Gimme a Gee!!

I promise to show you why deficits "work." First though a thought: I think you can reduce international politics to a kind of competitive sport. The title suggests the cry of the cheerleader. Gimme a “G," Let’s hear it for the Gee-Seven!

The last meeting is best remembered for the near-riots, vandalism, and police brutishness. But it should be remembered for the repetition of the most orthodox of economic orthodoxy: “Fight the deficits!” Yeah team.

Aside from disenchantment with the Obama failure to make jobs appear out of thin air, or the pathetic rambling of the politically Neanderthal Tea Party – there were people of good faith who honestly believed that deficit fighting was number one on the must-do list. It swept the Republicans back into control of The House. Pious comments about saddling our grandchildren with our debts; about digging a hole and it being time to stop digging. In Canada, we believe almost as devoutly in deficit reduction. Remember Paul Martin’s time as Finance Minister when we were all told to pull in our belts and defeat the deficit. It is one of those “truths” that only the Left seems to object to. In fact, if I proceed now to dignify deficits I will be accused of being a knee-jerk Lefty. Here goes.

I am not an economist although I have some definite ideas about commerce and trade and banking and borrowing. I hope I can explain to all the rest of us layman, myself included, the simple reason why deficits are not the thief hiding under the bed.

Any advocate for the “Dismal Science” could put together figures and graphs and pie charts that would justify deficits. Contrarily the same people are flexible enough to show figures that justify the fight against deficits. I have one simple word: multiplier. It’s a word we use to describe the cascade of events that follows an initial move.

If a government decides that jobs are more important than deficits; if it decides that private business is not hiring; if it decides that it can spend money that will benefit the community at large: then deficits make sense.

I shall try to create a hypothetical model. The government decides it will spend – say – 50 billion dollars to build something that will benefit many people: say a series of well-managed small airports or a new transcontinental high speed rail line. One of the reasons governments can do it but private business can not, is that the government can afford to spend money without hope of corporate profit. Not quite. The real “ profit” will be for the thousands of people who will be put to work.

How does the “multiplier” work? Simple. First the salaries that are paid by the subsidy create wages that are taxable. So the government gets back some of its investment. But there are many other multipliers. For railroads there are thousands of miles of steel rails to be fabricated. Work for steel mills that will then have to hire labour which will in turn generate two kinds of tax revenues: salaries of the workers and profits of the steel company. There will be cement companies. There will be companies that make rolling stock. Every one of those will start hiring and again the double tax benefit occurs. Of course there is the most important multiplier of all: the newly hired workers will be able to start spending money again. Bingo – retailers, car dealerships, restaurants, everyone suddenly has a bigger customer base. The government is not “wasting” it is “investing.”

By the way, the supply-side denizens believe that tax relief will be the great multiplier. Maybe it is and maybe it proves my point: increased tax relief causes deeper deficits, but the money will trickle down into the economy. That theory has been disgraced, but don’t tell it to John Boehmer, Mitch McConnell, or even Jim Flaherty.