct, efficient and equitable than our current monetary policy.

Why deny ourselves these beneficial outcomes? Why incur unprecedented deficits at all levels of government which will tie our hands in a wicked policy environment now and in the future when we need both hands free? And why throw raw meat to the dogs? There are many neoclassical opportunists who are pandemic Keynesians, but will be happy to ride with the hounds the moment COVID-19 is under control.

The job of governing may just get harder anyway, without us making it worse for ourselves. It's time for bold new solutions to our most difficult policy issues. The Chicago Plan could be one of those solutions.