Sensible spending policy seizes the day in Canada

Canada has a reputation for dullness. Yet when it comes to economic policy the reputation is undeserved: Canada has surprisingly often been the place where the future happens first.

And it’s happening again. Last week, Canadian voters swept the ruling Conservatives out of power, delivering a stunning victory to the center-left Liberals. And while there are many interesting things about the Liberal platform, what strikes me most is its clear rejection of the deficit-obsessed austerity orthodoxy that has dominated political discourse across the Western world. The Liberals ran on an openly Keynesian vision, and won big.

Before I get into the implications, let’s talk about Canada’s long history of quiet economic unorthodoxy, especially on currency policy.

In the 1950s, everyone considered it essential to peg their currency to the U.S. dollar — everyone except Canada. Later, when European nations were scrambling to join the euro, Canada showed that it’s feasible to keep your own money despite close economic ties to a giant neighbor.

Oh, and Canadians were less caught up than the rest of us in the ideology of bank deregulation. As a result, Canada was spared the worst of the 2008 financial crisis.

Which brings us to the issue of deficits and public investment. Here’s what the Liberal Party of Canada platform had to say on the subject: “Interest rates are at historic lows, our current infrastructure is aging rapidly, and our economy is stuck in neutral. Now is the time to invest.”

Does that sound reasonable? It should, because it is. We’re living in a world awash with savings that the private sector doesn’t want to invest and is eager to lend to governments at very low interest rates. It’s a good idea to borrow at those low rates, putting those excess savings to use building things that will improve our future.

Strange to say, however, that hasn’t been happening. Across the advanced world, the modest fiscal stimulus programs introduced in 2009 have long since faded away. In 2010, elite opinion somehow coalesced around the view that deficits, not high unemployment and weak growth, were the great problem. There was never any evidence for this view. But it was what all the important people were saying, and few politicians were willing to challenge this orthodoxy.

Austerity rhetoric comes naturally to rightwing politicians. Center-left politicians who endorse austerity, however, find themselves reduced to arguing that they won’t inflict quite as much pain. It’s a losing proposition, politically as well as economically.

Now come Justin Trudeau’s Liberals, who are willing to say what sensible economists have been saying all along. And they weren’t punished politically — on the contrary, they won a stunning victory.

So will the Liberals put their platform into practice? They should. Interest rates remain incredibly low. Further, Canada is probably facing an extended period of weak private demand, thanks to low oil prices and the likely deflation of a housing bubble.

Let’s hope, then, that Trudeau stays with the program. He has an opportunity to show the world what truly responsible fiscal policy looks like.