Wednesday, February 22, 2012

Drummond-style restraint: Ontario’s Greek tragedy

Spain has been the scene of dozens of protests, like this one Monday in Valencia against education budget cuts and government austerity measures.

Thomas Walkom, Opinion, The Toronto Star:

For Ontario, the real lesson from Greece is not the danger of debt. It is the danger of overreacting to that debt.

This is not how the debate is usually framed. The standard argument, articulated most recently by Liberal government adviser Don Drummond (and repeated Tuesday by Premier Dalton McGuinty), is that debt and deficit will career out of control unless public spending is dramatically curbed.

The crises in Spain, Portugal and Greece occurred because government spending cuts designed to remedy debt problems sent those countries spinning into economic decline.

Throughout much of Europe, measures aimed at reducing debt have created a self-reinforcing spiral of doom.

Government workers are laid off to save money, which leads to higher unemployment. Higher unemployment reduces tax revenues, thereby widening fiscal deficits. Governments are forced to borrow more to cover these shortfalls, thus increasing debt.

If we assume, as Drummond seems to, that the U.S. economy will never fully recover and that the price of oil (and therefore the loonie) will stay perpetually high, then Ontario’s economy will remain precarious.

In this scenario, “unprecedented” spending cuts of the kind Drummond recommends would be the worst possible action.

It would be far better for Queen’s Park to undertake a less ambitious debt reduction scheme, even if doing so caused the government to miss its 2018 target date for balancing the budget.

Spain’s austerity regime has led to a youth unemployment rate of 50 per cent. Greece’s has led to rioting in the streets. Ontario doesn’t need either.

Continue reading here.

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