The timing could not be worse. Four days before Conservatives in Canada are set to choose a new leader, Donald Trump released his huge budget proposal, or, to use a phrase that more accurately describes the phantasmagoric document, his grand budget magic trick. Suddenly, an enormous amount of attention is on one of the foundational principles of Conservative economic thinking: lower taxes combined with deep spending cuts will deliver enormous economic growth. The problem is, no one can figure out how the Trump trick works. If he blows this one, it will sideswipe the new Conservative leader here, who must provide a convincing alternative to the Trudeau deficit spending agenda.
Here’s how Trump’s sleight of hand works. Take big tax cuts—corporate tax in the U.S. would go down to 15 per cent—chop $3.6 trillion from a multitude of programs including Medicaid and welfare, add $469 billion to defence spending going out to 2027, and suddenly you get a surge to three per cent economic growth by 2020. So far this sounds like standard supply-side economics.
There’s just one quibble: Where does that key figure of three per cent growth actually come from? This is where the budget document starts to resemble what illusionists call a Bentz Production, an old trick in which a magician somehow takes objects out of an empty sack—in this case, economic growth.
But the sleight of hand was immediately exposed by Larry Summers. The one-time chief economist of the World Bank went on to become Bill Clinton’s secretary of the Treasury and the director of Barack Obama’s National Economic Council, so a political grain of salt is worth taking here. In a blog post, Summers eviscerated the Trump budget document not on the basis of political or social policy—though Summers predictably believes the administration’s priorities are profoundly wrong—but on pure economic grounds. “There appears to be a logical error of the kind that would justify failing a student in an introductory economics course,” Summers wrote. “The administration asserts that it will propose revenue-neutral tax cuts, with the revenue neutrality coming in part because the tax cuts stimulate growth! This is an elementary double count. You cannot use the growth benefits of tax cuts once to justify an optimistic baseline and then again to claim that the tax cuts do not cost revenue. At least not in a world of logic.”
This “double counting” has been at the heart of the criticism of Trump’s economic plans, and goes to the fundamental logic of tax cuts as a form of stimulus. Are they truly revenue neutral? Does the promised growth truly compensate for the loss in revenue? And what about the massive deficits that are being accumulated in the meantime? If the growth doesn’t materialize, as it didn’t under George W. Bush, are people left with massive deficits and no social programs to help them?
Democrats in the U.S. and Liberals in Canada have long histories of running up massive deficits and they can pay a political price for these. (To be fair, they also have records of balancing the books, as both Clinton and Chrétien did). But at least those deficits come with the shock absorbers of social programs. The truth is, most budget documents—left or right—are notorious for fudging numbers, and for making growth promises that don’t add up. But Trump’s is on a different scale. “It appears to be the most egregious accounting error in a presidential budget in the nearly 40 years I have been tracking them,” Summers says.
Even if you discount Summers as a partisan Democrat, his logic is hard to dismiss, and it forces us to press any candidate who proposes big growth alongside massive tax and spending cuts for details. The fact that Stephen Harper, the Conservatives’ most prominent and articulate proponent of this kind of economic thinking, will not be at the convention is a huge loss to the party, but very telling. Harper spent most of his adult life doing serious work on the practical side of Conservative governance and he ought to be at the convention to shore up his legacy and the principles of the party rather than allow the Trump brand of right-wing economic and social thinking overshadow the Conservative agenda. But Harper claims he doesn’t want to take the spotlight from the new leader, so he has virtually disappeared from the political landscape he once dominated. His absence leaves the party open to the influence of Trumpian ideas that may, in fact, have no basis in logic.
