Just this morning, I was watching something called Cashin' In, a business affairs show with M*A*S*H's Wayne Rogers as a panelist. Rogers used be Trapper John and is now a Republican mouthpiece who pretends to be a financial analyst.
This week's report that Canadians are wealthier than Americans for the very first time in history was the main point of discussion.
While Americans might enjoy throwing politically-charged barbs at their neighbors to the north, Canadians now have at least one reason to be smug.As U.S News points out, this isn't the old Canadian dollar, which was only worth about 60 American cents, either. Due to a spectacular free fall of the greenback that began in 2002-'03, the two currencies are at about par and have been for about three years.
For the first time in recent history, the average Canadian is richer than the average American, according to a report cited in Toronto's Globe and Mail.
And not just by a little. Currently, the average Canadian household is more than $40,000 richer than the average American household. The net worth of the average Canadian household in 2011 was $363,202, compared to around $320,000 for Americans.
By the way, a high Canadian dollar actually hurts our economy. Given that we're an export economy, a higher dollar increases the price of said exports. We're doing better than the Americans in spite of a high dollar, not because of it.
Trapper John was able to hijack the debate by issuing a ton of GOP talking points about corporate taxes that are sort of true, but only sort of. The Cashin' In folks that passed for liberals, and pretty much everyone in the Canadian media, decided that they were only going to tell half the story, as well.
For that reason, Canada is very probably going to stay richer than the United States, which I figure is about five years from the point of no return.
Yes, the Canadian government has cut corporate taxes fairly significantly in recent years, and there's a lot to be said about the competitive edge that those cuts give an economy. On this, Trapper John is actually right, while telling not quite a third of the story. I'm seeing this talking point throughout the American media and blogosphere, so I thought that I'd address it. But I warn you now, it's gonna take a while to explain.
One of the major differences between the United States and Canada is that we could afford to cut corporate taxes. We weren't crazy enough to think that they would spur enough growth that they would they would pay for themselves, which tax cuts by themselves almost never do. Even classical supply-siders will tell you that but modern Republicans won't.
Canada got where it is today over the course of nearly thirty years. It caused a lot of hurt, unspeakable amounts of political upheaval, and intelligent decision making from both of the major parties at the time.
When the Progressive Conservative Brian Mulroney came to power in 1984, our debt problem was as bad or worse than America's is today. The outgoing Liberal Minister of Everything (and future prime minister) Jean Chretien said in public that "we left the cupboard bare." Consecutive Liberal governments between 1963 and 1984 vastly expanded the role - and therefore the cost - of the federal government. They just couldn't be bothered actually paying for it.
Mulroney tried cutting spending, but the opposition Liberal Party made that politically toxic. He instead focused on the revenue side of deficit reduction. First he signed the Free Trade Agreement with the United States, which grew the economy and therefore the tax base. Then he instituted a national 7% sales tax, the Goods and Services Tax.
While the constant dollar size of the debt and deficits grew, they began shrinking as a percentage of GDP. They were still unacceptably high, but trending in the right direction.
Of course, the idea of a national sales tax was about as popular as you'd think it would be, and Mulroney's government was reduced to two seats - a drop of 154 out of the then-295 seat Parliament - a few months after his 1993 retirement.
When Chretien took office that year, the international markets forced his hand on the spending side. The Economist was calling for Spain to replace Canada in the G7 and there was a very real fear of a confidence crisis in the market. That would have driven interest rates up and made the situation impossible to correct without a major devaluation of the dollar.And Canada's credit rating actually was downgraded during Chretien's first term.
Chretien and his finance minister, Paul Martin, took an axe to everything, cutting ministries by roughly 25% each. Between those cuts and the Mulroney revenue, not only was the budget balanced by the turn of the century, the government was running surpluses.
And those were real surpluses, not the imaginary ones that Bill Clinton and the Republican Congress created out of whole cloth in the late 1990s. Those were the product of the tech bubble and accounting fraud. Even if Bush hadn't passed stunningly large tax cuts and gone to war with everybody, the U.S government still would have gone back into deficit because Clinton and the Republicans hadn't factored unfunded liabilities into their budgets. Plus, they raided the Social Security trust fund to create the mirage of a balanced budget, thereby increasing the unfunded liabilities.
It was only after dramatic revenue enhancements under Mulroney and draconian spending cuts under Chretien that subsequent prime ministers Paul Martin and Stephen Harper even thought of cutting corporate taxes. Had it been done during the Mulroney or early Chretien years, it would have only ballooned our crippling deficits and shaken market confidence to the point that we couldn't service our debt anymore.
Then there's the more recent history to consider. Unlike the United States, the Canadian government didn't allow the banking and housing markets to become huge under-funded and over-leveraged casinos that were born to fail.
Like most conservatives, I supported the push for Canadian banking deregulation a decade ago. I was wrong and Jean Chretien and Paul Martin were right. Canadian banks are temperamentally more conservative than their foreign counterparts, so I doubt that they would have over-leveraged themselves in a whirlwind of idiotic derivatives trading that even they didn't understand. But the proposed mega-mergers at the time would have created Too Big To Fail institutions that would have dwarfed even America's as a percentage of our economy.
