Wednesday, June 11, 2014

Austerity doomed to fail

This election, Tim Hudak is another Mike Harris. That’s obvious.

But although Kathleen Wynne is pretending to be the “social justice” leader, as Bloomberg points out, she’s actually a “less draconian Harris” planning the “biggest Ontario cuts since 1995” when Harris came to power.

Great Depression austerity mistake

John Keynes — the father of centrist mixed-market economics responsible for a 30-year post-war boom — urged more government spending to end the Great Depression during the 1930s.

Governments balked, implemented austerity and prolonged the slump.

As Keynes pointed out, “the boom, not the slump, is the time for austerity.”

History repeats

Paul Krugman is a modern day Keynes. He’s been urging fiscal stimulus (government spending) to end the Great Recession since the free-market collapse in 2008.

But governments have been repeating the same mistakes of the 1930s, with the same disastrous results.


Krugman pointed out how American cuts have cost $200-billion a year in economic growth and added one point to the unemployment rate.


Europe embraced austerity and killed off their recovery. The bond-rating agency Standards & Poors actually downgraded European countries back in 2012 for plans to cut spending:

As such, we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues.


The IMF recently documented how austerity has caused much more damage than right-wing experts had anticipated.

Indeed, if the fiscal multiplier is really, really high in certain situations—such as during a downturn— then austerity could prove counterproductive.
Those higher taxes and severe spending cuts will cripple growth so much that the nation will end up with an even bigger deficit than it started out with.

Debt burden

Since the debt burden is measured in debt/GDP, this means austerity actually increases the debt burden by slowing GDP growth. Economic growth since the 2008 meltdown is already anemic.

In the post-WW2 era, we paid down the debt by increasing government spending. Infrastructure and social spending created jobs and growth which raised tax revenues. Debt was paid down to 45% by the 1970s from over 100% after the war.

All pain no gain

Instead of inflicting pointless pain on the people and making the economy and debt-burden worse, we need to slow deficit-reduction plans.

As the IMF’s chief economist noted: “Decreasing debt is a marathon, not a sprint. Going too fast will kill growth.”

Progressive taxation

We also need to embrace the tax fairness we had in the post-WW2 era by eliminating costly tax cuts for the rich. These have added to soaring inequality which has caused economic growth to dwindle.

In Ontario, Mike Harris cut income taxes by 30% causing a $5.6-billion structural deficit we never recovered from. These tax cuts must be eliminated on the highest bracket.

Pointless corporate tax cuts

The Liberals also — outrageously — cut corporate taxes from 14% to 11.5% in 2010. (The NDP stopped them from cutting them to 10% in 2011.) This added $2.4-billion to a $10-billion deficit!

Considering Canada has the lowest corporate tax rate of ALL major economies, we must raise corporate taxes higher than 14%.

Step in the right direction

Only Andrea Horwath and Tom Mulcair plan to reverse these absurd corporate tax cuts. But much more needs to be done.

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