Front Burner - Encore: Never mind the deficit?

Episode Date: December 29, 2020

This holiday season, economists are watching how Canadians spend to see how deeply the pandemic has changed the way we shop, save and even give to charity. But differences in consumer spending have nothing on the tremendous amount of money the federal government continues to spend to get the country through the COVID-19 pandemic. Despite the protests of deficit hawks, a growing movement says we can shed our old worries about the federal debt. In fact, modern monetary theory argues that since we control our own currency, the government can create more money and never go broke. Today, an encore of our examination into this controversial idea and how it relates to Canada.

In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through angel investment and industry connections. This is a CBC Podcast. Hi everybody, Jamie here. I hope that your holidays are going well. Today and tomorrow, we're going to have encore episodes for you. Then we're back on Thursday with a fresh show. So you can look forward to that. But in the meantime, another listen to an episode about a growing idea. The governments could spend a lot less time worrying about how much money they spend.

Hope you like it. It's 1994, and Finance Minister Paul Martin is shaking hands with a friend of Carl McNeil. McNeil has just died. He was 100 years old. And McNeil had lived most of his life in poverty on a small farm in Ontario. And despite his meager means, it was Canada's spiraling federal debt that he was worried about. So McNeil saved up. And before he died, he left $37,000 to the government. He said he wanted to pay his share. One of McNeil's friends here is actually handing the check over to Paul Martin and explaining all the things that McNeil didn't have. A refrigerator or electric stove or running water. He lived very, very frugally.

But happily. So with his final $37,000 gift to the government, a voluntary tithe he cobbled together while living much of his life without the barest modern necessities. McNeill managed to pay the interest on the national debt for about 30 seconds. It's now 26 years and one global pandemic later, and the Parliamentary Budget Officer expects Canada's total debt to hit $1.2 trillion next year. I mean, just think of all the expensive ways we're propping up the COVID economy, the wage subsidy, business loans, CERB, expanded unemployment insurance. Our finance minister, Krisha Freeland, says that while the debt matters, we need to spend

the money in the short term. These are things we just can't afford not to do. The cost of failing to act is much, much greater today than the cost of acting. And for some, Carl McNeil's debt anxiety is happening all over again. And that even includes the parliamentary budget officer himself. We cannot afford deficits of over $300 billion for more than just a few years. And when I say a few years, I really mean a year or two.

But as the world sinks deeper into the red with COVID spending, more people are asking, what if that worry is misplaced? What if, for generations, governments and a good portion of voters have been fretting about budget deficits when they don't need to? Well, that's the idea behind a growing movement challenging how we understand our economy. It's called Modern Monetary Theory, MMT for short. And it argues that Canada controls its own money, so it can't go broke. And it's explained in Stephanie Kelton's book, The Deficit Myth. She's a professor of economics and public policy at Stony Brook University.

She advised Bernie Sanders' campaign, and she served on Joe Biden's policy task force. And she tells me that rethinking the debt can revolutionize a country. Let's just be honest. Our governments can never go broke. They cannot become insolvent. They cannot have bills coming due in dollars that they cannot afford to pay. That cannot happen. So if you lived through the 90s like I did, you probably heard a lot about the deficit that sounded like this. For two decades now, we have spent more than we have saved. The days of overreaching, overspending governments are over.

Mr. Chairman, this government has cut up its credit card. That's the so-called deficit slayer, then Finance Minister Paul Martin. And he's talking about the federal budget the way we so often do, like it's a household budget. I keep this gorgeous Excel spreadsheet at home. I love it. If my household spends more money than we make, we'll have to go into debt or use up our savings. But just in case you wanted an expert opinion, here's how Stephanie tells it. If we choose to spend more than our income, we can make up the shortfall by maybe putting some of our bills on our credit card. But at the end of the day, you're sitting there in front of that spreadsheet and you're saying, OK, the visa bill is due.

