AGRIWEEK BACKGROUNDER

The wheel has gone a full revolution since the Trudeau Dark Age. Deficits were thought to be harmless in the 1960s and ‘70s. By the 1990s their elimination became a national priority, while Paul Martin was finance minister. Now there is an all-out competition among politicians as to who can propose the grandest government spending schemes. Damn the deficit torpedoes.

It is as if a fever were sweeping the known world. Virtually all developed (and some not so developed) countries are racing to shore up sagging economies with public spending. The vanguard is the Obama administration, which has committed or intends to commit at least $2.5 trillion to various government bailouts. Over the long-term there can be only one result from these adventures. Governments around the world will flood the financial system with staggering amounts in government bonds, notes and other securities. Placing them will drive up interest rates, crowd out private-sector borrowers and impede capital formation. Because the global financial system is so thoroughly interconnected and interdependent, no country in the world will escape the impact. The increasing cost of capital will systemically depress economic activity far into the next decade. High and rising interest rates have always been associated with higher inflation and shrinkage in equity investment. The natural rules which govern these affairs have not changed and will never change.

The Harper government was forced to follow the herd by its precarious political position. The threat of parliamentary overthrow is repeated daily. The risk this government runs is that it is not spending enough and not increasing the public debt fast enough to suit the opposition. In this dangerous time, the most raw and irresponsible form of political adventurism is rampant. The NDP Layton is the Snidely Whiplash of Canadian politics. He thinks he is so close to a position of power and influence, which he will never achieve by election, that he can taste it. The alleged anti-Harper coalition of the Liberals, NDP and Bloc was semi-officially abandoned, but its skeleton obviously stands ready in its closet to reconstitute at any time. Meanwhile Ignatieff has assumed the position of overseer of the elected government, an act of stunning pomposity. The risk of parliamentary defeat is still constant, the Harper government is a lame duck, and no number of elections in the predictable future will produce a majority of any party. Canadian politics appear on the path frequented by such as Italy, Israel and other countries where political opinion, represented by dozens of parties, is too fragmented to permit the democratic principle of majority rule to function.

Will the alleged ‘stimulus’ work? It somewhat depends on the definition of success, but whatever the parameters it will be impossible to compare the economic experience of the next few years with what it would have been under some other fiscal strategy. However the history of government economic intervention is not promising. These days mark another waypoint in another cycle, which is the return to uninhibited and unbridled government economic intervention and a retreat from the theory and practice of free enterprise. We already see American financial institutions and automobile manufacturers under the supervision of the U.S. Congress, which consists of ordinary and often dumber-than-average elected politicians with no expertise compared to that of career executives. Their authority comes from financial leverage using taxpayers’ money.

The worldwide drive to stave off recession is really an attempt to restore the spectacularly unsustainable conditions which led to the present troubles. It is plain to see that the prosperity of the last decade has been made possible by over-borrowing, excessively easy access to credit, the conversion of savings into current income and artificial profits from overheated stock and real estate markets. Left on their own, after an adjustment period which could be painful but ultimately very effective, economic conditions would stabilize. Government bail-outs are based on the logically indefensible notion that the economic downturn resulted merely from minor malfunctions in the financial system.