Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this: 

 The first four men (the poorest) would pay nothing.

 The fifth would pay $1.

 The sixth would pay $3.

 The seventh would pay $7.

 The eighth would pay $12.

 The ninth would pay $18.

 The tenth man (the richest) would pay $59.

 So, that's what they decided to do.

 The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. "Since you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by $20."Drinks for the ten now cost just $80.

 The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men – the paying customers? How could they divide the $20 windfall so that everyone would get his 'fair share?'  They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer.

 So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay. And so:

 The fifth man, like the first four, now paid nothing (100% savings).

 The sixth now paid $2 instead of $3 (33%savings).

 The seventh now pay $5 instead of $7 (29%savings).

 The eighth now paid $9 instead of $12 (25% savings).

 The ninth now paid $14 instead of $18 (22% savings).

 The tenth now paid $50 instead of $59 (15% savings).

 Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.

 "I only got a dollar out of the $20,"declared the sixth man. He pointed to the tenth man," but he got $9!"

 "Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too. It's unfair that he got nine times more than I!"

 "That's true!!" shouted the seventh man. "Why should he get $9 back when I got only two? The wealthy get all the breaks!"

 "Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!"

 The nine men surrounded the tenth and beat him up.

 The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!

 And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

 For those who understand, no explanation is needed. For those who do not understand, no explanation is possible.     

The new GM could fit in the trunk of a Volkswagen

In the bizarro backward-land that is the North American auto-rescue world, the industry would be saved by chopping it into an itty-bitty, teenie-weenie fraction of what it once was.

Jobs would be saved by slashing jobs. Free enterprise would be protected by giving ownership to governments and unions. Public demand would be satisfied by offering fewer products, and specializing in models buyers want least. Parts suppliers would be assisted by reducing the capacity of their customers.

It’s a big rescue plan in which little is rescued. The industry that’s too important to die would employ fewer workers than Microsoft. If GM is essential to the U.S. economy, what’s that make Starbucks, which will have four times the employees?

At least 50% of GM would be owned by the U.S. government, another 39% by the United Auto Workers — if they’re willing to take it.

After a hundred years of demanding more and more from the employer, the union is being offered a major chunk of the company itself. Here, you think it’s so rich, you take it.

Chrysler would similarly give itself away — 55% to the UAW, 35% to the Italian carmaker, Fiat. At this rate the union that’s been trying to dictate to management for as long as anyone can remember would become the biggest beast on management row.

Only Ford (maybe) would be left with actual managers managing. Pattern bargaining would become one set of UAW negotiators confronting another group of UAW negotiators, calling one another varmints and thieves, both sides threatening to shut themselves down unless they agreed with themselves, and fast.

Barack Obama, the great left-wing president, would succeed in nationalizing what was once the country’s mightiest employer, but only to slash at it more fervently than any corporate fat cat ever dared.

He’s already fired one GM chief executive because he didn’t chop fast enough. GM once had 150 plants in operation; new CEO Fritz Henderson’s plan, worked out in close cooperation with Mr. Obama’s auto advisers, would leave it with 34. It would reduce its dealerships by half, and they would sell only four models – Chevys, Cadillacs, Buicks and GMC trucks. Chrysler would similarly cut back on its offerings and adapt some super-duper secret Italian technology from Fiat that would somehow spruce up sales figures.

Hands up everyone who’s ever owned a Fiat. Anyone?

Fiat specializes in minuscule little gas-sippers that are just great for the narrow streets winding through Italy’s scenic 2,000-year-old village squares but have had little success in North America, where no one buys them. But slap a Chrysler banner on them and they’re going to become popular, right? Because only super-popular companies like Chrysler are found teetering on the edge of bankruptcy.

If anything in this upside-down, inverse universe leaves room for optimism, it may be the sense that the industry and all its associated players have finally passed through the various stages of apathy, denial, rejection and anger, and landed somewhere in the vicinity of acceptance. Supposedly acceptance is essential to recovery. Ponder that, when you’re trying to pass a tractor-trailer in your Fiat-powered Cherokee.

By Kelly McParland

The national Post, April 28, 2009.

By Kevin Libin National Post February 7, 2009.

By the time President Franklin Delano Roosevelt addressed his nation in his first radio fireside chat one March evening in 1933, America’s banking system was on the brink of collapse. A fifth of the country’s financial institutions were out of business. Citizens, nervous about losing their savings, had started a run on the remaining banks’ cash, preferring the safety of mattresses. Roosevelt, having ordered the banks closed, spoke to a rattled and frightened nation. There was, to be blunt, not much stirring in his words.