The Macy's bill has come. I have an electric bill, a house payment, a car payment and all this. And you are working within the financial constraints that are your reality. Now, the government obviously doesn't get a paycheck, but it does get taxes. And in this government is a household way of thinking. When the government spends more than it makes in taxes, it goes into debt. That's the deficit. In the 90s, the total debt was huge compared to the size of the economy.

And since the interest on our debt was so expensive back then, there was a lot of panic about how much money the government could spend. Despite earlier predictions, the new figures show the problem is much larger than many people anticipated. The country is in debt up to its eyeball, said Martin. The government aims to reduce the deficit to 3% of GDP. We have never equivocated. It is a target we will meet come hell or high water. Back in the 90s, the Canadian deficit was a global embarrassment.

The Wall Street Journal actually called this a third world banana republic. More importantly, two big agencies lowered our credit rating, making loans more expensive. The bond rating service of Standard & Poor's says some of Canada's bonds have become a riskier investment. The reason? First and foremost, the external debt problem. Even though our debt today is much cheaper than it was back then, there's still all this worry about our economic future right now. I'm sure you've heard the soundbites from Conservative MP Pierre Palliev. The finance minister's plan is debt-fuelled government spending. The Bank of Canada's governor's plan is debt-fuelled consumer spending. It's the credit card strategy. How to pay it all back? We will cross that bridge when it collapses.

strategy. How to pay it all back? We will cross that bridge when it collapses. Mr. Speaker. But Stephanie says, hold on just a second. Why are we panicking? Because the government blew its household budget. Because she says the government isn't household. More precisely, Stephanie says that when the government spends more than it taxes, there's still no way for it to rack up a bill that it can't pay. The federal government, as the issuer of the currency, faces no purely financial constraint, and that's a huge difference. Let's back up for a second here because I've got a secret to share with you. Our money, it isn't real.

Sure, some of it is physical and has a beautiful picture of Viola Desmond on it, but that doesn't change the fact that it's plastic. A plastic symbol of ones and zeros on some computer somewhere. The Canadian dollar is only worth anything because the government says that it is. And we, individuals, society, the banks, agree. And since the government also controls how much of that money exists, Stephanie says it can create more whenever it wants to. And this right here is the big difference between your household budget and the government budget. Now, if you could issue the Canadian dollar, I think you'd probably find

better things to do with your time than to sit in front of your spreadsheet, much as you seem to enjoy it and play with those numbers every month, right? Because there'd be little to worry about. You know, with the federal government, what happens is the federal government can insert its own payments. It can make payments in terms of its own currency that put numbers on our ledgers, that place numbers on our balance sheet, so they can send out cash in a pandemic that all of a sudden we have more income to spend. out cash in a pandemic, that all of a sudden we have more income to spend. So say the government wants to spend a billion dollars on like, I don't know, orange juice or like a vaccine nobody thought we'd need a year ago. Someone at the Bank of Canada just has to type zeros on a keyboard and boom, a billion dollars appears. Mimosas and needles for everyone ensues.

And there's no reason for the government to put that bill on a credit card, since they can just create the money. And even if they did put it on a credit card, they could just type the money to pay it off. Maybe I'm oversimplifying it all a teensy bit, but Stephanie says that for countries to control their own money like we do, I've got the basic idea here. You'll have to forgive her for speaking American for a second. I went down the rabbit hole. You know, what I discovered, it works like you just described it. So here in the U.S., when Congress authorizes some additional spending, like we had a $2.2 trillion relief bill for coronavirus and the economic fallout. Now, they didn't have $2.2 trillion and they didn't go out and find $2.2 trillion. They didn't raise taxes to come up with the money.

They didn't go borrow from China or anywhere else. What Congress has is the power of the purse. What the federal government has is the ability to commit to spending money it does not have. When it comes to spending money that we don't have, Canada is doing a lot of that right now. According to the Parliamentary Budget Officer, Canada will spend almost $330 billion more than it makes next year. And as I mentioned earlier, the federal debt is projected to hit $1.2 trillion. federal debt is projected to hit $1.2 trillion. Finance Minister Christa Freeland says we need to keep spending to stimulate the economy.

