Does Jim Flaherty deserve a ‘pass’ in the cabinet shuffle?

Stephen Gordon, Kevin Milligan and Mike Moffatt grade the minister


 

He steered the Canadian economy through the worst global crisis since the Great Depression and sought to take away the proverbial “punch bowl”—to use a central bank metaphor— when homeowners and investors seemed to be getting too excited about ever-rising housing prices. And in just a few more months Jim Flaherty could become the third-longest serving finance minister in Canada’s history (after William Fielding and Paul Martin, in case you were wondering). But will Mr. Flaherty survive a widely expected cabinet shuffle this summer? Speculations on the issue have been many and varied.

More important still, though, is another question: Should he stay? Should Prime Minister Stephen Harper give Mr. Flaherty a pass? Here’s how our resident econ profs graded the finance minister over his (nearly) seven and a half years in office.

To view a larger version of the report, please click here (pdf).


 

Does Jim Flaherty deserve a ‘pass’ in the cabinet shuffle?

  1. Flaherty has now done to the national economy what he did to the Ontario one. Personally I’d make him ambassador to Outer Mongolia. The trouble is, no one else in that party, including Harper, is any better.

    There is no point in shuffling the cabinet. Only the media believes this will improve things

    • We won’t know until after he leaves office if he did to Ottawa what he did to Ontario (hide a big deficit)

      • We’ve already got the biggest known deficit in Canadian history…..and how much more is he hiding?

        • $3.1 Billion, at least.

      • Has done so federally too. Larger governemtn, spending about $60 billion more than in 2005 before neo-Cons got power.

        And national debt has skyrocketed right along with CPP and union pension shortfalls and CHMC bad debt.

        Flaherty has screwed Canadians, just media and Ottawa BS hides it.

    • It’s (dare I say?) scandalous that Ontario finally tossed the bums out and then turned right around and put them back in power in Ottawa.

      • Ontario confused Harris with the PCs….and later did the same with Harper.

        Eventually it dawns on them they got the Tea Party instead.

  2. So he spends 2008 swearing (all the way up to election day) that there would never be a deficit OR a recession. Then he’s totally erratic on stimulus spending, finally having to be forced into it by the Opposition. And has spend the subsequent years taking credit for that stimulus package.

    He introduces, and then claws back the 40-year mortgage, and is credited with wise handling of the housing crisis. But he pulled a Homer and fell back to a strong housing market that he had nothing to do with, so further credit there.

    On tax policy, his signature move was to cut the GST (flying in the face of most economists I’ve read on the topic) and creating a structural deficit in the process. Beyond that, a ridiculous mishmash of hyper-specific tax cuts. And Canada is now leading the race to the bottom on corporate taxes, actually driving the trend, rather than merely remaining competitive.

    Really, if this is a B Minus performance, I would LOVE to be graded on that curve. Good enough for government work, I guess.

    • You forget, pundits own the memory hole, and love the Cons. The list they present may have happened despite Flaherty’s presence, but Flaherty’s presence cannot be denied. Despite his numerous bad ideas (GST reduction, denying the possibility of a global recession, initially refusing the possibility of stimulus, 40-year mortgages, unwisely relaxing other mortgage rules, etc, etc), the Canadian economy didn’t tank as much as Greece, Spain, or Ireland, and Flaherty exists in the continuum which is Canada. Ergo ispo facto, or some other latin.

      • Funny, the latin squib.

        Pundits do control the memory hole, to a degree. I wish more of them loved the Cons (unless you’re restricting the group to financial commentators exclusively).

        Raining there?

        • Not today! What is this shade of blue? Last time I saw it, I was on vacation (I’m not joking!).

    • Flaherty didn’t claw back the 40-year mortgages he introduced. The man behind tightening the mortgage rules the Conservatives loosened was Mark Carney. He also set the time table attempting to bring about a soft landing in the inflationary housing market (caused by mortgage deregulation.)

      Flaherty should get part marks for cooperating with the Bank of Canada, aligning regulatory policy with monetary policy. The economy is more efficient when governments and central banks are on the same page.

