Our debt is out of control - nearly 70% of our economy, and it's projected to reach Greek-like levels in just 15 years. What to do? Many politicians say: stimulate!
John Maynard Keynes believed that. Last night on the O'Reilly Factor, Bill attacked me for defending Ron Paul's criticism of Keynes and the Fed. It's hard to make points over Bill's interruptions, so I'll make some here.
Keynesians say, when the economy is sluggish, increase spending! And our President says that it's definitely wrong to cut. Obama said this about Republican proposals to cut:
"A 70 percent cut in clean energy. A 25 percent cut in education. A 30 percent cut in transportation... These are the kinds of cuts that tell us we can't afford the America that I believe in and I think you believe in."
He is wrong. We can make cuts and have a better America.
Japan and Canada demonstrate that. Japan applied the Keynesian prescription in the 90's. Budget deficits ranged between 6 and 9 percent of GDP. Their debt went from 11 percent of GDP to 80 percent. And the policy failed to stimulate. Oops.
In my syndicated column this week, I point out that 15 years ago, Canada had just as much debt as we (also 70% of their economy). They also had high unemployment and sluggish growth. Their bond rating was down graded. They tried the opposite of the Keynesian prescription.
In 1995 Canadian leaders cut unemployment benefits and other programs. It happened quietly because it was a liberal government, and liberals didn't want to criticize their own. The result was that Canada's debt stopped increasing. As the government ran budget surpluses, the debt went down.
Canada also raised some taxes. But the spending cuts were much bigger, six to one: agriculture was cut 22 percent; fisheries, 27 percent; natural resources, almost 50 percent.
Another good result: since 1997 Canada has the highest growth rate of any of the G-7 countries. And guess who has a lower unemployment rate now - the US or Canada? Read the full column here.
Japan and Canada provide a nice natural experiment about how Keynesian policy works in the real world, and Canada shows us a way out of our debt hole.