For Canadians of a certain vintage, and I freely admit to being one of them, the idea of increasing government debt holds particular terrors. We remember the fiscal shock of the 1990s when Canada flirted with insolvency. But it's a poor general who fights the last war. A lot of mainstream economists and those like Stephanie agree about this. Government spending is important to keep the economy going in hard times. Because it lets people keep buying things, which stops our economy from grinding to a halt. keep buying things, which stops our economy from grinding to a halt. When the government steps in in a moment like the one we're in today and supports people's incomes, it allows them to continue not just to pay their mortgage or their rent and their recurring bills, their electric

bill and their phone bill and that sort of thing, but also to be customers for businesses that would otherwise be struggling to stay afloat. Right. And this is a refrain that we've heard a lot of times coming from our prime minister. We decided to take on that debt to prevent Canadians from having to do it. If the federal government hadn't taken on significant debt in order to send money to Canadians to support businesses and households, what would Canadians have done? Honest to Pete, I heard him say that, and I thought it was just about the most perfect way of describing what the government is doing in the current moment. There are Conservatives who think Canada needs to be spending right now too, but object to the way Trudeau's government is doing it.

Take Conservative leader Aaron O'Toole. We have to make sure that if we're basically indebting our children, we're doing it for strategic, smart reasons. So if it's about getting people back to work, it's about helping the vulnerable, reinforcing some long-term care homes, working with our provincial partners to prepare for a second wave, that's great. If it's hundreds of millions of dollars handed out to the charitable friends of Mr. Marneau and Mr. Trudeau, that is disgraceful. But now we hit this fork in the road. The first road leads to a town we've all lived in. It's a place where after the crisis is over, you immediately start worrying about the amount of money you spent.

This is the deficits matter town. And the second road, well, the second road leads to a much different place. It's a town where after the crisis, you can keep spending if you need to. So you don't cut healthcare and education to pay back the debt. You keep spending on that stuff because it will keep the economy growing in the future. This town is called Deficits Don't Matter As Muchville. And it thinks that for every dollar of deficit the government spends,

it's actually creating a dollar of surplus for the people. We can never make spending the enemy in our economy. Spending is the thing that powers our economy. So we've just reached this very important part of the podcast. It's the part where you tell me this sounds so crazy, right? Surely there would

be consequences to spending forever. We can't just keep typing wind turbines and navy icebreakers into existence. And Stephanie actually agrees here. Does it then follow that governments can simply spend as much money as they want and never have to worry about anything because there are no limits. No, there are limits. That limit is inflation. It's what everyone is worried will happen if we add too many zeros into the money computer. And it's what Stephanie says we should be obsessing about instead of the deficit. Why? Well, because when everyone has more money, but they still have the same number of things to spend it on, the prices of those things go up and your money buys less. Suddenly, a loaf of bread costs like a thousand bucks, and I know you don't want to pay

that. So if we create new money and keep spending after the crisis, how can we stop inflation from happening? keep spending after the crisis, how can we stop inflation from happening? In Stephanie's model, she says, we target our spending. What matters is what people do with that income. How much are you sending and what do people do with it? So if you're sending such big checks and those checks are coming so frequently that people are going out and trying to, you know, spend lots and lots of money chasing after goods and services in the economy, and businesses can't keep up with all that demand, sure, you're going to push prices higher, you're going to cause

an inflation problem. But if you're sending out enough income to support people so that their livelihoods are not compromised, so that they don't get evicted from their apartment or from their home, so they don't lose their car, so they can afford to feed their families and they're not in line at food banks and so forth. Basically, you want to put money in the right places where people are going to get what they need instead of consuming more, like making sure everyone's employed. All right, but inflation might still happen eventually. So how do we control it once it does?

