Liberal leader Michael Ignatieff correctly identifies consumer debt as an ongoing problem in the Canadian economy. Sadly he seems to misunderstand why systemic debt is so dangerous. Consumer debt is not a problem because it will reduce consumption, which only matters if you buy into the nonsensical Keynesian idea of the paradox of thrift. The true danger is if consumers (also known as people) don’t reduce their personal debt.
The fact that debt levels are so high in Canada suggests that the current level of consumption is not sustainable. Borrowing to consume doesn’t increase spending power, it merely redistributes future spending power to the present. The value then of borrowing for consumption is nil. Actually it is worse than nil because interest will have to be paid on the loan.
This should be explained to Mr. Ignatieff as he touts further government spending as a way to increase consumption and avoid another economic downturn. Putting aside the fact that there is zero evidence to support his hunch that the recovery is not stable, Mr. Ignatieff is offering the worse possible solution. More government spending would increase government debt, and government debt is differed taxes from the perspective of the taxpayer/consumer/individual. Ultimately it would mean an increase to the tax burden, and, ironically, a resulting drop in consumption.
Mr. Ignatieff seems to be confused about how he would fund a future ‘stimulus package.’ He says that the government’s planned cuts in corporate taxes will reduce the capacity of the government to ‘respond’ to a recession. Yet at the same time he has already committed his hypothetical government to new spending predicated on those taxes not being cut. So wouldn’t that new spending also reduce the government’s ability to ‘stimulate?’ Where exactly would the Ignatieff government get the money?
All that new government spending will do is increase the amount of debt in Canada.
And as Michael Ignatieff himself says, it is the debt that we should be worried about.
