By Jordan Grant,
Basically the same set of advisors who advised the Tories before and are now advising the Liberals in Ottawa. But there is a choice to be made. What I’ve found out, through my association with COMER and other people, is that there are other economists with other sets of ideas. It’s just that you don’t hear about them very much in the media.
The linchpins of a sustainable economic system have got to be full employment and social and environmental sustainability. With the kind of economics that we get out of the Bay Street spokespeople, sustainability just doesn’t fit into the value system of the standard neo-classical or conventional economic system. Bill Krehm talks a lot about value systems.
If we are going to use an economic system which gives us sustainability and full employment, forget about the economic system for a second, and think about people and what it is out there that needs to be done.
Thanks to technology, it’s obvious that we don’t need anybody to be working a forty-hour week in order to produce the goods and services that people need. We’ve got such high productivity that we can produce the basic needs without full employment. Yet how are we going to have people gainfully employed?
Well, we need more than goods. We need more than the standard set of services. Take a look at all the things out there that we do need; they tend to fall into things like cleaning up the environment, providing health care, providing education, providing for social needs, providing for the needs of the soul – the Arts, culture and leisure. Those are the things that generally are largely provided through the public sector and, instead of expanding the public sector to focus on satisfying those kinds of needs, we’re cutting back and concentrating on the private sector. The private sector, traditionally, has not been providing those sorts of services.
Look at the Past to Move Forward
Now, how do we get there? So much for “where do we want to get to in the future?” Some clues are in the past. I want to contrast several different years, and address the common concern about debts and deficits.
Going back to the middle of the depression, 1934, the unemployment rate by that time had reached a peak of about 25% and dropped down to about 15%, still way worse than it is today. Founded federal debt as a percentage of GDP – we keep hearing about how much we’re buried in federal debt and how it ties our hands – the funded federal debt at the time was over 90% of GDP. Today it’s around 60% or 65% excluding the pension plan contributions. The percentage of federal revenue that was spent on interest – if you can believe it – was almost 50%. About forty-seven cents of every dollar of tax revenue went back out to pay interest on the debt. And also the interest on the debt held by non-residents was fully one-third. We hear today about global finance, about the fact that our debt is held by foreigners and how that binds our hands. It was one-third.
The comparable figures today are: unemployment compared to 15% is about 9.5%; the funded federal debt as a percentage of GDP is about 60%; the interest – versus 50% then we’re at about a third; and the percentage of federal debt held by nonresidents is about 25% versus a third.
But then, later on in the ’30s, Hitler was marching through Europe and the governments, having failed to do much about the depression, were suddenly faced with something where they had no choice but to marshal resources in order to fight Hitler.
At that point they turned to their economic advisors and they suddenly started to hear new advice – particularly from Graham Towers, the first governor of the Bank of Canada.
When Towers testified before the Commons Banking and Commerce Committee – I believe it was called [that] at the time – he basically said: “You know, they’re basically asking, ‘Where can we get the money 12 | Economic Reform May 2021 www.comer.org to fight this war?’”
And Towers said, “Money is not the problem.” He confirmed that, “Anything physically possible and desirable can be made financially possible,” that the limits are not the limits on how much money we’ve got but on the men, at the time – it turned out women got enlisted as well – material and knowledge. It’s all the physical resources that are out there; those are the limits. The limits aren’t the money. We can, you know, make the money available.
So the government took [this] to heart and launched into the war, began enlisting people into the army and cranked up the armaments industry, and so on.
So how was it financed? Basically what happened was that initially, in the first couple of years of the war, the Bank of Canada began to buy government-issued bonds to pay for the cranking up. Initially the Bank of Canada bought bonds. When the Bank of Canada buys bonds it is creating new money. It injected the money into the system. The government started spending it into circulation. Money started getting into the hands of people and then into the banks. Then, as people began to have incomes and began to be fully employed, they began to have savings.
The Importance of Savings is Misleading
We keep on hearing from Bay Street how important savings are and that we’ve got to encourage savings and so on, but what are savings? Savings are surplus income. You can’t have savings unless you’re making income beyond what your needs are. That’s what happened.
During the Second World War, from 1938 to about 1944, we dropped from about 11% unemployment down to 1.2% unemployment – it took about three years – and once the government got that circle going, through government expenditures to get money into the hands of the people. Then, the people had savings to continue to buy government bonds; the government, instead of running these huge deficits, began to run surpluses.
The other thing is that the percentage of the federal debt that was held by nonresidents dropped from one third to about 7%. The debt itself jumped up to 120% – higher actually by the end of the war – but the debt isn’t what matters. What matters is the interest cost on the debt. The interest cost on the debt dropped from 47% down to about 12% [of GDP]. You know, if you’ve got a huge federal debt at zero interest, it doesn’t matter. The debt, to the extent that it’s financed by the Bank of Canada, just represents the money supply.
A Willingness to Pull Together Creates Opportunity
Certainly there were very drastic measures taken during the time. The whole country pulled together and it was willing to accept extraordinary measures to get the economy moving in order to fight the war. People accepted things like wage and price controls and rationing during the war, which are things it would be much harder to accept now. The same basic sets of tools could be used today in a less drastic and more measured means in order to get the economy going again.
The key thing is that we keep in mind that the limits are the limits of the real resources in the economy and not money. It’s a question of getting the people who control the levers of power and the people in the Bank of Canada to begin using their powers for the benefit of the Canadian people again.
Jordan Grant was an Executive Member of COMER. He was also Chairperson of the Bank of Canada for Canadians Coalition. He is/was President of Seaton Group, Concord, Ontario. He made this presentation at a COMER conference on the leveraged buyout of Canada.
You can always count on Jordan to be knowledgeable, clear, detailed, and to the point.