Right now, the government stops inflation by raising interest rates to make spending more expensive. But modern monetary theory says there's already another government tool in place that protects us from the kind of inflation we talked about. Taxes. tool in place that protects us from the kind of inflation we talked about, taxes. You don't need to tax dollars away from someone in order to be able to spend the dollar. You're the issuer, right? So why do you tax? Well, one important reason is that by taxing some dollars away from me each month or each

year, I have fewer dollars available to spend on goods and services. In other words, taxes reduce my purchasing power. So to stop bread from costing a thousand bucks, you tax money out of people's pockets and bread stays at three bucks a loaf. It's about taking some money we created back out of the economy so people can buy less. the government might take a look at its spending proposal and say, you know, I want to do about three or four trillion dollars of spending investments in the economy. But I'm a little bit worried that that would push the economy too far. And if I spend three or four trillion dollars, it's going to create inflationary problems. So what I'm going to do is I'm going to write a bill that matches, right? I'm going to say I can spend three or four trillion, but I don't want to cause an inflation

problem. So as I'm spending that three or four trillion, I'm also going to subtract two or three trillion, maybe more, right, from the hands of other spenders in the economy so that we aren't competing with one another for limited resource space. In other words, the tax is like inflation security. It's inflation protection. It allows the government to spend its own dollars into the economy without creating inflationary pressure. Just to be clear here, Stephanie thinks the kind of inflation we're talking about here is incredibly rare in countries like Canada and the US.

That adding zeros to the money computer doesn't automatically cause inflation. And that if you spend carefully, this tax tool doesn't have to be used that often. So I've got to be honest with you. Talking about money this way feels weird and totally unnatural to me. The decades of looking at the government like a household budget, it isn't just a Canadian thing, right? Remember how UK Prime Minister Margaret Thatcher talked about the deficit? Let us never forget this fundamental truth. The state has no source of money other than the money people earn themselves. You don't grow richer by ordering another checkbook from the bank. Someone has to add up the figures. Every business has to do it.

Every housewife has to do it. What about U.S. President Ronald Reagan? Can you imagine if a head of a household or a business were forced to spend every dime that was budgeted, even if savings were available? Well, that's the situation the president is in now. So it's no wonder that ignoring the deficit and creating money seems like a total break from reality. And you know what? I asked Stephanie about this, and she says she understands Canadians' fears about our current spending. At one point in my life, all of that stuff would have scared me too. So I understand it as someone who's experienced the kind of concern that many people have when they hear people use very big numbers and attach words like deficit and debt to those numbers,

and then tell us that in fact, what the government is doing is putting the rest of us on the hook. That is somehow going to mean that our lives are going to be harder in the future because of what the government is doing. So when you hear that kind of stuff, yeah, it's enough to scare anyone, right? And it's so unfortunate because there's enough in the world happening today to be worried about without layering on a bunch of additional concerns that, I'll just be honest with you, no longer worry me. Of course, there are economists that don't buy anything Stephanie has told us so far. They think creating more money will pretty much guarantee a thousand dollar loaf of bread. Other critics point out no

politician wants to raise taxes because the public hates taxes and the governments operate much too slowly to make this whole thing work. Not to mention the advocates for smaller government that would hate the feds taking this kind of control. But if you buy Stephanie's argument, this kind of control. But if you buy Stephanie's argument, she says that it's a gateway to a much smarter way of spending. Congress does not think about inflation at all when they authorize new spending. All they think of is, does the spending add to the deficit? Does it increase the debt? And I'm saying those are the two least important considerations. The important consideration is the inflation risk. And nobody stops to think about that today. a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through

angel investment and industry connections. Hi, it's Ramit Sethi here. You may have seen my money show on Netflix. I've been talking about money for 20 years. I've talked to millions of people and I have some startling numbers to share with you. Did you know that of the people I speak to, 50% of them do not know their own household income? That's not a typo, 50%. That's because money is confusing. In my new book and podcast, Money for Couples, I help you and your partner create a financial vision together. To listen to this podcast, just search for Money for Cops. So let's check back one more time with history's most boring superhero, the deficit slayer. In the mid-90s, liberal finance minister Paul Martin flexed his fiscal powers. In three years, he zapped $25 billion from the budget.

