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In June 1966 I joined the Department of Finance in Ottawa where I was assigned to international programs. Canada had committed to spending one per cent of GDP on international development. GDP was growing so fast it was hard for federal government spending on foreign aid (as it was then called) to catch up, and in fact it never did. Successive governments changed the target, and then abandoned it, even as growth faded, and was replaced with the economic stagnation of today.

What makes an economy grow? In 1966 the unemployment rate was the lowest in the postwar period, and employment growth had been strong for years.

More people working at full-time jobs for decent wages is what makes economies (and GDP) grow.

High rates of economic growth meant postwar government budgets were balanced.

In 1966 public debt had been declining as a percentage of GDP for two decades and it would continue to decline for another 10 years. So long as real interest rates remain below the rate of economic growth, public debt will shrink as a percentage of GDP (unless governments decide to borrow aggressively to grow the economy).

The Trudeau government has just released its mandate letters for ministers. The letter for the minister of finance says the government must reduce the debt-to-GDP ratio over three years, and balance the budget in 2019-20.

This is in line with the Liberal party election platform which estimated that federal debt could be reduced by one percentage point of GDP each year for the next three years.

By adopting financial targets as a goal, the new Liberal government has bought into what Yale economist Robert Shiller calls "reverse causality." Charging the minister with balancing the budget and reducing the debt to GDP ratio confuses cause and effect. It is growing employment and rising incomes that causes the budget deficit to fall, and lowers the debt-to-GDP ratio, not the opposite.

As Shiller explains, even the debt-to-GDP ratio is misleading. GDP is measured over one year; it is an arbitrary measure. Debt is given in currency but without a time period. Framing debt to GDP suggests the debt is all due in one year, which is far from the truth. Public debt is staggered over time, some bonds are payable in only 30 years.

The proper chain of causality is that a weak economy produces deficits and more debt, while a strong economy creates surpluses and reduced borrowing.

In a stagnating economy like today, the vision for government should be more spending and investment to create employment for young people and the unemployed.

With interest rates at rock-bottom lows, larger deficits to fund job creation are what is needed, not promises to pay down existing debt.

Fiscal austerity makes economic performance worse. Despite this result, conservative economics favours spending restraint because asset holders like lower levels of government borrowing and debt. The power of the wealthy explains the adoption of conservative economics, not its scientific value.

Trying to balance the budget in three years and restrict new borrowing right away as the Liberals intend to do means the Trudeau government has adopted a conservative vision that limits, voluntarily, the ability of government to help out, when what is needed is bold policies that create good jobs.

Though it does not say it, the government is hoping that the 75 cent dollar will do what it is not willing to: produce more jobs in Canada, by replacing imports with Canadian products.

The great liberal John Maynard Keynes fought the conventional wisdom of his day, the "treasury view" which, like the Liberal mandate letter, focuses on calming messages for financial markets.

According to this view, familiar today as austerity, governments should restrict spending, and allow financial markets to revive the economy.

Keynes taught that economies were not self-correcting. Consumer and business spending could stagnate; new government spending funded by borrowing would kickstart a weak economy.

In a federal state such as Canada, government borrowing and debt levels need to be integrated, not viewed separately. What matters for the Canadian economy is how much all public sector borrowing and public sector debt are supporting job creation. Isolating the federal borrowing from provincial and municipal borrowing gives a false picture of economic reality.

With the exception of Alberta, provincial governments across Canada are pursuing austerity. Municipalities are starved for funds.

Years of federal government manipulation of fiscal transfers have reduced provincial job-creation capacity. Instead of pursuing balanced economic development, workers have been forced to move to look for jobs.

Toronto, and Vancouver especially, have become over-crowded, pushing up the cost of living, and making city housing unaffordable for many workers.

The Canadian jobs picture was analyzed by Matthew C. Klein for the conservative Financial Times of London, and it should set off the alarm bells in Ottawa.

In recent years, Canadian full-time jobs have been created disproportionately in Alberta. With the collapse of oil prices, and the suspension of bitumen sands spending, those jobs are disappearing and not being replaced elsewhere.

Working Canadians have been poorly served by the economic performance of the last 40 years. A new direction is needed now.

Politics and leadership are about vision. Governments can inspire people but they need to do more than raise the general comfort level.

The Liberal party of Canada abandoned economic liberalism some decades ago amidst a worldwide inflationary crisis. Redefining liberal to mean conservative economics is unlikely to produce a better future.

In the 1960s Canadians were inspired by a vision of government co-operation between rich and poor nations building a more equitable world. What Canadians expected to see at home, they wanted to see elsewhere.

With expectations high, the new Liberal government needs to provide more than conservative economics.

Duncan Cameron is the president of rabble.ca and writes a weekly column on politics and current affairs.

Photo: Ryan/flickr

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