Despite stubbornly high unemployment, tepid economic growth, and a large current account deficit, Canada enjoys one macroeconomic indicator that many crisis hit European governments would dearly love: insanely low borrowing costs on its debt. Investors inside and outside Canada recognize that Canada is a monetary safe haven and, desperate to flee the riskier shores elsewhere, are more than willing to lap up CDN denominated assets despite the trivial yields, prioritizing safety over profits. Imagine if the Canadian government was a business; what would its shareholders be demanding of it? Undoubtedly, they would demand that Canada use its access to cheap capital to make investments that will pay off heavily in the future. As a government, Canada should do likewise.
Canada is experiencing a confluence of factors that make it the optimal time to invest heavily in several targeted industries. Not only are rates on Canadian debt at record lows and expected to stay that way in the short term, but inflation worries remain distant. Depressed economic output and high unemployment due to the recession justify the use of Keynesian stimulus to boost demand and create jobs. Moreover, there are a series of critically important investments in sectors like green energy that will need to be invested in at some point regardless, and to which there is a major competitive advantage to being an early adopter. There is no point in waiting until debt servicing costs rise, the benefits from economic stimulus are reduced, and when we are playing catch up on the competitive economies of the future. The time to invest is now.
Regular Canadians recognize this fact. They know that one has to go into debt to make worthwhile investments in the future, whether it is getting a college education or fixing a leaking roof. The key condition is whether the expected return on investment outweighs the costs of servicing and repaying the debt accrued by the investment; the lower the debt servicing costs, the better the investment conditions. For most of us, it rarely makes sense to invest in stock markets financed by taking on debt as the interest on debt is usually higher than the expected average interest from other forms of investment. The profitable debt-financed investments we make in our lives are thus not on the markets, they are in things like a college education where the return on that initial investment can vastly outweigh its costs.
Take an issue like green energy, and imagine that the government (well, perhaps the next government) invested a substantial sum into green energy and other green technologies. Due to declining reserves of cheaply accessible fossil fuels, and due to the importance of combating global warming, this is an investment that will need to be made at some point regardless. The sooner this is done, the less money is wasted financing the ever increasing costs of fossil fuels. Moreover, the companies that manage to be among the first entrants into this market will enjoy a competitive advantage and will end up leading the worlds shift into a green economy. Countries like Germany are already doing this and their green energy companies are now competitive around the world. Along with numerous other issues from major infrastructure to education, investment in these issues can have a very high return on investment and we suffer a distinct opportunity cost by not doing this as soon as possible.
Many may feel uneasy about such a proposal. Governments, one might reasonably point out, should balance their budget, and not run huge deficits. Our government should be stable and sustainable into the long term, with an eye to intergenerational equality. Members of the political right and left disagree on the priorities for reducing the deficit, and are often ineffective at actually accomplishing significant deficit reduction, but they all agree, at least rhetorically, in the idea of deficit reduction. However, a good long term investment is a good long term investment, even if it requires debt to do it. While I certainly agree we should aim to reduce egregious spending on useless fighter jets, supermax prisons, and tax cuts for the richest corporations in Canada, we should not rule out the idea of large deficit financed investments simply because they are deficit financed. Shedding the shroud of this political taboo allows us to make decisions based on their efficacy, and not as part of a zero sum political trade off that sees investment in green energy as, necessarily, crowding out spending on healthcare or higher taxes or anything other issue.
The key idea behind economic Keynesianism is that, during a market recession, government expenditure should go up so that the total economic impact of market and government does not experience significant fluctuations that are disruptive and cause suffering such as high unemployment. Conversely, when the market is surging, governments cut back and pay off their debts or save for future recessions (this second part is often ignore). It has the effect of smoothing out the swings between peaks and troughs, with a net social benefit from this smoothing.
Politicians in Europe are not just ignoring Keynesian economics, they are imposing anti-Keynesian economics. Instead of increasing spending, they have gone on a binge of austerity, a euphemistic name for massive slashes to government spending. So at the same time that Europe is experience a significant suppression of its market economy, it is also faced with the loss of government spending and a doubly reduced economy. This is why Greece, best known for its admittedly massive debt problems, is also facing an enormous problem with an economy in severe depression. With the election of François Hollande in France, Europe may move away from the previous Merkel-Sarkozy order that emphasized only austerity to one with limited pro-growth measures. Canada should not repeat Europe's mistakes.
Cheap money should not be taken advantage of if there is no worthwhile investments to be made with it. Investments should not be made if the costs of financing them are too high. And it is best to wait until the need for Keynesian spending in either case. However, we currently have all three conditions - a rather rare occurrence - and so the timing is right to build the high speed rail between Toronto and Montreal, to move towards solar and wind, to build up world class universities, and to invest in the Canada of the future.
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