How Canada can learn from Reaganomics

By Don Pittis, CBC News

U.S. President Barack Obama says he wants to "make America the best place on Earth to do business," but some economists think Canada has a better chance.

Brian Wesbury, a well-known U.S. economic commentator, recently told the CBC's Mike Hornbrook the Canadian advantage is that the country has "learned the lessons of Reaganomics."

Reaganomics in Canada? It is enough to make Prime Minister Stephen Harper blush. But don't expect Harper, or his Finance Minister Jim Flaherty, to start using the term. That's because Reaganomics is an epithet that repels as many as it attracts.

To economic conservatives, Reaganomics, named after the movie star U.S. president, Ronald Reagan, is all about tax cuts and deregulation. From this point of view, the argument is that business makes a country strong. Governments just get in the way. Proponents of Reaganomics say business makes the money while governments waste it. You can see why the people who own businesses like lower taxes. It means more money for them.

But what is the effect of Reaganomics on ordinary folk?

Well, according to this argument, what's good for business is good for you. Low taxes create more business investment, and more investment means a stronger economy and more jobs. This is very much the argument being preached this week by Flaherty and the other Conservative ministers out on a campaign to convince Canadians the idea is a winner. To less conservative people, on the other hand, Reaganomics is a term that sets teeth on edge. Like Thatcherism in Britain, it stands for union busting, tax cuts for the rich and diverting tax money to the military industrial complex.

Finding facts in ideology

To our federal parties to the left of the Tories, business is not the only creator of wealth. Reaganomics, they would say, amounts to "corporate welfare" and attacks all the good things about government, from health care to public education.

Combing the facts out of the ideology is far more difficult. But if the rising tide of rhetoric and attack ads is any indication, that is something Canadian voters soon may be forced to do.

Is an economic boom a result of current cuts to taxes? Or is it the fruit of previous government largesse on things like education and infrastructure? It is almost impossible to prove.

I remember one media report that showed economic growth during Britain under Margaret Thatcher was exactly equal to the new output of North Sea oil during that same period. Things Thatcher was famous for, like busting the crumbling and unpopular coal miners' union, had no significant effect.

Of course, the lack of irrefutable evidence will not, and probably should not, stop a government from following its ideological course. It is as voters we are forced to consider the implications.

Besides the "strong business versus government waste" argument mentioned above, one of the most plausible benefits of corporate tax cuts is that they encourage business to locate here instead of somewhere else.

For Canadians, who share a border with an industrial power 10 times our size, this seems like a good plan. It is certainly better than what has happened many times in the past, with Canadian businesses escaping south to lower taxes and labour costs.

According to Jayson Myers, president and CEO of the Canadian Manufacturers & Exporters, 10 years of corporate tax cuts have not resulted in a flood of new business arrivals.

Of course, that doesn't mean it won't happen as taxes get even lower.

Lessons from the Emerald Isle

Myers says, however, that Canadian taxes are somewhere in the middle of the pack. Taxes in Ireland, for example, are much lower.

But the mention of Ireland must bring us to a grinding halt and lead us to the most valuable lesson of Reaganomics. The fact that the U.S. president sang When Irish Eyes Are Smiling with our own Brian Mulroney is not the only connection between the Emerald Isle and Reagan's policies.

Reagan and Ireland both cut taxes. But they did not raise revenue or cut spending enough to compensate. So impressed were they with their own ideology that both the Reagan administration and the Irish government borrowed heavily, confident the cuts would bring a future windfall.

Under the Reagan regime, the U.S. government deficit doubled and the debt tripled to nearly $3 billion, starting an addiction to borrowing that continues today.

At 12.5 per cent, Ireland still has the lowest corporate taxes in the world. But Ireland is proof that low taxes are not enough. Even with European guarantees, no one wants Irish bonds. The government is cutting its spending to the bone. Despite that, a poll of global investors this week predicts the country will default on its loans.

If Canada is stronger than some today, it is less about Reaganomics than because of a balanced budget bequeathed to us by Liberal prime minister Paul Martin when he was in charge of finance. We had to bite the bullet then. But is it better than the bullet the Irish are biting now. And despite Obama's brave words, I'm afraid our American cousins still have some bullet-biting in their future.

As voters, you may decide that tax cuts are good for business and good for the economy. But let's not follow the Reaganomics script too closely. Don't let the government borrow to pay for tax cuts.