Two pieces of extraordinary rubbish in the Globe this morning. (Down from their usual average, I know, but still...) In the first,
Rhéal Séguin interviews Jacques Parizeau about Monsieur's post-referendum plans to "invest" $17-billion of the province's pension funds in the ultimate speculative play: government of Quebec bonds.
"It was the normal thing to do in order to protect against those who may be tempted to create panic on the financial markets," Mr. Parizeau said in an interview."We would have let the bonds drop to a certain value and we would have intervened on the market to buy them at a lower price and then sell them later. We would have made a lot of money."
Well, yes:
unless the price continued falling. Bear in mind that Parizeau, as he was good enough to inform us after the fact, intended to achieve independence within a matter of days (the only way, to give him his due, that it ever could be done, and almost certain to fail even then), and that the government of Canada, as was also later revealed, had no intention of yielding to this putsch. (That's Chretien, God bless him: He may have been a corrupt old bastard, but he was
our corrupt old bastard).
The likely result is too ghastly to contemplate: a crisis of legitimacy, as the two governments wrestled for effective control of the province (though most of the cards would be in federal hands), the courts filled with petitioners seeking the protection of the law against an illegal coup d'etat; probably the odd hydro tower toppling, as the Cree asserted their rights; and massive capital flight, and a currency crisis, and a bank failure or three, and... Anyone who doesn't think this would soon have spilled into the streets doesn't remember the heavy sense of menace that hung over Montreal in those days. Remember "money and the ethnic vote"? Remember Landry and the hotel worker? We dodged an enormous bullet on October 30, 1995: not separation (the Parizeau regime would have collapsed within weeks), but chaos.
But none of this troubles Monsieur's serene contemplation, as he surveys the imagined past -- or Séguin's. Listen to this:
Mr. Parizeau explained that the financial markets at the time had already factored in a possible Yes vote for sovereignty in the referendum.
They had factored in a
possible Yes vote. They had not begun to price in the reality of such a vote, since no one had any idea what the consequences would be. And if they had, there would have been no opportunity for the profit-taking Parizeau imagines: prices would already be at their long-term level. But I'm interrupting:
It was generally recognized [that's Séguin speaking, not Parizeau] that the bonds would have returned to their original value shortly after the vote, allowing the government to resell them and reap huge profits.
Bunk. A friend of mine was managing a large bond fund out of the States at the time, with significant exposure to Canada. His whole career, he told me later, was riding on calling the referendum right (ie a flip of a coin). If there was that much risk attached to Canada bonds, multiply that several times over for GQuebs.
There's lots more in that vein. But let us not neglect the other piece of rubbish, this one by Jim Stanford, economist for the Canadian Autoworkers Union. It's on the theme -- surprise! -- of the national debt, and the evils of paying it down, which the NDP apparently believes is a big votewinner ("if you'll just consult this table of compound interest, it clearly shows..."), notwithstanding its leader's recent $200-billion gaffe. The party has been stressing the point post-budget, as have other lefty commentators. (Linda McQuaig wrote a similar column in the Sunday Star).
Here's the spin:
Canada's public-debt burden has plunged since the deficit was eliminated in 1997. Net federal debt currently equals 41 per cent of GDP -- down by 26 points since 1997, good enough for second-lowest in the G7. This turnaround, dramatic by any measure, was not mostly due to debt repayment. Almost 85 per cent of the work was done by economic growth (which boosted the denominator of the debt-GDP ratio, far faster than debt repayment shrank the numerator).Indeed, suppose the Liberals had not paid back a single loonie of debt since 1997 (balancing the books instead of running significant, allegedly unplanned surpluses). The debt ratio would equal 45 per cent of GDP today, instead of 41 per cent, still second-best in the G7.
Of course, since these same people were telling us that the debt-to-GDP ratio didn't matter back when it was at 67%, you may want to consider the source. But let's take up his point. Why, he asks, is the government devoting $3-billion a year to debt repayment (actually it isn't: it's only said it would devote that amount to a contingency reserve, to be put toward the debt
if unspent. Last year, for example, a third of it was.) in order to meet the arbitrary benchmark of a 25% debt-to-GDP ratio in 10 years, when it could achieve the same result in 11 years merely by balancing the budget every year?
