Across the developed Western world, the political left is rethinking the meaning of public debt—at least when it comes to national economies. As the provincial debt mounts, does rethinking our financial system hold any lessons for progressives in Newfoundland and Labrador? What would progressive economic policy look like in this province?
More Money, More Problems?
Despite a few serious conceptual concerns, the economic school of “modern monetary theory” (MMT)—with all its revolutionary implications for public debt—are presently in vogue across progressive circles. MMT sees public sector debt as a reflection and cause of private sector savings. For a nationally sovereign producer of currency, it argues, the government only has inflation and physical resources to worry about if it spends more than it takes in. MMT thinkers acknowledge the danger of runaway inflation as an eventual result of high public debt, but are far less worried about it than mainstream economists. (The MMT argument is that taxes, rather than raising government revenue, actually work primarily to check inflation by controlling the amount of currency in circulation.)
It’s perhaps important to note, of course, that MMT is one of economics’ so-called heterodox schools—that is, minority points of view that don’t prevail in the discipline. For their part, some MMT thinkers, like Michael C. Hudson, see that mainstream exclusion as a result of the economics profession being captured by big money, who want dominant thinking in economics to celebrate—not limit—the power of capital.
While MMT might be attractive for national states, what about places like Newfoundland and Labrador that no longer mint their own currency? MMT’s suggestions are minimal yet instructive, providing a means to compare ways of thinking about provincial debt. Should Newfoundland and Labrador face an overwhelming structural deficit, unmanageable public debt, or an existential financial emergency, is there a progressive answer to how that debt could be managed while avoiding crippling austerity?
A Bigger, Beefier Bank of Canada
Marc-Andre Pigeon, a professor of public policy at the University of Saskatchewan, has suggested that there are no reasons (outside of political ones) that the federal government or Bank of Canada could not assist provinces that face financial hardship, at least up to a point.
The federal government could simply “make transfer policy more generous,” Pigeon told The Independent. Nothing beyond intergovernmental politics stops the federal government from making federal health and social transfers or equalization terms more favourable.
The Bank of Canada already lists provincial debt as eligible collateral, Pigeon explained, shoring up demand for the holding of provincial debt.
“There’s going to be a substantial demand for that debt, just by virtue of this overnight clearing and settlement process,” Pigeon said. “This is very poorly understood. Most people who study and worry about provincial debt don’t really ever think about this. But it’s actually a consistent source of demand that the provinces can rely on, to some extent.”
As well, the Bank of Canada could buy provincial debt on the open market.
“They have the power, through the Bank of Canada Act, to buy provincial debt. And that’s another way of funding, indirectly, a province. And that’s what the European Union Central Bank did with Greek debt, basically,” Pigeon continued. “They’d either buy it on the open market or they would accept it as collateral for borrowing by the banks in Greece. And that’s as good as saying there’s a ready demand for your debt.”
The Federal Backstop
Pointing to examples like Greece or Puerto Rico may not be encouraging. But it’s important to remember that the austerity imposed on those economies was not an inevitable choice. If Newfoundland and Labrador’s provincial debt causes societal decline, that responsibility weighs on the federal government as much as our own. Is it reasonable to expect a small city of half a million people—made up increasingly of seniors and the un- or underemployed—to sustain itself against so many trends out of its control?
Unfortunately, there is no indication our government has a plan to reach financial sustainability—except hoping for increased oil production and praying for a rise in price. It’s also unlikely the federal government, particularly a Conservative one, will “see the light” promised by those economists who call for an outright expansion of the Bank of Canada’s mandate. Expanding the Bank’s mandate normalizes the idea that the central bank has a role to play when confronting national economic problems—like provinces facing unmanageable debt.
Meanwhile, Mario Seccareccia, an MMT-sympathetic economist at the University of Ottawa, explained that Canada’s central bank already does more than it claims. In 2018 he was one of 61 economists that wrote Finance Minister Morneau, asking him to direct the bank to explicitly pursue the multiple mandates spoken of in the Bank of Canada Act.
“They’re still pretending that they’re doing inflation targeting only. It’s a kind of game of charades,” Seccareccia told The Independent in a phone interview. He highlighted the example of New Zealand’s central bank, which now crafts policy with jobs explicitly in mind.
“They had a single focus, inflation targeting. Now, they’ve included employment, what they call ‘maximizing sustainable employment’, in New Zealand,” Seccareccia said. “[This] is a big change, because they’ve introduced that officially.”
