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Neil Reynolds
Neil Reynolds

Neil Reynolds

Democracies can't live in perpetual stimulus Add to ...

The British government has run a budget surplus in only six of the 37 years since 1975. The American government has run a budget surplus in only five of the 52 years since 1960. The Canadian government has run a budget surplus in only 10 of the 46 years since 1966. As Hudson Institute scholar Christopher DeMuth asserts in a prescient paper, Debt and Democracy, Keynesian doctrine – surpluses in the good years, deficits in the bad – has morphed in the advanced democracies into perpetual stimulus. As a result, the exponential accumulation of debt means that the next generation, people still unborn, could theoretically be required to pay all of their lifetime incomes in taxes merely to make the interest payments on an enormous debt.

“Obviously,” Mr. DeMuth says, “this will never happen.” But, based upon past experience, democracies are not yet prepared – with few exceptions – to balance their books. In these circumstances, what gives? In Mr. DeMuth's assessment, democracy gives. A day of reckoning comes. The Western world must either return to balanced books or risk a turbulent end to the great age of the dynamic democracies.

“The routine redistribution of wealth from future generations to ourselves is profoundly undemocratic and corrupting,” Mr. DeMuth says. “The risks … are not only economic but political. [The use of] deficit financing of current consumption now undermines spending discipline and political accountability. The reinstitution of responsible management of public debt may be essential to the sustenance of democratic self-government.”

The Washington-based Hudson Institute, founded by the famous global strategist Herman Kahn in the 1960s, is an internationally respected think tank. Mr. DeMuth, a distinguished fellow at the institute, formerly taught at Harvard University's Kennedy School of Government. His paper analyses different kinds of debt and concludes that the great democracies now routinely justify all debt as “investments” of one kind or another. “This [is] catnip for practising politicians,” Mr. DeMuth argues, “because it offers [a way to provide] constituents with more government services than taxes to pay for them.”

Mr. DeMuth cites Sweden as an example of a democratic state – “where the welfare state is alive and well and government debt is low” – that properly balances spending and taxes. It is not the welfare state that's coming to an end, he says. It's the debt-financed welfare state. But this is tantamount to saying the same thing in different ways. Most electorates would not tolerate the taxation required to run a pay-as-you-go welfare state.

Canada might be regarded as a halfway house in the DeMuth analysis. Although successive federal governments ran deficits for more than 30 years in a row – from prime minister Lester Pearson through prime minister Brian Mulroney – we have since recorded 10 budget surpluses in the past 13 years. The lingering problem is that we ran larger deficits in three bad years (total: $200-billion) than we ran surpluses in the 10 good years (total: $90-billion).

By the DeMuth analysis, however, Prime Minister Stephen Harper is certainly right to refuse alms to bankrupt European states. We have been this way, Mr. DeMuth says, before – when the democracies heaped easy money, as humanitarian investments, on spendthrift African countries for three decades (beginning in the 1960s). By the 1980s, Mr. DeMuth notes, the recipient nations could not service their debts even at near-zero interest rates.

Easy money, though, always encourages debt, whether in poor countries or rich, whether by households, corporations or governments. As Time magazine noted in May, the developed democracies “have all accumulated unprecedented levels of debt.” Here is Time's Top 10 list of indebted democracies (counting all borrowed money).

Canada is No. 10 with debt equal to 276 per cent of GDP. Australia is No. 9 with debt equal to 277 per cent of GDP. Germany is No. 8 with debt equal to 278 per cent of GDP. The U.S. is No. 7 with debt equal to 279 per cent of GDP. Though details differ, these four democracies are essentially tied. South Korea is No. 6 with debt equal to 314 per cent of GDP. Italy is No. 5 with debt equal to 314 per cent of GDP. France is No. 4 with debt equal to 346 per cent of GDP. Spain is No. 3 with debt equal to 363 per cent of GDP. Britain is No. 2 with debt equal to 507 per cent of GDP. Japan, only slightly more indebted than Britain, is No. 1 with debt equal to 512 per cent of GDP.

And people thought that banks were too big to fail.

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