      Neither Flaherty or Carney should be given credit for steering Canada through the Great Recession. We were saved from a financial market meltdown that crippled other countries because of policies the previous Liberal government had in place:

      “Much of the country’s resilience stems from policies—such as bank regulation and sound public finances—which predate Mr Harper. ” (The Economist 2010)

      http://www.economist.com/node/16060113

  3. So, let me get this right. Our resident economists are dead against a GST cut. But, did any of the three voice concerns at the time about ANY tax cut (I seem to recall a chorus of don’t cut GST – cut income tax instead) NOT don’t cut any taxes beacuse it will create astructural deficit? Don’t think so.

    • Do the math.

      GST is 7%, Income tax is 15%

      A man earns $1000 pre tax. He gets $850 (1000 x 0.85) of that to spend after income tax. He can buy products worth 790.50 (850 x 0.93) after GST.

      If we reduce GST by 2%. He can now buy $807.50 (850 x 0.95) worth of products.

      If instead we reduce income tax by 2%, he has $870 (1000 x 0.87) he can spend, which means he can buy (at 7% GST) $809.10 (870 x 0.93)worth of product.

      Reducing income tax means people can buy more things. If people can buy more things more things need to be made. If more things need to be made, there will need to be more people hired, or working longer hours. If more people are hired or working longer hours, pay will rise. If pay rises, total income tax levels received by the gov’t increase.

      Where taxes are applied *matters*.

      • $809.10 is 0.2% higher than $807.50. I doubt the difference would lead to a virtuous circle of job creation…

        It should also be kept in mind that a VAT is to some degree a regressive tax. The wealthy consume less of their income than middle-income families (i.e. it’s less than a flat tax.) Progressive taxation is required to provide equality of opportunity and invest in social and physical infrastructure. (The last 30 years of right-wing cheaponomics has produced a $125B infrastructure deficit.)

        No doubt, our VAT is lower than most developed countries and should be higher. It might be a good sell to the public to offer them tax neutral income tax cuts and bigger GST rebates in exchange for a higher GST. It would be smarter to give bigger tax cuts to the middle class and leave taxes the same for the wealthy (who have enjoyed countless tax cuts over the past 30 years.)

        Trudeau should run on getting rid of Harper’s boutique tax cuts and with the savings cut income taxes (and increase spending.) That’s a less costly way to win over the right-leaning vote (than carving the terrible policy in stone while promising to recklessly cut taxes further — Canada is already a low tax country: #9 of 31 developed countries.)

        To increase disposable income for low income earners, a pharmacare program would go a long way. Bulk purchases of meds could also reduce costs.

        • Uh. Yeah. And most people make more than $1000 in reality. Think in terms of national numbers and suddenly, 0.2% makes a lot of difference. After all, the entire government budget for CBC is only 0.04% of our federal revenue.

          • A 0.2% increase in job creation means for every 500 jobs one is created. Of course the 0.2% difference in spending power wouldn’t directly lead to a 0.2% increase in job creation. (Labor costs are usually only a fraction of the price of goods and services.) It’s negligible no matter which way you slice it.

      • False logic. Let me explain. To do so, you have to use the benefit of hindsight and go back to when the GST cuts were made.

        Canada, as we know through the 00’s, was benefitting from record demand for our natural resources internationally. And as a result, tax revenues from all sources were up. Way up. And, if you were of the opinion that this was a structural change in world demand that would go on forever (not just the ultimate peak of a very long business cycle) then it appeared that you had some room to cut taxes. Let’s accept the $12 billion as a given. What choices did Finance have? Let me list a few:

        1) Do nothing – use the excess revenue to pay down cumulative debt

        2) Expand the Fed gov’t spending – through transfer to provinces, increasing dramatically the size of the public sector

        3) Cut taxes somewhat, but continue to run deficits so that the %debt of GDP remains constant

        4) Cut GST $12 billion

        5) Cut personal income tax $12 billion

        6) Cut corporate income tax $12 billion

        7) Cut import tariffs (another form of consumption tax if he accept the arguments of our bloggers) $12 billion

        Now, there may be valid economic reasons why GST is the lest desirable tax to cut IF you are going to cut taxes $12 billion.