One-time Conservative leadership comet Kevin O’Leary, who flashed across the political sky before quickly burning out, promised the magic Trumpian three per cent growth, but never bothered to explain how he would achieve it. O’Leary threw his support behind the putative front runner Maxime Bernier, who has similar ideas. An outspoken Libertarian, Bernier wants to drop corporate income tax to 10 per cent and have only two levels of income tax, at 15 per cent for individuals making up to $100,000 and 25 per cent above it. There would be mass privatization of agencies like Canada Post, and the opening up to competition of telecom and maybe even banking. All of these are deeply Conservative or libertarian ideas and they represent, quite frankly, an admirably bold slate of proposals after the decade of Stephen Harper’s radical incrementalism. But still, there are no details at this point as to how or why this plan will lead to genuine economic growth. It is a theory without a proof.
One interesting example of this is Bernier’s controversial promise to dismantle supply management, the protected quota system for Canada’s dairy and poultry farmers. Bernier calls it a “cartel” and claims it has costs Canadians billions of dollars in higher costs for items like butter and milk. The Dairy Farmers of Canada dispute this, of course, but just call a store in say, Boston, and compare the price of a similar kind and size of milk—it’s cheaper there than in Ottawa. The truth is, a protected dairy system is ideologically inconsistent with any truly Conservative thinking, and even some Liberals like former MP Martha Hall Findlay have argued persuasively that the system makes key foods more expensive, especially for low income Canadians. The problem is that the Dairy Farmers are a politically powerful lobby, especially in Quebec, and Bernier is a man alone even in his own party on this one. June 1st is World Milk day. If Bernier wins, expect farmers to roll tractors on Parliament Hill. Plenty of people remember when they dumped milk on then-agriculture minister Eugene Whalen in the 1970s—a bad photo op for sure.
Does Bernier at least have the math on his side? Even that is in doubt. A farmer pays about $24,000 per dairy cow under the quota, so estimates are that buying them out and ending supply management could cost anywhere from $25 billion to $35 billion. That would have to be paid out over time, something which Harper opened the door to. How would Bernier pay for it?. “A temporary levy on these products would be raised to compensate farmers for the value of their quota,” he wrote in an article in the Financial Post. Let’s pause for a moment here. A “temporary levy”? Feed that through his political opponents’ attack ad factory mill and it comes out with a screaming headline: “BERNIER’S TAX ON MILK.” How is that the most libertarian candidate ever to run for the party leadership has ended up being corned with that?
Bernier says the tax—sorry, “levy”—would be 10 cents a litre, temporary, and revenue neutral. Ultimately he says consumers wold still save money, because the price of milk would fall so far that the tax will be tiny by comparison. This all sounds eerily like the Liberals’ defence of their tax neutral carbon “levy,” the same one Bernier rails against. Conservatives don’t believe in temporary taxes, right? After all, income tax was supposed to be temporary.
I asked Bernier’s policy director, Martin Masse, to explain how his candidate would justify this and immediately the details blurred. “First, I want to emphasize that our proposal for supply management is not and was never meant to be a precise and fully costed plan ready to implement if we were in power tomorrow morning,” he wrote. “It is a general policy proposal meant to show CPC members what we intend to do.” He also pushed back on the whole “tax on milk” idea. “A tax is meant to raise revenue for the government,” he wrote. “This would just be a temporary levy aimed at paying the cost of compensation. Again, without a precise number for the overall cost, it’s impossible to say how much it would be for a litre of milk and for how long. We’ve been using the Australian example to show that this is entirely feasible. They imposed a $0.10 levy for 8 years.”
The Bernier camp often cites Australia as their model for open competition, but just a year ago the Australian government had to bail out its dairy farmers to the tune of $555 million after the price of milk dropped. Bernier says he would never bail farmers out, but would let them fail, as he would do with a company like Bombardier. But isn’t the whole point of his levy to not have them fail?
Supply management is just one example of how the promises of a campaign get a lot trickier when it is time to govern. Trump is discovering that, and the next Conservative leader may have to learn it as well. In the meantime, in the wake of Trump’s sleight of hand budget proposal, which Democrats and Republicans say will never pass anyway, expect more serious scrutiny on any magical promise for surging economic growth. It is the one grand trick few governments, on the left or the right, Trudeau or Trump, have managed to pull off.