What the Gramm–Leach–Bliley Act did wasn't so much "unleash the economy" as it let the banks become really fat guys who had to be taken out of their apartments by a crane because they were stuck to the couch.
Nor did Canada ever get the insane idea that absolutely everybody in the country had to own their own home, regardless of their ability to actually pay for it. I was raised by a banker, so I can tell you that things like NINJA (No Income, No Job, No Assests) loans would have been unthinkable here, even if they were magically legal. And remember, NINJA loans were a creation of the lenders, not the borrowers. Despite what Republican talking points tell you, there was proportionally very little borrower fraud in the housing crisis.
Canadian law also didn't allow for what amounts to "no money down" mortgages, and those rules have only gotten tighter since the Great Collapse of Ought-Eight. Canadian homeowners can't even deduct their mortgage interest from their taxes. Granted, no other sane country on Earth allows that, either.
We didn't reap the benefits of the housing and banking bubbles, but we didn't lose our shirts when those bubbles burst.
Exactly no one in the United States is proposing anything close to what the Canadian experience demonstrably proved can work. Even the most liberal of Democrats are suggesting minuscule revenue increases by the letting the Bush tax cuts expire only on the wealthy, when they should all expire, including those for the middle class. And Republicans are demanding huge, unaffordable tax cuts up front and not cutting real program or entitlement spending for more than a decade.
When proposed spending cuts and entitlement reform are that far in the future, one can safely assume that they'll never happen at all. The idea of trusting a kid to eat his broccoli after he has his ice cream is so idiotic that even those most negligent parent knows it. And yes, I do understand that I just compared the American government to a spoiled child.
Worse still, the short term (ten-year) cost of entitlement reform would be so high that it would negate the possible (and incredibly optimistic) benefits of the tax cuts. Remember that George W. Bush's Social Security reform plan would have cost a trillion dollars over ten years, and there's no reason to believe that Paul Ryan's Medicare reforms would cost less.
Former President Bush's institute this week put out a laughable book that suggests that America can just grow it's way out of the problem. The only problem is that it assumes a significantly higher average annual rate of growth (4-5%) than the United States has enjoyed since the end of World War II (3.2%.) And that, my friends, is exactly the kind of wishful thinking that put America where it is today.
Unlike what Republican politicians tell you, this isn't 1980. The problem then was unsustainable inflation, which was only broken by dramatically high interest rates that caused a brutal recession. The Reagan tax cuts might have spurred growth after the 1982-'84 recession, but they did so at the cost of tripling the deficit.
For my liberal friends, it isn't 1932, either. Revenue generation alone, as we saw during the Mulroney era in Canada, isn't going to do the trick. Things on your end of the ledger are going to have to change in a big, bad way.
Unless you want them to disappear entirely, entitlement programs like Medicare and Social Security are going to have to be means-tested immediately, accompanied with an increase in the retirement age to at least 70. Both are going to have to treated like the middle-class welfare that they are, since the contributions being made to current retirees only barely match the costs. If you want to avoid outright privatization, costs are going to have to dramatically cut.
Oh, and don't look to everybody else for sympathy. Their 401(k) plans got annihilated in the market meltdown four years ago, including those right on the threshold of retirement.
In the very near future, public employee contracts regarding pensions and health care - which are rapidly bankrupting the states - are going to have to be renegotiated in good faith. Public workers going to have to pay dramatically more into their benefit plans. If they don't, current retirees, who really can't fend for themselves, are going to take it in the neck soon.The fact that mid-size American municipalities and counties are already going into bankruptcy is a bad sign. It's just a matter of time before enire states follow them into the rathole. And stop pretending that you can make more in the private sector. That hasn't been true in quite a while now.
You know what? Unlike what most politicians will tell you, now is precisely the time to do it. No politician is going to attack the free lunch mentality when times are good. Any time reform is mentioned in a time of prosperity, that reform s said to threaten an economic downturn. The way I see it, consumer demand isn't going to rebound the the U.S economy for probably a decade, so now might be an ideal time to go with austerity.
But that's never going to happen. As opposed to the Canadian experience in the 1980s and 90s, no one party is going to have the political majority needed to enact a holistic reform of the taxation and entitlement system. The reforms then necessarily have to be bipartisan, and that just isn't going to happen.
Canada gave its governing parties the electoral mandates to carry out the reforms that it did, and it had fifteen years in which to do them. Even then it was painful and politically unpopular. It wasn't easy for the Progressive Conservatives to create a national sales tax, and it lead to to the biggest political debacle in history that I'm aware of. The only reason the Chretien Liberals survived making the cuts that they did was the absence of a unified opposition at the time. God knows that Harper spent enough money once the Liberals fell apart.
No one in the United States, of either party, has the time or the will to do what's necessary before it's too late.
Trapper John won't tell you that. I just did.
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