Good Deficits & Bad Deficits

"deficit spending can actually be helpful"

This is probably true if there is no other choice, however, if our government banked a surplus and spent the surplus during an economic downturn we would be more economically secure because we would be less subject to interest rates and the vagaries of the world financial markets at the time. Debt to GDP ratio is still the most important indicator of our economic security regardless of the positive spin Paul Martin puts on his glorious, though practically meaningless achievement, of a lower 'deficit to GDP' ratio.

In reality, this article has little to do with Canada's situation with regards to deficits that were run in the 1970s, 80s, and early 90s since interest rates in Canada during this time were not determined by market forces but by the Bank of Canada. The reason for this policy of high interest rates had nothing to do with deficit reduction. In fact, it contributed to a greater deficit by making the government pay higher interest costs, which I am sure all of the lenders to the government were ecstatic about. Rather, their high interest rate policy was intended to protect the assets already possessed by primarily wealthy people by making credit more expensive and therefore less attractive thereby controlling inflation. This worked quite well; of course, the down side was that inflation was very low (anyone with money could buy more with it) but the economy was killed off in the process to the point where the real unemployment rate for much of this time was around 20%.

One problem with using high interest rates to try to control inflation (which is not caused by public debt but by private debt) is that it punishes the people who have already participated in the economy when interest rates were low(er). This was seen when in the early 80s peoples' mortgages came up for renewal and were surprised to face mortgage rates of 20%. Many lost their homes due to this reason.

I like Paul Hellyer's ideas about controlling inflation (which is really about managing the economy); namely, the idea of using the Bank of Canada to use private bank reserve requirements to control access to credit and by increasing minimum payments on new credit card debt. He has many other good ideas resulting from good economic analysis and his books are worth reading.

Paul Krugman sounds like an interesting read as well.