Paul Martin Can Teach Economically Illiterate USA

♠ Posted by Emmanuel in at 6/16/2010 12:09:00 AM
And now back to our regular programme of commentary on the godforsaken fiscal haemorrhage known as the United States of America. Not so long ago, Canada was the goat of the G7, with a massive fiscal deficit hovering around 8% of GDP. What happened? Fortunately, the story in Canada was a good one as the fiscally conservative but socially liberal Paul Martin went about his business making large cuts. But, unlike the British who are not exceedingly suave at explaining the needs for cuts to the public or the Americans who deny the need to do so--he's not called Tim "Deficits Still Don't Matter" Geithner for nothing--Paul Martin embarked on a programme of educating the public on the need for these cuts. Contrast this to Obama seeking $50B more from Congress to throw at broke state governments (and influential teacher's unions).

That is, you need to work at not allowing others to define you--with some justification--as either brutally insensitive (Cameron-style) or blissfully ignorant (Geithner-style). From the Financial Times comes this cautionary tale with a happy ending from a country that's been there, done that and come out fighting. It took Martin a lot of courage and imagination to do--something patently lacking among American politicians who serve as boilerplate fodder for rational choice theorists...
[Former Canadian Finance and later Prime Minister] Paul Martin has a word of advice for George Osborne as the chancellor starts taking aim at the UK’s towering budget deficit: keep your eye on the voters, not on the markets. As Canada’s finance minister in the 1990s, Mr Martin spearheaded a deficit-slaying strategy that is now widely seen as a model of how to restore fiscal discipline.

“The markets are not being cut, it’s the people who are being cut,” Mr Martin, now retired, tells the Financial Times on Monday. “If you prepare them well, people will understand. They will not stay with you unless they feel that the sacrifice you’re asking of them is going to succeed.”

Mr Martin became finance minister in 1993 after Canada’s Liberal party, led by Jean Chr├ętien, ousted the Conservatives in a general election. The federal deficit was running at more than 8 per cent of gross domestic product while the national debt had climbed to 70 per cent of output. With 36 cents of every tax dollar earmarked for interest payments, members of parliament were under growing pressure to rein in the deficit.

Wide public consultation played a critical part in his ability to push through budget cuts, Mr Martin says. He spent most of 1994 criss-crossing the country, bringing business executives and administrators to meetings with union leaders and teachers with education administrators.

“Everybody would be there saying: ‘You’ve got to cut the other person’,” Mr Martin recalls. “They understood that it wouldn’t be easy.” Events beyond Canada’s borders helped. The Mexican debt crisis broke just two months before Mr Martin was due to deliver his belt-tightening budget in early 1995. Canadians were jolted by a much-quoted Wall Street Journal editorial that described the Canadian dollar as the northern peso.

“People were really quite scared that we were on the precipice of a crisis,” recalls Don Drummond, the finance department’s budget chief at the time and recently retired chief economist at Toronto-Dominion Bank. “By 1995 the public was not only ready for it, but egging the government on,” Mr Drummond says.

Mr Martin decided on budget cuts by going through a list of government departments with Mr Drummond and David Dodge, the finance department’s senior civil servant who went on to become governor of the Bank of Canada. The 1995 budget trimmed departmental operating budgets by about 5 per cent. Cuts to grants and subsidies went far deeper. Some non-profit groups saw their budgets virtually wiped out.

“I would say: ‘Department of energy, how much can we cut and still maintain our priorities?’ They would say ‘35 per cent’, so I would write down 35 per cent,” Mr Martin says. “I was accused of being arbitrary and unreasonable. And I was. But if you spend five years doing this and engage in process, you’ll be nickelled and dimed to death. “At the end of it, we still hadn’t met our target, so we sat down and we did it again...”

Helped by low interest rates, a rebounding global economy and a falling Canadian dollar, Mr Martin balanced the books within three years. But the discipline did not last. The Liberal government and its Conservative successor, which took office in 2006, “saw unanticipated surpluses, and kept spending them”, Mr Drummond says.
Martin's successors have made something of a mess of things like Bush and Obama after Clinton, but given the place Canada begun which is highly reminiscent of the situations of any number of industrialized countries nowadays, there are lessons here.

What makes the USA so painfully pathetic nowadays is its inability to make sacrifices for the common good. If Bush told Americans that their patriotic duty after 9/11 was to go shopping, then Obama has effectively told them to go shopping some more. Essentially, that's what Tim Geithner told the G20. It's always someone else's fault in the blame-free, self-indulgent culture Americans have made their own--China's manipulation, Germany's export orientation, and so forth. Collectively, have they ever considered that accumulating $13 trillion in debt was somehow their fault?

Bottom line: if you want to run your country into the ground, feel free to follow the US example--American exceptionalism nowadays is that America is exceptionally bad. It seems to me that the key to getting things in reasonable shape in the world economy is not to indulge these overindebted, overweight, and overstimulated people but to put them in their place.

In the meantime, they (and we) can reflect on the Canadian example of enlightened politics. Unlike the primitive American scene where Democrats are unwilling to make cuts to social expenditures and bicker endlessly with Republicans who are averse to raising revenues, Canada's leaders patiently explained to key constituencies why cuts were required for the sake of all. If you are reasonable and adopt an understanding, patient attitude towards your constituents instead of engaging in the brainless brand of combative American politics, people are more likely to listen.

Oh Canada, you put America to shame. Then again, it's not so difficult to do nowadays, is it?