DO YOU BELIEVE IN MAGIC?

We will find out if they believe their own bafflegab

THE LIBERALS MUST, WRITES ANDREW COYNE. THEIR BELIEF IN THE STIMULATIVE POWER OF SPENDING WILL DRIVE THE DEFICIT TO $90 BILLION.

The contrition tour is underway in the New Democratic Party, as party brass try to come to grips with their stunning loss in the past election. A panel led by party president Rebecca Blaikie, charged with analyzing what went wrong, suggests, unsurprisingly, that the party was too cautious. Trapped by its front-runner status, it was too unwilling to showcase its radical credentials at a time when a significant section of the voting public was looking for radical change.

The issue that crystallized this, of course, was the party’s declaration that it would balance the budget, not only over the business cycle or an electoral mandate, but starting in year one and for every year after that.

“Our balanced budget pledge was, in part, responsible for presenting us as cautious change,” Blaikie reports, in a memo to party members. Whereas the Liberals were able to present themselves as the party of “real change,” on the strength of their promise to … run deficits of $10 billion for two years.

It’s the standard theory of Election 2015. It’s one I’ve offered, myself. But you have to admit it’s a little odd. The difference between paralytic NDP timidity and swashbuckling Liberal boldness, it would seem, was a deficit of less than one-half of one per cent of GDP — not even rounding error. Moreover, the Liberals promised to repair this minor breach almost instantly, returning to balance within two years.

This, remember, at a time when both parties were insisting the economy was tumbling into recession, on the heels of the “worst economic growth record since the Depression.” And the radical, progressive, damn-the-torpedoes formula for addressing this crisis — the defining difference between the two opposition parties — was a pledge to borrow about two days’ worth of GDP, for a couple of years, then stop. Half a yard onward rode the Six Hundred.

Oh well. Perception is reality and all that. Perhaps the Liberals thought the economy would actually recover pretty quickly on its own. If a little timely spending allowed them to claim the credit, where’s the harm in that? Otherwise it’s hard to square the floridity of their rhetoric, on the urgent need for, and miraculous benefits of, deficit financing, with the tepidity of what they were actually proposing.

Indeed, the Liberals boasted that their deficits, at their peak, would be “less than half the average Harper deficit of over $20 billion per year.” The combination of “fiscal discipline with investments in economic growth,” they promised, “will end the Harper legacy of chronic deficits and reduce Canada’s federal debt-to- GDP ratio each year.”

Of course, that was then. As we all know, the fiscal situation has deteriorated somewhat. The $ 10- billion- for- two- years commitment has long since been discarded. Indeed, a new report from economists at the National Bank of Canada projects deficits totalling $90 billion over the next four years. Yet the prime minister continues to insist that the promise to balance the budget in four years is “very” set in stone, as is the pledge to constantly reduce the debt-to-GDP ratio.

The National Bank economists are not the only ones to find this puzzling. To hit the prime minister’s target, after all, would on present forecasts require substantial cuts in spending and/ or increases in taxes. And yet the government’s stated economic philosophy — its unique selling proposition, if you will, in the past election — is that such measures would be contractionary and counter-productive.

And while a declining debt-to-GDP ratio would seem a less restrictive target — you could run deficits of up to $25 billion a year on that principle, if you do the math — even that seems contradictory. If balancing the budget in every year, as the NDP and Conservatives promised to do, was barbarous idolatry — what’s so special about a calendar year? — and if $10 billion was just an arbitrary number the party could take or leave, it’s hard to see why a declining debt-to- GDP ratio should be the object of any greater fetish-worship. Would the world end if the ratio, instead of falling, remained constant — or even rose a little? As National Bank’s Warren Lovely asks, “do we need the federal debt burden to keep falling forever and ever until the end of time?”

Don’t misunderstand me. I have no problem with arbitrary fiscal targets, including balancing the budget every year. While there is no iron law to these things — we do not live in a Micawberian universe where a sixpence either way marks the difference between happiness and misery — I prefer arbitrary targets to none at all. But that’s because I don’t believe that deficits possess the stimulative magic others attach to them, certainly when compared with the capacity for long-run damage from amassing too much debt.

But the Liberals do believe in magic — or at least they claim to. In the models on which the Liberals profess to base their policies, government spending has a multiplier of at least 1, and possibly more than 1: a dollar in government spending produces more than a dollar of extra growth. The best way to reduce the deficit in the long run, as many a Keynesian would advise, is to increase it in the short. Which being the case, why would they be deterred from running deficits of $10 billion, or $30 billion, or $60 billion — still only three per cent of GDP — for that matter?

We are about to find out, in other words, whether the Liberals believe their own bafflegab. The tension that was implicit in their platform is now explicit. If the Liberals blink at $30-billion deficits — if, rather than let ’ em rip, they impose restraint, even as the economy struggles — they will be conceding that they do not really believe in the stimulative power of deficits. They will be admitting that the central plank in their platform was a lie.