Oniomania: [oh-nee-uh-mey-nee-uh]
(Noun) An Uncontrollable Desire to Spend
Washington politicians just don’t seem very interested in truly curing egregious US spending habits. Sure, the struggle between higher taxes and reduced entitlement expenditures occurs with the regularity of election cycles, but even the most radical suggestions appear to fall flat in addressing what has now become a severe problem. Consider that 62% of all current Federal spending is on entitlement programs, including Medicaid and Medicare, Social Security, and Welfare. Add defense spending and the figure jumps to over 80% of spending. Relative to the overall US economy, these programs now represent 14.3% of total 2012 GDP compared to 9.9% of GDP in 1965.1
The US Solution? Bureaucracy
Spending increases for these combined programs over the past decade have been a major contributor to the accumulated Federal debt of $16.3 trillion, or an estimated $52,000 per person in the US.2 In fact, since 2001 the debt limit has been raised 13-times — a total increase of $10.4 trillion — in order to keeping funding these initiatives.3 This growth in spending is a result of the Keynesian economic philosophy born from the Great Depression, promoting the role of an increasingly activist government during times of economic contractions in order to correct inefficiencies within the private sector.4 The problem with the approach is that the US has neglected to save during those expansionary years; a tenet of Keynesian economics conveniently overlooked by political and monetary leaders alike.
The time for reconsidering the US economic philosophy appears to be at hand. In 2010, Social Security began running a deficit for the first time, paying out $48.9 billion more in entitlement spending relative to receipts,5 and these deficits will deteriorate further after 2015. With 78 million baby boomers retiring and no change to current spending rates, the Heritage foundation estimates that by 2045 the total US federal tax receipts will just cover entitlement spending. Bold changes will need to be taken, but these solutions do not need to be novel or unique. Just ask the Canadians.
The Canadian Solution? Balance
Instead of hamstringing future prosperity through inaction, US policy makers should consider looking to our neighbors in the Great White North for advice. The Canadian approach to dealing with its own spending and debt challenges over the past two decades has been to promote incremental real cuts to superfluous spending programs, as well as implementing reductions to corporate tax rates, which has helped stimulate economic growth.
Fiscal restraint in Canada began in the mid-1990s when Prime Minister Jean Chretien’s Liberal Party ascended to power, cutting expenditures on social and defense programs in order to reduce federal spending levels. This philosophy continued with the change in leadership when current Prime Minister Stephen Harper’s Conservative Party assumed the majority in 2006. Over this entire time period, Federal spending as a percentage of GDP in Canada dropped from 22% in 1995 to under 16% in 2012.6 In comparison, the US is presently running at 24% government spending as a percentage of GDP.
The results of the Canadian experience have been truly impressive. Federal net debt7 in Canada increased by less than 1% per year between 2002 and 2011, and was actually in decline by -1.8% per year up until the global financial recession in 2008.8 Comparatively, US Federal debt increased at an annualized rate of 12.4% over this same time period.9 Similarly, debt-to-GDP in Canada has remained relatively stable from 80.6% in 2003 to roughly 85% in 2012 after falling to 66.5% in 2008,10 while US government debt-to-GDP has nearly doubled from 58.8% in 2003 to 103% in 2012.11 Consequently, it should come as little surprise that Canada also maintains a higher credit rating than the US by both S&P and Moody’s.
Although the widely marketed notion in the US argues that government spending initiatives will encourage economic growth, the Canadian economy has been keeping pace — or even outpacing the US — on virtually all economic criteria despite its more austere approach. Importantly, since January 2007 annual GDP growth rates in Canada have averaged 1.3% measured on a quarterly basis, outpacing 0.9% average annual growth rates in the US, particularly during the 2008 recession.12 Currency markets have clearly taken notice of this improvement in Canadian fundamentals. Since January 2002, the Canadian dollar has appreciated nearly 60% against the US dollar, and has remained above parity for the better part of the last two years.13
Source: Trading Economics, October 2012
Continuous Improvement
Harper’s Conservative party in Canada is clearly not finished with these prudent fiscal measures. Within the 2012 budget, spending reduction proposals included further cuts to various government agencies including agriculture and agri-food, Canada Revenue Agency (similar to IRS in US), public safety, international assistance, and national defense spending.14 Proposals include eliminating the Canadian penny from circulation given that the cost and raw materials of producing a penny is higher than the actual value of the penny;15 an arguably moderate initiative, but one that simply gets chuckles from US legislators.