A Revolution Between the Ears
Regardless of what might be possible through federal action, though, it’s unlikely to be much solace for Newfoundland and Labrador’s politicians and electorate, who already labour under an image of the province as a national laggard and mooch. The political reality is that federal intervention, uncharted as it may be, could probably well entail a significant loss of sovereignty, or mandate harsh fiscal austerity in exchange for help. But the reasons for that have as much to do with culture and ideology as with actual economic reasoning. For many economists, there is a disconnect between the real life evidence and what institutions hear. Why?
“One needs a sociologist studying the behaviour of people or a sociologist of science to explain why this situation occurs,” said Marc Levoie, an economist at the University of Ottawa.
“Basically, all these international organizations are rather conservative, whether you’re talking about the IMF, central banks, the World Bank. If you’re advising these institutions, then you tend to say, more or less, what the institutions want to hear. And you get large benefits from that. You go in the best hotels, you’re being flown on business class across the Atlantic. There’s a car waiting for you when you arrive. I had this treatment a couple of times by central bankers, so I know what these guys get,” Lavoie told The Independent. “I think that explains, in part, why we have this [situation].”
Are there other progressive solutions to the province’s public debt problem? It’s an old and difficult problem that has long dogged the provincial economy, but real, specific and compelling proposals to increase the province’s revenue and decrease expenses seem as elusive as ever.
What is to be Done?
When it comes to concrete means of increasing revenue, Newfoundland and Labrador’s historically low income and low wealth population make ideas like, say, a wealth tax, quite hard to sell. Farther away from home, wealth taxes gained some popularity in the wake of the Occupy movement and perhaps among our own anti-budget protestors—though it was quickly pooh-poohed by local opinionmakers.
Greg Philo of Glasgow University, in one proposal to deal with the British public debt, suggested that wealthy individuals could assume liability for the public debt, and it would be paid down after death.
On the left flank of the NDP, and increasingly the Democratic Party, public banking is perennially popular. One local obstacle is that Newfoundland and Labrador has very low levels of public trust in government. This might hinder the retail competitiveness of any public bank.
But Michael Schuman‘s work has suggested that the province has an especially pronounced lack of local finance, insurance and real estate business, and that this ‘leak’ out of the local economy could be partly plugged by credit unions. Though the effect on provincial revenue would be quite indirect, the long term effect would be to keep more wealth—ripe for income-producing investment or taxation—within the economy. And there is plenty of room for growth: NL has fewer credit union members, in real numbers, than even PEI. Proposals with potentially similar long-term effects, like plans for Nova Scotia-style CEDIFs, also seem to have gone no where, or at least no where visible—despite being recently recommended by some local industry.
Government bonds programs provide another direct way to increase revenue and have debt (and the income and wealth from bonds) held by locals.
British Columbia, Alberta, Ontario, Manitoba, Quebec, Saskatchewan and Prince Edward Island each had, or currently have, some kind of provincial savings bond program. Similarly, the former federal program was also quite popular. If Newfoundland and Labrador has an equivalent program, it seems to have put no marketing muscle whatsoever into it.
What political solutions are on offer?
If the NL NDP has any in mind, they’ve kept them fairly well-hidden—along with even their characterization of any problem. Instead, most of their recent campaign focused on pocketbook issues like arts funding and low income bus passes. The fledging NL Alliance addresses debt and revenue plans in its ‘guiding principle three‘ page, but their proposals (e.g. stopping year end fiscal spending) seem ultimately only partly-formed.
The Liberals’ Way Forward perhaps aims to put forward such solutions as well. To its credit, the Liberals have at least shown an understanding that aggressive cuts and/or layoffs would have knock-on slowdown effects across the economy. But that understanding was probably partly forced on them by the 2016 anti-budget protests, whose grassroots elements were effective but had an inchoate character and ultimately fizzled out. We still don’t know how things went down internally. But from outside, the sheer scale and energy of the protests seem to have forced the Ball government to listen. This is in itself is a valuable political lesson for progressives.
That kind of organic energy, currently lacking, is probably what we need for fiscal solutions to seem real, consensual, legitimate and strong. Where is the popular movement of people working together, instead of the technocrats, politicians, and people who write (and read) articles like this?
It doesn’t seem to be realized yet in the NL Alliance, and it’s certainly not realized in the NDP. Overall, there doesn’t seem to be much sign yet that Newfoundland and Labrador’s progressive community is prepared to do the long, hard work required to popularize pro-social economic policies and prevent another austerity budget.
There is still a silver lining. Maybe the uncertainty generated by a minority government will be the driver people need to get more interested and organized than ever before.
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