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Government should spend like a household Add to ...

For someone paid to be optimistic, Finance Minister Jim Flaherty was remarkably sombre in last week’s speech to the Canadian Club in Toronto, warning about the impact of financial uncertainty on an already shaky recovery. He concluded with a tried-and-true conservative analogy, suggesting that, in turbulent times, government should imitate households and live within their means.

During a crisis, the manager of a household’s finances must “make difficult choices to put your family’s finances on a structurally stronger footing,” Mr. Flaherty said, suggesting that finance ministers do the same. “You figure out a way to restrain your spending and … reduce your debt.”

Say what? Canadian households have not exactly been paragons of fiscal prudence lately. In fact, they’ve been borrowing and spending like drunken sailors since the recession began. Gross consumer debt has shot up by almost 50 per cent in the past five years. By contrast, over the same period, government debt has increased just 38 per cent. The recession didn’t slow the party; in fact, super-low interest rates encouraged more consumer borrowing. And frankly, this is a good thing – consumers’ willingness to spend prevented a much deeper recession.

And while Mr. Flaherty’s aw-shucks invocation of “kitchen table economics” no doubt plays well with his populist base, it bears no relationship to real-world household behaviour. Canadian households are still racking up debt like there’s no tomorrow. According to the most recent Statistics Canada data, household debt has reached $1.6-trillion (more than 150 per cent of disposable income) and is still growing at nearly a quarter of a billion dollars a day.

So if his government really wants to internalize Canadian household wisdom, Mr. Flaherty should go shopping and take out a second mortgage on the Parliament Buildings.

On the other hand, if Mr. Flaherty really wants a role model for fiscal prudence, he should look to the corporate sector. Profit margins have remained strong despite the current slowdown; tax cuts have accelerated the inflow to corporate coffers. Yet, Canadian businesses are sitting on much of that cash, rather than reinvesting it. Their cash hoard now exceeds half a trillion dollars (for non-financial companies alone, not counting banks), and it’s growing quickly.

Spooked by the recent financial chaos, corporations are socking away money for a rainy day. But their reticence to spend makes the rainy day much more likely. Such is the irrationality of capitalism: What seems sensible for one actor – saving rather than spending at a time of worry – is deeply damaging to the system as a whole.

Mr. Flaherty says the biggest contribution his government can make to economic confidence is to reduce its own spending and debt. By that criteria, tight-fisted corporations should indeed be our role models. But if governments actually follow that example, we’ll all soon be wearing barrels. Because debt is the consequence of the recession, not its cause. To pay off our debts, we have to work, produce and generate income. It’s impossible to dig yourself out of a hole.

The task of government is not to glorify or emulate the myopic behaviour of any one self-interested participant in our economy. The role of government is to take a bigger view. Government must strive to overcome the co-ordination problem that’s a fundamental source of our macroeconomic weakness. The biggest contribution government can make to the recovery is not to reduce its own spending and debt but to help people get back to work. For that we need more spending, not less: by corporations, by households and, yes, by governments.

Jim Stanford is an economist with the Canadian Auto Workers union.

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