Austerity–Sooner or Later All Politicians Must Engage in it

   Do not think about, write about or deal with  human behavior without determining the effects of incentives.

     Wherein we see one of the Iron Laws of Economics–politicians can ignore economics, but economics does not ignore politicians.

National Post – (Latest Edition)
Philip Cross
History loves fiscal irony

Funny how big-spending politicians end up on the other side of the great debate

Clearly, history has an enormous appetite for irony. British prime minister Neville Chamberlain went from saying the Munich Agreement secured “peace for our time” to declaring war on Germany less than a year later. Strident anti-Communist Richard Nixon opened up relations between the U.S. and China.

Nowhere are policy reversals more ironic than in budget-making. French Socialist President François Hollande was elected on the promise of breaking with the fiscal austerity allegedly suffocating much of Europe. However, following a second downgrade of France’s credit rating in less than two years, he introduced $72-billion of spending cuts and tax hikes over the next three years. Last month he fired his cabinet to quell an incipient revolt in the Socialist Party against his conversion to the merits of austerity and structural reform. Hollande’s main contribution to stimulating growth are the brisk sales of the tell-all book of former first lady Valerie Trierweiler, in which she reveals his contempt for the poor as “sans dent” or toothless. So much for Solidarity with the masses.

These actions establish Hollande as a worthy successor to François Mitterand, the first Socialist president of France. Elected in 1981, he invited the Communist Party into his cabinet and pursued a radical economic plan of wealth taxes and nationalizations. Two years later, faced with the inevitable economic crisis, he made his famous “tournant de la rigeur” and adopted austerity, in the process driving the communists out of his government and starting them down the road to oblivion (they won 1.7% of the vote in the 2012 election).

There has been a long litany of radical leftist governments who, faced with a burgeoning economic crisis, an empty fiscal cupboard and credit downgrades, have made death bed conversions to austerity. Most famously in Canada, Bob Rae’s NDP government won the Ontario election in 1990 on the promise to “proudly fight the recession and not the deficit” in the words of finance minister ‘Pink’ Floyd Laugren. They proceeded to jack up the deficit to a record $9.1-billion with profligate spending on social programs. Two years later, with the economy in tatters and the deficit spinning out of control, the government reversed course, enraging its union base by introducing the Social Contract that imposed a wage freeze and unpaid leave on public sector employees to save $2-billion.

Similar examples litter Canada’s history books. Following the crippling 1981-1982 recession, Quebec Premier René Lévesque abandoned the Parti Québécois’ trade-union roots and imposed a steep wage cut of 25% for six months on public sector workers. Jean Chrétien was elected in 1993 on Red Book promises of cutting the GST and adding $6-billion to infrastructure spending, while warning that eliminating the deficit too quickly would boost the unemployment rate to 25%. Two years later, after a debt rating downgrade and the Wall Street Journal calling Canada an honourary member of the Third World, he embraced fiscal austerity in the 1995 budget. Unemployment stayed stubbornly below 10%, proving Chrétien wasn’t much better at forecasting than keeping promises.

It is not just in Canada that political promises to spend more and inflate budget deficits inevitably must confront reality. Bill Clinton was going to spend his way out of the lingering 1991 recession, but was convinced by his Wall Street-trained treasury secretary that adopting austerity would do a better job of bringing down interest rates and stimulating growth, igniting a boom that carried him to re-election. Barack Obama inflated the U.S. government deficit to record levels for two years before reversing course under pressure from a Republican Congress, resulting in a near record shrinkage of the U.S. deficit over the last two years. It will be interesting to see when and how Ontario Premier Kathleen Wynne breaks her commitment to more government spending; history suggests two years, after a downgrade of Ontario’s debt.

History’s love of irony is so complete, I openly expect Gabrielle Nadeau Dubois, the militant leader of Quebec’s student revolt in 2012 against a trivial hike in tuition fees, will someday be the one to explain the need for students to face the reality of Quebec’s fiscal straightjacket and accept markedly higher tuition fees. Fiscal reality trumps utopian ideology every time.


    Politicians–what we would do without them spending our money pointlessly?

Government Job or Respect–Which’ll It Be?
Cheerio and ttfn,
Grant Coulson, Ph.D.
Author, “Days of Songs and Mirrors: A Jacobite in the ‘45.”
Cui Bono–Cherchez les Contingencies


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