Interestingly, these initiatives have coincided with lower corporate tax rates. In terms of tax reform, the Conservative Party of Canada implemented a series of corporate tax reductions in 2006 in order to lower the tax rate from what was then 22%. After a number of reductions over the past 6-years, the corporate tax rate has been lowered to 15% as of January 1, 2012. Adding the provincial tax component of 10% to the federal tax rate, Canada’s current total corporate tax rate stands at 25%, sharing the lowest corporate tax among G-7 countries with Great Britain.16 In comparison, the US Federal and State corporate tax rate remains at over 39%.
A US Challenge That Should Not Be Avoided
Some may argue that the wind has been at Canada’s back throughout this reformation, but this should not keep US policy makers from shirking from the challenge. The size of the economy is obviously a key differentiating point between the two as the US economy is over 8-times as large as the Canadian economy in terms of GDP. The US two-party system of government also adds more complications to bipartisan agreements on fiscal matters, which Canada’s parliamentary government appears to more easily navigate. Although Canada supports universal healthcare for its citizens, total spending on large, critical entitlement and defense payments accounts for 40% of the total budget.17 And finally, Canada’s rich natural resource driven economy has clearly benefited from the surge in global demand for commodities over the past decade.
Nevertheless, the Canadian experience shows that a prudent balancing act of revenue and expenditures can have meaningful results over relatively short periods of time. Unfortunately, the US Keynesian experiment has proven to have more fatal flaws than originally theorized, particularly viewing the impact excessive spending can have on reducing economic growth and the debasement of the underlying fiat currency. As US legislators now face the unambiguous problem of growth latency due to excess spending commitments, perhaps it is time for policy makers to consider sage guidance from those who have successfully navigated these waters.
Sincerely,
Chris Gaffney
SVP & Director of Sales
EverBank World Markets, a division of EverBank
800.926.4922
1. 2012 Federal Budget in Pictures, Heritage Foundation. Online at heritage.org/federalbudget/
2. US National Debt Clock, December 17, 2012.
3. Heritage Foundation
4. “On the Size and Growth of Government”, Garrett and Rhine, Federal Bank of St. Louis Review, January 2006.
5. Social Security Administration, 2011 Trustees Report.
6. “We Can Cut Government: Canada Did”, Cato Policy Report, May/June 2012
7. Defined as the total liabilities of the government less its financial assets
8. Public Accounts of Canada 2011, Prepared by the Receiver General for Canada, Table 1.3, 2012
9. Table D.3 Credit Market Debt Outstanding by Sector, March 8, 2012
10. International Monetary Fund, Trading Economics, October 16, 2012
11. US Bureau of Public Debt, Trading Economics, October 16, 2012
12. Bureau of Economic Analysis, Statistics Canada, Trading Economics, October 16, 2012
13. Bloomberg, October 2012
14. “Budget 2012: Planned Cuts by Department”, National Post, March 29, 2012
15. “Eliminating the Penny”, Economic Action Plan 2012
16. “Canada Cuts Corporate Tax Rate to 15%, Lowest Overall Rate in G-7”, Tax Foundation, Jan 4, 2012
17. “Interactive Graphic: How Ottawa Spends”, Global News, March 26, 2012
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Comments
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Great read Chris!!
Hi Chris. If you want to go back further to the source of the Canadian problem, it started in 1968 with the election of Liberal Prime Minister Pierre Elliot Trudeau. Unfortunately we elected him a total of 4 times before he resigned in 1984 (nothing as sensible as term limits up here). He was a leftist “intellectual” with a disdain for economics and deficits. When he came to power, Canada’s accumulated deficit was in the order of 16 billion, when he stepped down, it was in the order of $300 billion and running at an annual rate of $30 billion. The unsustainabie level of spending and a threatened national credit rating finally forced forced both the government and opposition party (Liberal and Conservative) to develop a sense of fiscal responsibility. This also led to a national sales tax implemented in the early 1990′s (GST which stands for either Goods and Services Tax or Gouge and Screw tax, take your pick.) Also, my recollection is that much of the federal spending cuts were not genuine, but reductions in transfer payments to the provinces, thereby contributing to the significant deficit problems some of our provinces incurred (unlike your states, our provinces aren’t required to avoid deficit spending) . Does this kind of irresponsible spending remind you of any current US politicians?