He explained the basics of how banks worked, why they needed cash deposits, why most remained sturdy and the plan to gradually reopen them. He concluded: “You people must have faith; you must not be stampeded by rumours or guesses. Let us unite in banishing fear. We have provided the machinery to restore our financial system, and it is up to you to support and make it work,” he said. “Together, we cannot fail.” When the first banks began to reopen the following day, thousands of clients were lined up outside, ready to redeposit their money. America was soothed.

We are told now, repeatedly, that we are in the teeth of the “worst” financial crisis since that time of Great Depression. And while the public understands vastly more about the financial system and its cycles, today’s leaders — egged on by around-the-clock media eager for high drama, buoyed by a society with a self-absorbed nature that seems to erase any context of longer-term troubles — have traded Roosevelt’s cool reassurances and we’ll-weather-this-too approach for dark forecasts of worst-case scenarios and panicky appeals. U.S. President Barack Obama warned this week that the U.S. economy could become a “catastrophe for families and businesses across the country.”

He recently described this as “a crisis unlike any we have seen in our lifetime.” Last week, our own Conservative government’s throne speech insisted we are in “a time of unprecedented economic uncertainty.” British prime minister Gordon Brown this week said the world was in a “depression” and days earlier, his treasury financial secretary warned that the UK could suffer worse than it did during even the war years, “facing some of the harshest economic conditions for decades, perhaps for a century.”

If you’re not hysterical yet, you must not be paying attention: Political leaders have clearly made it their task to convince you this is the absolute worst of economic times. So much so, that they have all taken to revising history and exaggerating today’s troubles to make their case. The mystery is: why?

Because, these times are not “unprecedented.” This is not unlike anything we’ve seen. Serious economists do not call this a “depression,” or predict a return to bread lines, work camps and street urchins peddling apples on the streets. There will be no rationing, as there was in wartime London.

“That’s bullshit,” says Chris Thornberg, a principal at Beacon Economics in California, one of the first economists to foresee America’s housing meltdown in early 2007. “All the numbers we see right now are in line with what you would call a normal, bad recession. The increase in unemployment, the drop in payroll employment: this all looks like 1975. It looks like 1982. Not the Great Depression.”

This is a hard time for many families, certainly. But outside, things look familiar: We wait in line at Starbucks; this past Christmas the average American shopper spent $120 just on themselves. Wall Street managed to dole out $18.4 billion in bonuses, despite 2008′s annus horribilis. American economist Paul Krugman was left telling NBC’s Hardball recently that “you’ve got luxury cars landing at the dock in Los Angeles and then just sitting there because no one could buy [them] … this is functionally a lot like the Great Depression.” Because Lexus sales are down!?

We feel poorer, particularly in the U.S., because our largest asset-our home-has lost value. But unemployment rates today are lower than they were in recessions in the ’70s and ’80s. Projected to peak in the U.S. somewhere shy of 9%, jobless rates won’t match the nearly 11% reached in 1981/82, let alone the peak of 25% during the Depression. Even after Friday’s ugly job loss numbers-129,000 layoffs in January-Canada’s 7.25% unemployment rate still hovers below the average rate over most of the last 30 years. And Dale Orr, managing director in Toronto at Global Insight, says that 2009 Canada will still be mostly better than 1991. The International Monetary Fund expects U.S. GDP to shrink 0.7% this year; during the Depression, the American economy was cut by a third.

“We don’t have enough rhetoric of faith, the rhetoric of confidence,” says Amos Kiewe, a professor specializing in presidential rhetoric at Syracuse University. “I wish they would induce more confidence.”

There may be a number of reasons for the hyperbole. The most evident, is the recent and current environment of heightened political partisanship. “For the political opposition, they’ll use anything they can grasp on to embarrass the government,” says Mr. Orr, who has consulted on federal and provincial budgets since the ’80s.

The full weight of the recession crashed over North America at a time of concurrent election campaigns in Canada and the U.S., ensuring the economy would be the top issue. Politicians who seemed too serene-recall John McCain’s maligned “the fundamentals of our economy are strong”-were torched by rival spin-doctors. As the Democrats noticed worsening economic news correlating to larger gains in support, the Obama team had motive to paint a worrisome picture.

“The fact that it was an election year forced Obama to me more negative,” says John Huizinga, an economics professor at the University of Chicago.

The Democratic candidate even resorted to citing statistics that don’t exist: last summer, he said the “percentage of homes in foreclosure and late mortgage payments is the highest since the Great Depression.”
Actually, there exist no foreclosure data that far back. No wonder that by December, a CNN poll showed six in 10 Americans convinced a depression was nigh.

Of course, we have never before had the influence of that 24-hour all-news network, and a parade of others channels and websites, to help us worry as we have this time, since the last major U.S. recession happened before the First Gulf War, and the birth of the “CNN Effect.”

