Nov 2012 7

How to Fight the Global Economic Crisis?

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On the edge by Rachel Sapp On the edge by Rachel Sapp

After decades of economic growth, 2008 brought us back on the edge of the worldwide economic crisis. Insecurity has affected many markets and politicians in many countries have started discussing national debt and the banking sector more seriously.

In the last two years, the global economy became topic number one in the media. We were confronted with thousands of different opinions, strategies, and plans. But many of them were just pure fantasy or, even worse, fallacies, serving to gain more popularity for their proponents.

Nowadays, the high level of government debt is no longer a problem to some southern countries, nor of the economically powerful United States. The downfall recently experienced by Greece, Spain, and Ireland are a painful reminder for all politicians — especially for those who govern countries with overpriced housing and significant private debt. And Canada is one of them. In the last ten years, we lowered our total tax revenue from 33.7 to 31.1 per cent. But we also increased our government deficits to 5.5 per cent in 2009 and 2010 (according to data taken from OECD).

Now every Canadian seems to have a different opinion on our defence budget. Is it necessary to buy new planes and ships to better protect our coasts? And is it worth it? Or should we rather invest into more equality in our healthcare system, which is overloaded and has very long waiting times in the provinces with higher populations? Our finance minister, Jim Flaherty, tells us that real estate will equilibrate itself, but after two years he changes the amortization of mortgages. How should we perceive all the proposals, which are often contrary to had been said before?

Austerity or Spending?

Left and Right by Carsten Tolkmit Left and Right by Carsten Tolkmit

As a result, the economic crisis led to the articulation of new reform proposals based mainly on the division of left and right. The first concept to appear was the plan of austerity, introduced by German counsellor Angela Merkel and her government of Christian Democrats. The austerity plan proposed government cuts and greater effectivity of the services provided by the state apparatus, with the promise of lowering budget deficits.

The latter economical proposal can be attributed for example to the recently elected French socialist president, Francois Hollande. It fights the crisis in the exact opposite way of the austerity plan. The government is encouraged to spend on public projects with the general goal of boosting consumption. The main goal is to spend more but also gain more on taxes.

Each of the two approaches is different in its overall perception of the crisis. The austerity plan is the open admission of government responsibility for poor fiscal discipline and it tries to deal with the problem on the government level. We can say the government is a negative player and hence has to be punished in the sense of giving it less money.

The Keynesian plan proposed by Joseph Stiglitz, among others, places the government in a positive role. The crisis is not a problem of the government because it was caused by irresponsible banking and the financial sector, which were not under effective government regulation. They often accuse banks of “making money out of thin air,” as Canadian blogger Nick Rowe wrote on the Worthwhile Canadian Initiative. Both sides are constantly arguing about the best measures and tools to protect national economies. It seems that austerity measures are now losing their breath and more countries have started looking towards the spending strategy. Our question should be: is it really better?

Government Spending=More and Higher Taxes

Money by Kevin Saff Money by Kevin Saff

I think it’s obvious that the government has to make more money to be able to spend more. There is nothing to do about it. Politicians who tell citizens they will increase government spending while lowering taxes are simply dishonest. Our common sense tells us it’s not possible. You can’t earn less, spend more, and claim you will deal with your debt.

Many people dislike the idea of big government without properly understanding it. They claim to prefer low taxes and more responsibility for individuals. Their common supporting argument (especially in Canada) is that lower taxes would increase the competitiveness of our companies. On the contrary, they assume that big government is a dangerous institution that wants to control our lives.

The problem of the perception of economic reality was named by Joseph Heath and is called “count the costs, ignore the benefits fallacy.” And we are all influenced by it. We like to forget about the negative part of our preferred policies — or we only highlight the problems without considering the positive impact of the policies we dislike. Heath in his book Economics Without Illusions tries to deal with the most common fallacies and misperceptions of the contemporary economy. He uses simple language, real life examples, and common sense to show readers that the economy is not a mathematically complicated field but rather simpler study of human behaviour and its consequences.

Big Taxes are Like Living in a Condo

Condo by Sam Xu Condo by Sam Xu

This article deals with problem of austerity and spending. If I had to use the Heath's approach and use some of his real life examples, I would say that the difference between these two policies is like the difference in living in a house and living in a condominium. In the first case, you have only private amenities. You pay a basic fee (for mortgage or rent) and the rest depends on you. There are no services included in the rent and you have to pay extra for everything you want from heating to repairs. In a condo, you pay higher rent, but you have private and public amenities included. You can, for example, use its gym, swimming pool, parking spaces, and other services. If you don’t use them, it’s your own concern, but you have to keep paying to prevent a collective action problem. The question is whether you prefer to pay for each service extra in the former or have everything included like the latter. The same goes for taxes. You want a basic government health care program? Then be prepared to pay extra taxes for it. You want to pay lower taxes? Then don’t complain about broken-up roads. The government is just a vehicle for spending money collected on taxes. If it lowers taxes, it will give more incentive to private companies. If it increases taxes, it will spend more on public projects and hence put more money into circulation.

To conclude, low taxes are independence, which means more responsibility and a bigger risk. Higher taxes help to provide certain services to society as a whole (like in the shared parts of the condo building). Neither of the two is good or bad; they are just different. It always depends on our own preferences which one we think is best. But we have to understand the risk well and be prepared to deal with the consequences.

Neither austerity nor spending will solve the biggest problem, which is the irresponsibility of the banking institutions and of politicians. The allocation of resources obtained from taxpayers becomes the biggest strategic problem governments have to solve.

From my point of view, it is better to have a bigger apparatus to protect us from the crisis and be able to put more stimulus in the economy in times of need. We are currently using our resources in a way that isn’t clever. To have and maintain a modern army is a very expensive task. With the problems we’re facing in our economy, we should focus on different problems. One of them would be cheaper or even free education in university. We would also increase our taxes, which don’t correspond with the needs of our people. Our prime minister Stephen Harper is caught somewhere in the middle of austerity and spending strategies. This is not good, because it points to the indecisiveness of our government. France and Germany are trying new models with much more commitment and in more difficult circumstances. We should follow their examples and finally decide whether we want to live in a condo or not.

I’m sure that everyone has their own personal opinion, and I would be glad if you also contributed to the debate about this topic in the discussion below.

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