A global economic debate plays out in Canada as our government goes from miser to spendthrift
Canada’s Prime Minister Justin Trudeau and Finance Minister Bill Morneau are taking Canada into unknown waters, betting that spending will do what austerity has not. (Reuters)
To put it in a way that would not please either side, it is the contest between the misers and the spendthrifts. After years of the penny-pinching approach, Canada has switched tack to become a big spender.
And despite some very strong feelings on either side, it is not absolutely clear which is the right path to prosperity. The world will be watching.
The clash over the best way to boost a moribund economy is by no means solely a Canadian argument. Nor is it just a modern debate.
Historical debate
Countries from China and Japan, to Greece and Ireland have taken different views on the subject.
Historically, the dispute has arisen repeatedly — notably during the Great Depression, when the first response of austerity was blamed for making the problem worse. But when governments then altered strategy, new spending failed to lead to a miracle recovery.
Despite monetary stimulus and negative interest rates, Japan’s economy has lapsed into deflation and economic stagnation. (Reuters)
There is plenty of evidence on both sides. As I noted back in 2010, Japan and Ireland backed opposing strategies. But the countries’ circumstances are so different it is hard to declare a definitive winner.
China and Greece switched sides. Greece was driven by the ballot box toward bigger spending, then restrained by their stern European central bankers. China faced alternating worries, first cutting back on fears of overheating and then suddenly spurring new spending on fears of falling growth.
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