These are outlets hungry for high drama to fill their hours, notes Greg Elmer, a media studies professor at Ryerson University in Toronto, and are often moved to continually ask ‘how bad will it get?’ as a way of keeping the story moving. It doesn’t help that any journalist younger than 40 has never seen anything like this before, and may be willing to believe, therefore, that it resembles the Great Depression.

“I think it’s a trope, it’s a way to talk about any downturn in the economy,” says Mr. Elmer. While the cynical say it’s it’s a way to sell more papers, more likely, he says, it’s comparable to the habit of sticking the suffix “gate” on any government transgression, as though a rumoured sex-scandal like Troopergate was anything as serious as the felonious Watergate. Still, Alison Milward, a marketing manager at Business News Network says audience numbers have shown a “significant increase” as the economic news has soured.

That Mr. Obama hasn’t let up is probably partly due to the fact that he has since been battling congress over the stimulus bill. The more urgent the situation seems, suggests Mr. Kiewe, the more pressure he can put on rivals to play ball. “If we don’t pass this thing, it’s Armageddon,” hyperventilated one Democrat this week. Yet, careful observers note that the bulk of initiatives within the latest bundle of emergency measures won’t create jobs-at least not anytime soon-and that hundreds of billions are earmarked for expanding the federal government. That might suggest that the Obama administration sees advantage in exaggerating its urgency in order to smuggle through a number of otherwise unpopular policies. “You never want a crisis to go to waste,” Mr. Obama’s chief of staff, Rahm Emanuel said in November. “It’s an opportunity to do things you couldn’t do before.”

The starkest transformation has come from our own prime minister who in October of last year was lambasted by opposition leaders, in the thick of a campaign, for offering optimism about the economy, telling the CBC’s Peter Mansbridge that there was “probably some great buying opportunities emerging in the stock market as a consequence of all this panic.” In fact, in that same month, U.S. investing sage Warren Buffett had said the very same thing. But Mr. Mansbridge was incredulous: “Do you really want to say that?” he checked. The Montreal Gazette called it the “worst line of the campaign … cold comfort for the great majority of Canadians more worried about paying their rents and mortgages than playing the stock market.”

Within two months, with the opposition threatening to topple his government, claiming the prime minister was insufficiently alarmed over the economy, and forced to justify the first impending federal deficit in over a decade, Mr. Harper was using the word “Depression,” adding “I’ve never seen such uncertainty … I’m very worried about the Canadian economy.”

Since dodging defeat, and passing his budget, Mr. Harper appears to have lightened up a bit, after “ricocheting around,” says Peter Donolo, partner at the polling firm Strategic Counsel. “This is the ultimate problem for a leader: you’re buffeted by two forces, both of which are dangerous. One is the risk of overstating the difficulties so that you actually turn off the public as opposed to what you’re trying to do, which is focus them on the stakes. And there’s the risk of being too rosy and positive … where you’re going to let them down and they’ll feel deceived by you.”

And ever since Bill Clinton reached out to unemployed Americans in the 1992 election campaign, riding his “I feel your pain” empathy to the White House, politicians have been less focused on unflappable leadership and more anxious about seeming out-of-touch not only with the concerns of voters, but their feelings. “Instead of telling them what you think they need to hear, you tell them what they want to hear,” says Mr. Kiewe.

Determined to out-empathize their political opponents, sneak in spending wish-lists, and supported by media eager for ever-changing drama, political leaders may have trapped themselves in a rhetorical cycle of Depression-grade doom. That worries Mr. Kiewe: too much panic in the ranks could aggravate things, as businesses hesitate to invest and consumers get too scared to spend. Today’s political leaders may find that, unlike Roosevelt’s comforting words, the more they prophesize the economic end-of-days, the more likely they are to come true.

By Peter Foster
National Post, January 29, 2009. 7:03 PM

The typically pretentious theme of this year’s World Economic Forum in Davos is “Shaping the Post-Crisis World.” But didn’t Davos shape the pre-crisis world, and thus the crisis itself? The annual Alpine gabfest has long been the epicentre of ‘globaloney,’ a mixture of serious discussion, subversive ideas and outright flakery. It has certainly never — as some critics believe — been about promoting capitalism. Rather it has always been a mercantilist stew in which big businessmen, big government and big international bureaucracy get together to suck both the collective thumb and the collective teat. Its ideological heart is the impossible UN dream of “global governance,” and of a corporate sector moving “beyond” mere profits to take on the heavy mantles of social responsibility, sustainable development, Global Compacts and Millennium Development Goals.