        But that assumes that cutting ANY taxes was the right choice. This is by no menas a given, with the value of hindsight – my point being we would still have a structural deficit if the $12 billion was a cut to personal IT, for example. Maybe slightly less, but still there.

        Run up the deficits during the recession, and pay off the acquired debt during the boom.

        • Sorry, I don’t accept the 12 billion as given. That’s the flaw. I especially don’t accept the 12 billion as given because the *government themselves* said they didn’t know exactly how much the GST cut would affect their coffers.

          • I was using SG’s numbers as a given, for ease of argument, with the value of hindsight. Btw, I believe he has argued that there is no multiplier effect of injecting $12 billion into the economy through a GST cut of this magnitude on overall tax revenue. I also find that hard to accept, but have done so for simplicity.

            The gov’t didn’t know, or perhaps didn’t care – if you accept that the GST cut was totally based upon politics (courting voters with the most visible tax), not economics.

  4. So Flaherty deserves a “B” for creating a massive housing bubble and record levels of personal debt with mortgage deregulation? Yeah right. Plus there’s Flaherty’s disastrous deregulation of the CMHC:

    “I can’t imagine that Canadians would be pleased to learn that while the banks were publicly expressing concerns about certain markets, they were quietly allowed to reduce their own exposure to these very markets by offloading the risk to Canadian taxpayers.”

    The REAL Canadian bank bailout
    http://www2.macleans.ca/2012/05/24/the-real-canadian-bank-bailout/

    The professional opinion of an economist is on par with Crystal Therapist.

  5. It’s also ridiculous to suggest Flaherty deserves a “B” on tax policy. He has complicated the tax code with tens of billions a year in boutique tax cuts whose entire purpose is to buy votes instead of streamline the economy.

    He also wasted $14B/yr on unnecessary, ineffective and unfocused corporate tax cuts. Before this Canada already had one of the lowest effective rates among all major economies. Now we have the lowest. Wow, just look at all that prosperity pouring in!!

    “Effective corporate income tax rates are directly related to the share of income taxes in total tax costs. Corporate income taxes are lowest in Canada (7.3 percent effective corporate income tax rate), France (14.7 percent), and China (14.8 percent.)”

    KPMG: Competitive Alternatives 2012: Focus on Tax (Ch 3, pg 7)
    http://www.competitivealternatives.com/reports/2012_compalt_report_tax_en.pdf

  6. Looks like the “B+” for handling of the financial crisis should go to the Liberals and NDP. They are the ones who forced the Harper Government to adopt a stimulus package (like most other countries were doing.) Harper wanted to take the “expansionary austerity” approach of David Cameron which has made a huge mess of the UK economy (worst recovery in a century.)

    So here are the real grades:

    Financial crisis: F; Deficit: D; Housing Market: F; Trade A-; Tax Policy: F

    Average grade: D

    (Of course, the Harper Government is filled with spineless minions who get their marching orders from whiz kids in the PMO. No cabinet shuffle will curb that level of the sheer incompetence. Only a change of government.)

  7. So wait.. he gets a B+ on the financial crisis, based on what happened, not what he was wanting to do, and then an A- on trade policy based not on what happened, but what he was wanting to do.

    Either drop both categories completely, or at least grade both with the same damn philosophy as to whether it was what got done or what he wanted to do that matters.

    • The A- is also exclusively for “what happened”.

      • Why does he get favourably graded for policies he was forced into by the “evil coalition” of the NDP and the Liberals? He wanted to inflict austerity on Canadians in the face of the the recession, as did his boss.

      • So this sentence, “Overall though, the pluses outweigh the minuses since the minuses cannot be directly attributable to the minister,” doesn’t exist?

        Of course, I am assuming you understand what the word “since” means, since you’re a writer.

        • That has zero to do with “on what happened, but what he was wanting to do.” Rather the minuses are directly attributable to other people, which is the point. I’m only grading Finance on what is attributable to Finance, rather than what is attributable to the CBSA or the Trade Minister, etc.

