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Liberal leader Michael Ignatieff correctly identifies consumer debt as an ongoing problem in the Canadian economy. Sadly he seems to misunderstand why systemic debt is so dangerous. Consumer debt is not a problem because it will reduce consumption, which only matters if you buy into the nonsensical Keynesian idea of the paradox of thrift. The true danger is if consumers (also known as people) don’t reduce their personal debt.
The fact that debt levels are so high in Canada suggests that the current level of consumption is not sustainable. Borrowing to consume doesn’t increase spending power, it merely redistributes future spending power to the present. The value then of borrowing for consumption is nil. Actually it is worse than nil because interest will have to be paid on the loan.
This should be explained to Mr. Ignatieff as he touts further government spending as a way to increase consumption and avoid another economic downturn. Putting aside the fact that there is zero evidence to support his hunch that the recovery is not stable, Mr. Ignatieff is offering the worse possible solution. More government spending would increase government debt, and government debt is differed taxes from the perspective of the taxpayer/consumer/individual. Ultimately it would mean an increase to the tax burden, and, ironically, a resulting drop in consumption.
Mr. Ignatieff seems to be confused about how he would fund a future ‘stimulus package.’ He says that the government’s planned cuts in corporate taxes will reduce the capacity of the government to ‘respond’ to a recession. Yet at the same time he has already committed his hypothetical government to new spending predicated on those taxes not being cut. So wouldn’t that new spending also reduce the government’s ability to ‘stimulate?’ Where exactly would the Ignatieff government get the money?
All that new government spending will do is increase the amount of debt in Canada.
And as Michael Ignatieff himself says, it is the debt that we should be worried about.
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4 comments:
Actually consumer debt does reduce consumption because large interest payments erode income and people have less money in their wallets because of it. It isn't about Keynesian economics that government spending creates wealth. Consumer debt is a big problem for consumption.
"Consumption is the sole end and means of all production"
-Adam Smith
I didn't say that debt didn't reduce consumption. I just said that the government should not be primarily worried about the levels of consumption.
The Keynesian theory of the parodox of thrift claims that if people reduce consumption it will have a ripple affect of reducing production. But this ignores the reality that people may be rationally responding to incentives in the market that says this is not a good time to consume. Reduced consumption is thus not the disease but a symptom of the disease. Stimulus packages only treat the symptom not the disease by artificially increasing consumption.
So my argument isn't premised on consumption being unimportant, it is premised on the idea that a reduction in consumption is not an inherint evil. In fact if we all reduced consumption to pay down debt it would be very benificial.
I can say without hesitation or doubt, that through my life there have been thousands of government programs to dole out money to a myriad or groups and individuals, and not 1 cent has come to me personally: not a nickle, not a dime. I own a small company, work 60+ hours a week (or whatever it takes), and I'm generally a happy person. But all this talk about programs to piss money into the wind for my fellow, lazy, lay-about, fat-headed fellow Canadians that need to be coddled and fed from a sliver spoon rubs me the wrong way. Mr Ignatieff, (and who ever else promises to burn more money), FU AH!
Hey anonymous, you get government money all the time. Who do you think paid to teach your employees to read?
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