Canada's Free-Market Reforms Provide Model for U.S.

The Cato Institute's Chris Edwards analyzes the way in which Canada shrunk federal spending, opened up its markets, and pursued other reforms in the 1990s.

Canada's economic reforms since the 1980s…included free trade, privatization, spending cuts, sound money, large corporate tax cuts, personal tax reforms, balanced federal budgets, block grants, and decentralizing power by cutting the central government….

Canadian federal spending was cut from 23.3 percent of GDP in 1993 to 16.5 percent by 2000. Keynesians and their macro models would predict a crushing economic blow from such a spending reduction. They would argue that the "austerity" would slash "aggregate demand" and "take money out of the economy."

Yet Canada's spending cuts of the 1990s were coincident with the beginning of a 15-year economic boom that only ended when the United States dragged its neighbor into recession in 2009. As the government shrank in size during the 1990s, the Canadian unemployment rate plunged from more than 11 percent to less than 7 percent….

Edwards notes that things are far from perfect in the Great White North, but I think he's right that the Canadian experience shows ways in which government spending can be cut and, perhaps more important, how power can be decentralized. That's generally a good thing in markets and politics alike.

Well worth reading.

Reason's November 2010 issue (published in 3D!) covered three examples of significant government spending cuts in developed economies. Read "It Can Happen Here."

Comments

[sarcasmic]

Didn't someone write a book on how libertarian principles can fix what's happening in this country or something?

[R C Dean]

What's the total spend in Canada (national and provincial)? Isn't that the number that matters? Did the national government cut its spending by shifting it to the states?

When you add state plus federal spending in the US, you get a level relative to GDP that is getting close to Euro levels, after all.

[Isaac Bartram]

It doesn't answer all your questions but the linked article says:

Canada's structure of high individual
income tax rates is another weakness. The
top federal-provincial rate is 46 percent,
according to the Organization for Economic
Cooperation and Development.
That is higher than the top U.S. federalstate
rate of 42 percent, although the U.S.
rate would exceed Canada's next year under
President Obama's proposals.

I realize that only addresses taxation and not spending. That's not a small issue as elsewher in the article it states that unlike American states, Canadian provinces can run deficits beyond the kind of public works bond issuing that states can.

Anothe CATO graph shows total spending in Canada going from about 53% to about 43% in the same period that the US went from about from about 37% to about 42%. Based on the 23 to 16.5 level quoted in the article I would infer that Provinces have tightened their belts as well. Though it's worth noting that Ontario is currently has a Premier who is continuing the big spending that the Progressive Conservatives started in the 60s and 70s.

No matter how you slice it spending and taxation levels in both countries are too high. But it really does seem that Canada, for the nonce, is headed in the right direction.

[Silver Fox]

Though it's worth noting that Ontario is currently has a Premier who is continuing the big spending that the Progressive Conservatives started in the 60s and 70s.

Except, maybe, for the time period between 1995-2003, during which we had Mike Harris as Premier [until the last few years anyways, when he passed the mantle onto his successor].

Not a popular guy, given his "we need to cut spending, since we just can't afford it" budget approach.

[Ken Shultz]

Yet Canada's spending cuts of the 1990s were coincident with the beginning of a 15-year economic boom that only ended when the United States dragged its neighbor into recession in 2009.

I'd be interested to hear more about the events that brought those reforms about. I doubt all of Canada woke up one morning and decided to embrace free markets, budget discipline, etc. just 'cause that's just the kind of people they are.

Rather, Canada's economy is strongly tied to commodity prices, and I suspect they made those policy choices amid the economic shocks. And they've had plenty of booms and busts.

The long term trend of commodity prices has been rising since China entered the WTO, but the Asian flu, for instance, even if the effects were ultimately mitigated, probably gave plenty of impetus for austerity amid all the headlines.

Even if the Republicans never seem to follow through on fiscal conservatism, the ideology of a candidate can be a guide to the kind of reaction we can expect during a "crisis".

Crises are opportunities for change, and if the Canadians used those opportunities to pursue austerity, then they should thank Dog for them.

Obama's bad ideology led to predictably bad reactions to crises--that's probably the best reason of all to throw him out on his ass in November.

[highmesa]

Canadian federal spending was cut from 23.3 percent of GDP in 1993 to 16.5 percent by 2000. Keynesians and their macro models would predict a crushing economic blow from such a spending reduction.

I'm not really a disciple of Lord Keynes, but I think that is a misrepresentation. When the private sector is doing well, countries should be cutting gov't sector spending, and GDP was growing in the 90's. More precisely, they should be running surpluses to save for the next recession.

[np]

That's true, but part of that comes from higher taxation. Running a surplus is made more difficult by the excess spending of the last cycle (and this assumes private economic growth in spite of higher taxation)

[Aresen]

The only reason spending was cut in the 1990s was that Canada was facing a bond downgrade there was basically no alternative.

For all I despise Uncle Dishonest Jean Chretien, I have to give him credit for recognizing reality and making the cuts. But he absolutely had no choice as Canada was on the verge of going where Greece is now.