          • Well all that leaves then is tariff reductions on specific items, and a very generalized tariff increase through GPT. I thought gov’t picking and choosing winners was a bad thing to you guys?

          • The tariff reductions on industrial equipment were quite broadbased and there’s also the spending on border crossings. Also they tackled GPT (which is about two decades overdue and previous governments were hesitant to do), though as I’ve written I’m not a fan of the implementation.

      • If you are continually running trade deficits and money is flowing out of the country would you consider that a passing grade?
        I forgot to mention that for the previous 15 or 20 years the country ran trade surplusses.

  8. Weathered the recession? No, we didn’t get the worst of it because of policies set up by the former government.

    • BS

      • I wonder if you can manage to grunt out a reason why you think this statement is incorrect. Our banks would have failed like many others if it weren’t for those policies.

  9. So Harper gets a B+ from Gordon for adding $100 billion or so to the national debt. This is good public policy according to him.

    Not content with that level of silliness, Gordon then gives Flaherty a D for…adding $100 billion to the deficit, largely through stimulus spending, which Gordon supports.

    Economists: like used car salesmen, without the integrity.

    Note that these white, male economists favour anti-female policies, such has hiking the GST and lowering corporate and personal income tax. These measures would have significant disparate impact on women since they pay far less in income tax and control the vast majority of household spending.

    According to Milligan, half million dollar bungalows are good public policy. You have to be a truly despicable human being to actively support pricing homes way out of the reach of even middle class Canadians. Why not give Flaherty a high grade for making food and clothing more expensive while you’re at it?

  10. If our trade policy is so great, then why are we running trade deficits?
    In addition why are the conservatives always talking about simplifying the tax code, but instead make it more complicated by adding al,l those new deduction for its target voters.
    Stop ignoring the reality and come to the reality that the finances in tis country are a big F.

  11. The GST obviously was a campaign promise, but done because of a desire to transfer wealth back to the people and force the Gov’t to run leaner. When the Recession hit, it looked like they did it to help rev up the economic engine heading into the recession, but maybe the GST was accidentally reduced in time to be of a help. who knows or maybe they actually saw the decline in the numbers and where doing things to turn the economy into the wind and fill the sails, like loosening the mortgage rules and lowering GST.

    Now that Unemployment is just about to hit 7% would it be a good time to raise the GST and pull some of that liquidity out of the main street market to pay don’t the deficit, and then later pay down the Debt specifically.

    I would be in favor of letting the central bank a role in providing some advise on this. What if when times are tough, the GST went down 4%, and when its good went up 4% so that its not the Mortgages that are jumping up and down but the whole economy. (and the top level of GST be 3% higher than it is now so that it would curb inflation when at its max.) Then at least the inflation and deflation of Homes would be muted. It possibly could cut over all inflation by moving some of the punch bowl regulations of the BOC into the whole economy.

    Using the GST as a tool rather than just a TAX would also affect Imports. because instead of us taxing our labor causing our goods to be more expensive, we would be taxing imports more generally. Generally, a shift away to income tax and to GST/flat tax would serve our manufacturing industry, be a bit protectionist but helpful over all.

  12. Resources bailed out Flaherty, nothing else. Highly over rated. I am still laughing when Flaherty said buy stocks in 2008 when I was just finishing selling before the crash. Sure got those stocks cheap in early 2009 as I didn’t listen to Flaherty. “Trust” taught me that.

    Just wish I saw Harper/Flaherty’s “Trust lie” sooner. Most of those companies now pay less taxed as they are owned in tax favorable offshore investors. But more than made my money back as I bought a lot of undervalued Canadian stocks that ended up being bought out for good capital gains.

    In Canada you have to factor in Ottawa interferences, and why I am not taking the Potash crash. And why I am again up in cash as the next few years is not going to be good.

    Flaherty should have done like Carney, it is important to know when to get out. Even CPP is going offshore with a large percentage of investments.

    Must be doing something right, hit new record highs again this month. Almost to the point it is economical to move out of Canada for the tax savings. I now pay more taxes on foreign income than Canadian income.