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Harper's Davos speech, fiscal profligacy and economic growth

The Prime Minister's speech at Davos was, I would bet, written by Stephen Harper himself. It bore the stamp of his long-standing contempt for the European welfare state.

He all but said that the Europeans had brought the crisis on themselves through trying to live beyond their fiscal means:

"As I look around the world, as I look particularly at developed countries, I ask whether the creation of economic growth, and therefore jobs, really is the number 1 policy priority everywhere?

"Or is it the case, that in the developed world, too many of us have, in fact, become complacent about our prosperity, taking our wealth as a given, assuming it is somehow the natural order of things, leaving us instead to focus primarily on our services and entitlements?

"Is it a coincidence that as the veil falls on the financial crisis, it reveals beneath it, not just too much bank debt, but too much sovereign debt, too much general willingness to have standards and benefits beyond our ability or even willingness to pay for them.

Canada, of course, is different. And he proceeded to reinforce the difference before his top 0.01 per cent audience by promising cuts to public pensions.

But -- does he have a case that the fiscal crisis of the advanced economies, especially the Euro crisis is due to fiscal profligacy and indifference to growth?


Per capita growth in Canada over the past decade has been no faster than in the EU. As Jim has just noted, growth under Harper's recent watch is no better than the OECD average.

Much of the Euro crisis -- as is the case with the U.S. -- is due to the socialization of bad bank debt by governments which had been reducing public debt as a share of GDP before the crisis.

The weak U.S. fiscal position is hardly due to above-average spending on social programs and public services, but rather due to recession and pre-recession tax cuts.

Japan has been able to finance a truly massive public debt because they borrow it from themselves.

Many countries with much larger public debts than Canada -- the U.S., Japan, the U.K. -- do not pay higher interest rates than us, for the key reason that they have independent central banks able and willing to backstop the debt.

The Euro crisis is not a crisis of fiscal profligacy, but a crisis mainly caused by the absence of a European central bank prepared to guarantee the debt of weaker members (and even that seems to be changing.)

There is no significant correlation across OECD countries between per capita growth and unemployment rates on the one hand, and the ratio of public spending to GDP on the other.

This article was first posted on the Progressive Economics Forum.

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