Dear Chris,
You should do an article entitled “Taming Entitlements-Take a page from China’s book”. Bottom Line: Gain industry and become a budding super power like China, Lose your manufacturing base and crumble like the US.
The 60′s was the zenith of US manufacturing might and the birth of many so called entitlement programs like Wefare, Food Stamps, Medicare, etc. The link between the two is basic common sense.
Currently the Left wants to stick their hand in Government’s pocket and could care less from where or how the money originated. The Right wants to continue to butcher our manufacturing base (scrap it our or send it overseas). Neither party wants to make more widgets or grow more carrots.We are currently governed by greedmeisters, fools and elitists.
Sending our trade secrets, engineering data, craft skills,capital,machinery, etc overseas will go down in history as one of the greatest betrayals in the history of mankind. What the international corporations have done to the United States make Julius & Ethyl Rosenberg and Bendict Arnold look like rank amatuers.
The only difference between the psycopaths currently running Communist China and those that governed during the Korean and Viet Nam Wars is that the current gangsters dress a little better. And the American people are going to pay dearly for being the source of the economic plasma that has fueled the rapid rise of Communist China.
You completely ignored that fact in your article that Canada’s version of obamacare is a disaster. Regardless of their supposed spending control.
Perhaps some of the other pages that we should take out of Canada’s book is that their financial industry ie. banks, did not collapse because of the regulations that they have in place to prevent such occurrences. Also, they have a universal healthcare system with healthcare for all.
In the United States, on the other hand, we are in a state of collapse because the financial institutions have convinced everyone that they are supreme and are too big to fail so they continue to plunder the wealth of the United States and destroy the United States as a country. And, by golly, don’t all the lobbyists make our corrupt politicians rich in order to maintain that particular dream?!?!?
We have Social Security for our citizens that does NOT contribute even ONE PENNY to the deficit of this country and the funds are set aside in the SS Trust Fund. Does it need to be modified? Yes it does because the set aside funds will be “used up” in approximately 2033 at 100% and will be forced into a 75% payout category after that. You are doing a great disservice to the citizens of this country by continuing to perpetuate the myth that SS is part of the deficit.
I see your article as hopelessly biased towards the austerity that is NOT WORKING in Europe and causing considerable misery for its population. To put a different face on it, you are using Canada, and if you follow other than Fox News, you would know that their austerity programs are currently receiving great push-back. For example: they recently tried to increase tuition and were greeted with thousands upon thousands of people protesting in the streets–and, unlike the protests in the US–they did listen to the thousands who protested in the streets.
Not a doubt in my mind that most of the comments you will receive from your article will be patting you on the back. for speaking what you consider to be the truth. What will be missed by most is that even though you mention in the article that the United States is not Canada, most people will ignore that comment. We are, in fact, our own country and comparisons without truly comparing side-by-side becomes just an opinion piece without true merit.
Canada’s Social Security went belly up 18 years ago, anyone with nothing elkse to live on went on welfare.
All the data shows that we have a revenue problem and not a spending problem. The facts show that all the heavy spending occurred during Reagan and Bush’s watches. Yes, we do have an entitlement problem, but on the corporate side. Billion dollar profits, yer companies like Exxon, Halliburton and others receive corporate welfare from the government, thanks to their lobbyist’s efforts and some selfish politicians. It’s this type of disillusionment and mis-information is corrupting our society to where the so called, “Masters of Mankind” have their way to total domination against our democracy where their motto is, “Gain wealth forgetting all but yourself.”.
I am appalled to think that the folks who contribute there thoughts in article’s to the pfennig, are considering that Social Security is an entitlement. I was not given the choice for contribution into this governmental program. And since later have found out that those in government chose to borrow or spend some of the monies that I contributed without asking me if I chose to allow them to borrow or spend these funds. I was of the understanding that Social Security was a retirement security blanket for me when it was my turn to retire at age 65. I do not consider this an entitlement. I paid directly into this fund, therefore, I look at it as a return for my being forced into participating in this so called Social Security program.
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