Plan B: Borrow to build, borrow to survive

The Government of Newfoundland and Labrador should immediately tap the international bond markets and borrow $3 billion.

Our province’s problems are far more grave than most people can admit to, or even grasp. Oil prices will not recover for years, if ever. And one thing is for certain: the current Liberal government is just not equipped to deal with problems this profoundly serious. We are in the midst of a catastrophe.

Dwight Ball’s ministers have neither the experience of sub-sovereign finance nor the creative mindset to step up and do what is necessary to get over the epoch-making financial challenges facing us. They seem paralyzed with the sudden knowledge that they don’t even have the vocabulary to start figuring out a way forward. Nor would PC or NDP governments have the answers, in my view. No one in the PC Party as it is currently configured pushed back against drunken-sailor spending of the Williams era. As for the NDP, none of the current party headliners appear to have the global worldview or economic chops to make the radical decisions required to save the day. So, what to do? 

Austerity, for a start, is not the answer. Joseph Stiglitz, who won the Nobel Prize for Economics in 2000, has proven that economies in crisis need cash liquidity, first and foremost. After the financial crash of 2008, U.S. Federal Reserve Chairman Benjamin Bernanke knew, from his academic research on the Great Depression, that economies facing crises must see immediate aggressive injections of liquid cash. Austerity fails every time, mainly by snuffing out economic demand. Austerity plans were once in vogue but are recently being rejected for lack of efficacy. The austerity plan imposed on Greece in 2010, for example, precipitated a deep recession and vastly compounded Greece’s problems.

Borrow big

Many serious economists, therefore, insist that in a time of severe crisis you have to spend, and spend large. This often involves quickly borrowing large amounts of money from the international bond markets. The global bond market is bigger than the global stock market. Trillions of dollars are invested in both corporate and sovereign (national) bonds, and bond investors are constantly looking for new bonds to buy. Countries issue bonds to raise money for all their financial needs. Aside of sovereign or national issuers there are also “sub-sovereign” issuers such as states, provinces, municipalities, power utilities, hospitals, and others.

Newfoundland-ers…have a visceral fear of debt, located in our experiences of the merchant system and in our collective historical memory of the Commission of Government. 

Newfoundlanders, though, have a visceral fear of debt, located in our experiences of the merchant system and in our collective historical memory of the Commission of Government. 

The reality is that there are times when debt is good, times when debt can save you. Think England, 1940. Europe is on the brink of warwhat do you do? You borrow large to build the planes and buy the guns that will protect your children. This is where Newfoundland and Labrador is right now. The province will not go ‘bankrupt’(sub-sovereign states can not go bankrupt), but it will almost certainly become insolvent, unable to pay teachers and nurses, unable to stem an outflow of doctors and professionals, unable to sustain ferry services or repair roads.

Don’t think this can’t happen? Parts of the United States, in recent years, increasingly resemble underdeveloped countries: crumbling infrastructure, embedded poverty, and complete hopelessness. Hence, the popularity of Mr. Trump.

Meanwhile, out in the world, interest rates for governments to borrow money are at historic lows right now. Governments can borrow money through bond issuance virtually free. Japan has even gone to negative interest rates. Investors buy a Japanese bond for $100, and when it expires they get $99 back. 

Newfoundland and Labrador has an unconventional industrial and demographic base, so we would have to pay slightly higher interest— but still, a historic opportunity exists for this province to take on cheap debt and use it to get out of the current epochal, existential mess. 

Spend wisely

Good, we’ve raised $3 billion from international bond markets. What do we spend it on?

In general, people move away from rural Newfoundland or Labrador because of the inconveniences: the lack of access to modern medical and shopping facilities, entertainments, and schools. Many Newfoundlanders and Labradorians would stay put in their beautiful harbours if it was easier to come and go. Our province needs a massive upgrade to its infrastructure complex: new ferries, roads, causeways and bridges— all of it. 

A massive plan of infrastructure modernization, to be financed with cheap borrowed money, would employ people and rejuvenate rural areas by making life a little more livable. It would also improve the experience of visitors and tourists immeasurably. Business owners would rejoice and extend their operations beyond the Avalon Peninsula.

A rejuvenated, sustainable economy would emerge from the modernization of transportation infrastructure and repopulated rural areas. Tax receipts to government, to address debt service, would increase. The complexion of the population would be more diverse, with summer homes and legions of contented visitors. New industries would emerge, and they would need reliable energy supplies, which brings us to Muskrat Falls. 

 In a sense, the provincial government is a kind of massive social assistance program. But that deadly cycle was never sustainable and the jig is now truly up. 

Muskrat Falls is a debacle, to be surea poison soup of convoluted cash flows, complex ownership claims and poor project management. But in the long term, a re-energized Newfoundland and Labrador economy will need Muskrat Falls’ clean energy, and we will be happy for the revenues coming from out-of-province customers. Yes, mistakes were made, but we have no alternative now but to forge ahead with our commitments on what is, at its core, a much-needed piece of infrastructure.

Finally, when you are against austerity, as I am, it doesn’t mean you are in favour of lifetime employment for a select few. The overstaffed provincial government payroll needs to be addressed. In a sense, the provincial government is a kind of massive social assistance program. But that deadly cycle was never sustainable and the jig is now truly up. 

Part of the proceeds from a large government bond issuance program should go towards a once-and-for-all rationalization of the provincial government payroll. A system of early-retirement packages and pension lump-sum payouts would be offered to upper-level managers and late-career government workers. This would, in part, clear the path for younger people to develop government careers. In fact, this program could amount to a form of economic stimulus, as the majority of these payments would likely be re-invested in the province. The driveways of Mount Pearl would fill up with new rigs, among other things. 

The key is that the departing staff would not be replaced; the government needs to be resized to something about one half to two-thirds of its current size. Once the positions are eliminated the various departments and agencies would be tasked with finding efficiencies in places other than through the hiring of additional managers and bureaucrats. A particular focus of this plan should be the provincial health care bureaucracy. We need more world-class doctors and fewer clerks and health sector managers. We need to pay our physicians a competitive wage.

“More debt?” many will say. “We already have too much debt!” 

Well, there is no other real option than the issuance of cheap new debt as part of an economic restructuring and rescue plan. The alternative—an austerity program which hammers the poor with increased taxes and levies, maintains lifetime employment for a select few elite government workers, and kicks the ball down the road a year or two—is no option. It merely guarantees a humiliating and punitive bail-out by the Government of Canada in three, four years tops.

The current government’s plan—or rather, complete lack of a plan—is a path to poverty, mass exodus and social decline. It is time to do something brave.

Allan Dwyer is a former investment banker and Associate Professor of Finance at Mount Royal University in Calgary. He conducts research into global debt markets as well as the origins of financial crises. Follow him on Twitter at @AllanDwyer

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