He's quite right, as a matter of arithmetic. But why is he so attached to the arbitrary benchmark of balancing the budget every year? In fact, even if you ran small deficits, the debt-to-GDP ratio would continue to decline. They needn't even be that small: just so long as each year's deficit added less, proportionately, to the existing stock of debt than the economy grew that year. A 5% growth rate means anything less than a $25-billion deficit would be acceptable. You'd still get to 25% ... eventually.
But forget 25%: why are we so transfixed by a lower debt-to-GDP ratio? What's wrong with 41%? Or 50%? Sure, you pay less in interest each year at lower debt ratios -- we're now paying 19 cents of every tax dollar in interest, versus 36 cents at the peak -- but at the cost of forgoing all the extra spending and/or tax cuts you could have indulged in, had you been willing to borrow to pay for it. (Which is what you would be doing, even if the budget were balanced, or even in surplus: so long as the debt is higher than it would otherwise have been, any spending or tax cut is debt-financed.)
Now the point of all this is not to suggest that we should forget about the debt, or return to deficit spending. The point is that the balanced budget target to which the left has suddenly become attached is no more set in stone than the government's semi-official policy of running $3-billion surpluses (true to form, it tries to have things both ways, or rather three ways: an official policy of exactly balancing the budget every year, a semi-official policy of running surpluses equal to the continency reserve, and the actual policy of running much larger surpluses that are not announced until after the fiscal year is over). Stanford and friends prefer a zero surplus because it is smaller than a $3-billion surplus. It's as simple as that. Only by professing their belief in balanced budgets, they can pass this off as a newfound devotion to fiscal responsibility. (But in fact nothing's changed. When the deficit was $38-billion, they wanted it to be $41-billion. When it was $17-billion, they wanted it to be $20-billion. Now it's in surplus, and they want it to be balanced.)
On much the same, though opposite reasoning, I prefer $6-billion surpluses to $3-billion, and $9-billion surpluses to $6-billion: based on a gut feeling that we need to make progress against the debt while we can, in preparation for the day, not far off, when we may well have to start running the debt back up again, to pay for the aging baby boomers. That doesn't mean that a dollar in debt repayment is always to be preferred to a dollar in spending or a dollar left in taxpayers' pockets: otherwise the whole of the budget would be surplus, and taxes raised to the point of maximum revenue yield. But up to a point, it is. Think of it as an investment -- like Jacques Parizeau, by buying back its own bonds the government is investing in itself. (You'd think the left would love that.) The dollar you forgo in spending or tax cuts today is $1.08 you can have next year, or $1.17 the next, and so on. The debt is now $55-billion lower than it was at its peak, in absolute terms, but it's about $300-billion lower than it would have been if the debt-to-GDP ratio were still at its peak. That roughly three-eighths reduction in the debt, proportionately, has paid disproportionate dividends, more than halving the share of GDP going to interest.
Like most things, however, the returns to debt reduction diminish the further it is pursued. Maybe somebody has a formula for calculating where the "sweet spot" of optimal debt reduction is, where the gains just offset the costs. I don't. But as a rough guide, "several billion dollars more than the left thinks proper" will do.
POSTSCRIPT: The two arguments above each have their antecedents. For Parizeau, the respected financial analyst Will Rogers: "Listen, people, there's no great mystery to this stock market business. All you do is buy yourself a bunch of stock, wait for the price to go up, then sell it and take the profit. If it don't go up, don't buy it." And for Stanford, the classic historical text, 1066 and All That: "The National Debt is a very Good Thing, and it would be dangerous to pay it off, for fear of Political Economy."
UPDATE: Actually, the exact Will Rogers quote is: "Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it." But then, a gentleman always slightly misquotes.
last.fm
3/31/2004
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