Avoiding the 1930s

-- (historic), Commentary, Role of Government, Taxation, Trade, Uncategorized

In the recent G-20 summit in Washington, Prime Minister Stephen Harper and other leaders committed to a mostly sensible plan to steer through the current worldwide financial crisis. Before the summit, Harper properly urged other leaders to avoid protectionism.

He was right to do so, as 1930s-style protectionism would bring on a 1930s-style Great Depression. The Smoot-Hawley Tariff Act of June 1930, named after U.S. senator Reed Smoot and representative W. C. Hawley, sponsors of the legislation, placed tariffs on more than 20,000 gsdgIt was a counter-productive effort to “save” American jobs. In fact, the act killed U. S. employment because it walloped international trade, especially as other countries responded in kind.

Here in Canada, the federal government didn’t even wait for the threat of American protectionism to be become law; it applied higher tariffs in May 1930 on items that accounted for 30 per cent of American exports to this country.

The result of the protectionist trade war was the Great Depression, an economic downturn that otherwise would have been a recession were it not for government policy that made a virtue out of small-minded economic nationalism.

The agreement at the G-20 summit that no country would raise or impose tariffs for at least one year is a triumph of economic rationale over short-term panic and short-sighted policy. It is also proof that political leaders can learn from history.

However, not everything that emerged from the summit deserves applause.

Prime Minister Harper used the event to again prepare Canadians for the possibility of federal deficits. He did the same in Wednesday’s throne speech when his government warned that while structural deficits should be avoided, the same was not true in the near future. “In a historic global downturn, it would be misguided to commit to a balanced budget in the short term at any cost, because that cost would ultimately be born by Canadian families,” said Gov. Gen. Michaelle Jean as she recited the government’s priorities.

The family angle is political theatre. Canadian families pay plenty for Ottawa’s last string of deficits. Few thought those deficits were long-term when they started. A family of four still owes about $55,000 in federal debt and pays $4,000 annually in federal interest charges for what is still a $450-billion-plus liability.

Nothing is sacred. In times of a world war or a Great Depression, balanced budgets at any cost would be undesirable. But the Conservative defense of deficits is, as of now, indefensible. As of the last budget, the federal government planned to spend $208 billion this year. It plans to spend $10 billion more in 2009-10, i. e., $218 billion.

I’m not privy to private briefings the federal Finance department may give the prime minister and finance minister on decreased revenue expectations. But, for example, should estimates of the deficit next year end up at $10 billion, the federal government could and should hold spending steady at this year’s $208 billion instead of increasing outlays.

Are there areas in which Ottawa could restrain or cut spending? Transfers to the provinces are ripe for the knife. When Quebec subsidizes corporations at $5 billion annually and subsidizes millionaire parents with low day-care rates, it’s not difficult to make the case for fewer provincial transfers. Similarly, the federal government could end its own corporate welfare practice, which is worth more than $6.6 billion annually. That’s just the starter list.

As for the notion that Canada now has a responsibility to spend itself into the red zone because G-20 would like to see such action, an extra $5 billion or $15 billion (or what-ever number the Conservatives have in mind), will make little difference to Canada’s or the world’s economic situation. It would be akin to pouring a bucket of water into a raging river and believing such an action will change the direction of the river.

A balanced budget might hurt the automotive and aerospace companies to whom the Tories have now promised “further support.”

It might hurt civil servants if salaries and benefits are reined in, and myriad other interests in search of tax dollars. But would a balanced budget hurt Canadian families?

Not likely. The Conservative agenda on fighting protectionism is laudable, but not their retreat on red ink.