If government doesn't need to run something, it shouldn't. And in the future, Mr. Speaker, it won't. These are not the cuts of yesteryear. These are real cuts in real dollars. It was controversial. He cut about a quarter of government jobs, shrank transfers to the provinces and support for farmers. He even sold off CN Rail.

According to a CBC poll, 69 percent of Canadians agreed the government should switch attention from cutting the deficit to reducing unemployment. Unemployment for our youth. There's a whole generation of youth out there being wasted. It's just a crime. There's so many people that are unemployed right now that it's making it tough for everybody. But by the late 90s, he saved the Liberals' budgetary day with a surplus. For the first time in 27 years, it was not necessary for the federal government to borrow new money. Let no one doubt that Canada is at the dawn of its greatest age. For mainstream economists, there were real benefits to reining in our deficit.

The credit agencies eventually restored our ratings to AAA. We ended up posting budget surpluses all the way to the 2008 financial crisis. And today, our financial leadership would probably still argue managing the deficit is the right way to do it. Last year, then Bank of Canada Governor Stephen Polo slammed MMT. Now, essentially, the idea is that governments that can issue their own currency can never go bankrupt. Hands up if you think that's correct. Excellent. Now, to me, this sounds like MMT is offering the proverbial free lunch. And I think most of us know there is no such thing. Even as our government spends billions on the pandemic, and even though that spending didn't stop a credit rating agency from

reaffirming our AAA rating last week, Krista Freeland really isn't warming up to the idea. I am not among those who think Canada should have a fling with modern monetary theory. Whether on Bay Street or on Main Street, there are no blank checks. Our fiscally expansive approach to fighting the coronavirus cannot and will not be infinite. Traditional economic thinking has guided our spending for decades. It hasn't always kept the economy booming, but I've certainly never lived through hyperinflation like Venezuela or a banking collapse like Iceland. Have you? So critics say that because the stakes are higher than ever with this pandemic, we shouldn't be taking a chance on this untested theory if we don't know the consequences.

But that's also one of the most interesting things that Stephanie told me. Modern monetary theory isn't really a shift in the way the economy works. At its core, it's just a different way of thinking about things that have already been happening for years. She believes governments have been creating money and taxing it out for a very long time. I've just provided a description of how things work. It's here. Now, if we take this a step further and say, now that we have a better understanding of where the limits lie, now that we understand that governments can't run out of money, that they can't be forced into bankruptcy, they can't go broke. Now that we have accepted those arguments, and we recognize that inflation is the relevant constraint, then what? Now we have the debate. That's the debate where we decide if this way of thinking changes how our government acts. The next prime minister could be the inflation stopper, not the deficit slayer. And instead of asking if the deficit is too big, we could be

asking if the deficit is too small to grow the economy. And the real question is, you know, how long does the government want to continue to support the economy using its currency issuing power to provide all the fiscal support that's necessary to the Canadian economy for as long as it takes to come out of this, to protect families and communities and hold the economy together and lay the foundation for a robust recovery and withdraw fiscal support when it is safe to do so. Modern monetary theory is still a pretty controversial way of talking about the economy, and it is by no means mainstream. But at a time when Canada's debt is being called a lot of things, unprecedented, unconscionable, unbearable, MMT gives us another way to ask an important question.

Is it unnecessary? So maybe you disagree and screamed at me through this entire podcast, but hopefully by the end of it, which is right now, right or wrong, we've given you a different perspective on how to think about this issue. That's all for today. I'm Jamie Poisson. Thanks so much for listening to From Ferner, and we'll talk to you tomorrow.