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Friday, July 30, 2010

Ignatieff proposes wrong solution to economic problems

Liberal leader Michael Ignatieff correctly identifies consumer debt as an ongoing problem in the Canadian economy. Sadly he seems to misunderstand why systemic debt is so dangerous. Consumer debt is not a problem because it will reduce consumption, which only matters if you buy into the nonsensical Keynesian idea of the paradox of thrift. The true danger is if consumers (also known as people) don’t reduce their personal debt.

The fact that debt levels are so high in Canada suggests that the current level of consumption is not sustainable. Borrowing to consume doesn’t increase spending power, it merely redistributes future spending power to the present. The value then of borrowing for consumption is nil. Actually it is worse than nil because interest will have to be paid on the loan.

This should be explained to Mr. Ignatieff as he touts further government spending as a way to increase consumption and avoid another economic downturn. Putting aside the fact that there is zero evidence to support his hunch that the recovery is not stable, Mr. Ignatieff is offering the worse possible solution. More government spending would increase government debt, and government debt is differed taxes from the perspective of the taxpayer/consumer/individual. Ultimately it would mean an increase to the tax burden, and, ironically, a resulting drop in consumption.

Mr. Ignatieff seems to be confused about how he would fund a future ‘stimulus package.’ He says that the government’s planned cuts in corporate taxes will reduce the capacity of the government to ‘respond’ to a recession. Yet at the same time he has already committed his hypothetical government to new spending predicated on those taxes not being cut. So wouldn’t that new spending also reduce the government’s ability to ‘stimulate?’ Where exactly would the Ignatieff government get the money?

All that new government spending will do is increase the amount of debt in Canada.

And as Michael Ignatieff himself says, it is the debt that we should be worried about.

Posted by Hugh MacIntyre on July 30, 2010 | Permalink


"All that new government spending will do is increase the amount of debt in Canada."
Posted by Hugh MacIntyre on July 30, 2010 | Permalink

This is not rocket science. We are joined at the hip with the American economy. As they merrily continue to slide into the garbage can we will be dragged right along with them.
Better known as the joy of outsourcing and corporate greed. Or how to decimate the middle class by shutting down thousands of factories and firing millions of workers. It was a 20 year joyride that was great while it lasted. The end result was also inevitable.
Now it is China, India, Indonesia and other countries that are climbing the profit ladder while we are wondering how low we can go.
I see companies like "Accenture" are still advertising their services to corporate America.
When they go into receivership perhaps we will have reached the bottom and can start to crawl out of the hole we have dug for ourselves.
The way it stands now, all the stimulus packages will only delay the inevitable.
We still have a long way to the bottom.

Posted by: peterj | 2010-07-31 12:27:45 AM

The solution is reduced government spending not the opposite. Most of our problems are a result of government spending, especially spending beyond its means. We could use some ants for politicians instead of all the grasshoppers we have at present.

Posted by: Alain | 2010-07-31 11:33:26 AM

And while we are at it we want to outsource our upgrading. Talk about "hewers of wood and rawers of water".

Posted by: DML | 2010-07-31 9:39:09 PM

And while we are at it we want to outsource our upgrading.
Posted by: DML | 2010-07-31 9:39:09 PM

What do you mean by "upgrading"?

Posted by: peterj | 2010-07-31 10:39:48 PM

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