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The incredible economists

Any time an economist opens his mouth nowadays, someone puts a microphone in front of it. Economists seem to be everywhere.


Any time an economist opens his mouth nowadays, someone puts a microphone in front of it. Economists seem to be everywhere. Even the prime minister has some economics training, and Forbes Magazine tells us that economics students make more money when they graduate than any other kind of student except for computer engineers.

So why doesn't anyone seem to be really listening to economists? More than 230 economists signed an open letter urging political leaders to price on carbon, and then Canadians promptly elected the party with the no-action policy. Northerners elected New Democrats who opposed the carbon tax.

Economists also agreed that Harper should save the GST and cut other taxes. Harper cut the GST.

The big issue now is deficits. Most economists believe that a competent government will run a deficit in bad times. Prime Minister Harper seems to think the 11th Commandment says, "Thou shalt not run a deficit." The financial crisis will force his government into a deficit, so it will be interesting to see how he deals with this danger to his immortal soul.

Harper seems to fear deficits the way the Temperance Union feared rum:

“We never eat fruitcake because it has rum. And one little bite turns a man to a bum.”

Economists call it the "time inconsistency problem:" you can't trust your future self, either to stop drinking rum or to stop running deficits. Liberals call it the problem Paul Martin licked.

For most economists, deficits are like elephants, very useful if they are pulling in the right direction at the right time.

Bad economic times happen when people and businesses don't spend enough. This is a perpetual problem because productivity is constantly increasing in a capitalist economy.

Marx said so, among others.

This over-production has been the real cause of almost every recession. When the system produces more than people can buy, companies have to cut production. They have to lay people off. And people without jobs can't buy much. Good management creates a crisis.

Modern economists don't often call it over-production, though. We call it weak effective demand or under-consumption or lack of consumer confidence. To deal with lack of demand, Henry Ford paid his workers high wages so they could buy his cars. During the Great Depression, governments took the place of consumers by buying roads, dams and bombs. Baby boom families bought cribs and toasters and helped create one of the longest economic booms in history.

Since the 1980s, we have been trying a new strategy: instead of paying workers more, we lent them money. It worked wonderfully well for a while. Now the IOUs are a problem.

In the middle of the Great Depression, John Maynard Keynes realized that under-consumption by workers can be balanced temporarily by extra government projects.

Public spending helped a lot in the Depression. It also worked for Ronald Reagan, who was one of the conservatives who just couldn't stop spending and left a huge deficit.

Keynes said governments should pay down the deficit in good times. George Bush is another conservative who didn't listen.

During bad times, government revenues fall. Without a big surplus, there is an automatic deficit. If the government also cuts spending, like the business community does, it further reduces demand. It is interesting that a meeting of Canadian financial institutions recommended that Harper be prepared to run a deficit. Pretty scary when the bankers start sounding like Keynesian economists!

A recession really is the best time to do infrastructure projects. It is foolish to start a big project when the market is strong, as Sudbury did with its big tunnel project. Costs exploded and the city was competing with the private sector for miners! The United States created the Tennessee Valley Authority during the Great Depression. It undertook power projects and a wide range of environmental projects, including flood control, reforestation, or erosion control. It is the kind of project that Northern Ontario could use today.

There is a secret bonus for infrastructure spending. The Fraser Institute, a conservative think tank, claims the government taxes back 44.8 cents out of every dollar of income. If the Fraser Institute economists are right, one dollar of infrastructure costs 55 cents after taxes. But who believes economists?

Dave Robinson is an economist with the Institute for Northern Ontario Research at Laurentian University.