AOK - A quick article with two great graphics; basically the message to the US and other countries looking to the Canadian mid-90's debt reduction for guidance is: has to be at the right time and with space for monetary policy offsets, neither of which applies to the developed country situations today.
"Canada's Budget Triumph" - some additional context for the US
David Henderson of GMU has a working paper (h/t Tyler Cowen) on the story of how Canada's federal government solved its budget balance woes during the latter half of the 1990's, with almost no apparent ill effects. Much of the paper sets out the political context that made this possible, and is very useful in that respect.
Less convincing is the suggestion that Canada's experience can be used as a template for a US austerity program in the short term. The paper misses two important points, both crucial to Canada's success, and neither currently applicable to the US.
1) Austerity wasn't implemented during the recession.
Henderson suggests that "the Canadian experience does not support the Keynesian view that policymakers should not cut government spending during an economic slowdown." In point of fact - and it remains an open question in my mind whether this was by luck or by design - Paul Martin's famous austerity budget of 1995 was brought down at a point when private-sector employment had reached its pre-recession levels:
If we're going to apply our model to our cousins to the south, then we're going to have to wait a couple of years before US employment comes back.
2) Monetary policy could and did offset the fiscal contraction.
Henderson hardly mentions monetary policy, except to note that inflation was low and stable, and that by February 1995, the CAD had depreciated to USD 0.71. But there's much more to the story than that:
In the two years following the 1995 budget, the Bank of Canada reduced interest rates by more than 500 basis points. And by 1999, the Canadian dollar had depreciated by 10% in USD terms, fueling the export-led expansion.
Of course, we all know that the Fed doesn't have 500 basis points to give away, and engineering a depreciation of the US dollar is proving to be no small task.
Given these two very important differences, I don't see how Canada's experience of the 1990's can be used as a reliable guide for the current-day US economy.
Less convincing is the suggestion that Canada's experience can be used as a template for a US austerity program in the short term. The paper misses two important points, both crucial to Canada's success, and neither currently applicable to the US.
1) Austerity wasn't implemented during the recession.
Henderson suggests that "the Canadian experience does not support the Keynesian view that policymakers should not cut government spending during an economic slowdown." In point of fact - and it remains an open question in my mind whether this was by luck or by design - Paul Martin's famous austerity budget of 1995 was brought down at a point when private-sector employment had reached its pre-recession levels:
If we're going to apply our model to our cousins to the south, then we're going to have to wait a couple of years before US employment comes back.
2) Monetary policy could and did offset the fiscal contraction.
Henderson hardly mentions monetary policy, except to note that inflation was low and stable, and that by February 1995, the CAD had depreciated to USD 0.71. But there's much more to the story than that:
In the two years following the 1995 budget, the Bank of Canada reduced interest rates by more than 500 basis points. And by 1999, the Canadian dollar had depreciated by 10% in USD terms, fueling the export-led expansion.
Of course, we all know that the Fed doesn't have 500 basis points to give away, and engineering a depreciation of the US dollar is proving to be no small task.
Given these two very important differences, I don't see how Canada's experience of the 1990's can be used as a reliable guide for the current-day US economy.
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