However, now that the WEF’s self-styled global governors are faced with the major crisis that they have long predicted, but probably never really expected, they are clueless. WEF founder Klaus Schwab, a Rolodex socialist in the mould of former UN poobah Maurice Strong, can, like a villain from Atlas Shrugged, only berate greed and call for “better” regulation and “improved” institutions and more pulling together. The global governors never really expected, or wanted, to actually govern, but rather to sit like limpet jockeys on the back of the corporate sector, making infinite demands in order to salve their own sanctimoniousness, and using the poor and the ”climate crisis” as their whips.

In fact, Davos Man has his fingerprints all over the present crisis. Subprime loans were the very model of corporate social responsibility, of putting communities and people before profits. Meanwhile a perfect Davos-type deal is taking shape to address the crisis: big government is bailing out big business — in particular, big banking — with trillions of taxpayers’ dollars. Davos-ees, present in either body or spirit, are shuffling around the funds of those not present, or represented. The archetypal Davos Man, guilty speculator George Soros, is rejoicing in the profit potential. All that’s required is for the major banks to hold onto the “good” assets and let the rest wind up in too-truly named “bad banks,” as stranded crap wholly owned by taxpayers. Mr. Soros admitted this week that he would be interested in investing in the “good” banks “since the margins are very high.”

Given this shameful model, and their own culpability, it is perhaps not surprising that not too many bankers have actually turned up at Davos this year. However, lots of big politicians are there to provide posturing and light relief. The biggest disappointment is that President Obama could not be present so that attendees might touch the hem of his garment. Still, the first day of the conference saw speeches from both Russian Prime Minister Vladimir Putin and Chinese leader Wen Jiabao, who were given a prominent platform to bash the U.S. and capitalism (which should never, ever, be regarded as synonymous). Even the terminally leftish British Guardian remarked “How dismal that the Davos ideal of the post-crisis age is being championed by men so fond of armies, executions and the secret police.” Dismal? Or entirely appropriate?
Mr. Putin demonstrated that although Kremlin oligarch-style cronyism may be the Davos model, he hasn’t quite grasped the elements of global back scratching. He was asked by computer whiz Michael Dell how companies such as Dell might help Russia develop its IT sector and the economy more broadly. “We don’t need any help,” snapped the increasingly unpopular czar. “We are not invalids.”

Mr. Putin might also have taken umbrage at Sir Laurence Olivier’s son, Richard, a corporate trainer, putting on a seminar on “Leadership Lessons from Macbeth” rather than those of the Russian Prime Minister. According to Mr. Olivier, “The dark black magic of Macbeth has a particular resonance this year at Davos. It’s about how people who have bloody, murderous or greedy thoughts attract bloody, murderous or greedy spirits.”

Apparently Mr. Olivier was thinking of Lehman Brothers rather than those rumoured to have been offed by the Putin regime. Still, Mr. Olivier’s flakiness at least had some substance, unlike the cryptic meanderings of WEF leader Mr. Schwab.

Mr. Schwab wrote a piece for the International Herald Tribune on Wednesday to coincide with the opening of the conference. He has wittered on for decades about how “we” — that is, the people at Davos — are going to “govern globalization.” But it seems that dozens of conferences haven’t come up with much beyond boilerplate. Mr. Schwab declared without fear of cliché that the current crisis was a “wake-up call.” Everything apparently needs overhauling, especially thinking. We must move from “ego” capitalism to “eco” capitalism. “We will not be able to hide from our responsibility to work together to rebuild shattered economies and institutions.”

Who is this “we,” and who elected Klaus Schwab to organize it?

Far from presenting coherent solutions to the current crisis, Davos this week is a cacophony of contradictory policies coming, at one end, from those who are calling for “mixed economies” and “European” models, and at the other from those who are warning about the dangers of protectionism and lousy regulation, and pointing out that there are no alternatives to open markets and capitalism as a generator of wealth and welfare. (Thank you, Rupert Murdoch.)

Meanwhile, at the World Social Forum, the “alternative” Davos in Belem, Brazil, this week, there was reported to be “little outright gloating” at the state of the world economy. After all, what ultimately pays for radical NGO protests — or WEF posturing — but capitalism?

Jan 24, 2009 04:30 AM
David Olive
Toronto Star Business Columnist

As with all fads, we should be wary of the deficit chic that has turned the heads of even the most resolute deficit hawks. It will prompt the federal finance minister, Jim Flaherty, in his “stimulus” budget Tuesday to put Canada on the road to a $64 billion deficit over the next two years – surpassing the record $43 billion deficit of the early 1990s that Canadians sacrificed for years to eradicate.

And it’s unlikely to accomplish much. The main reason for this, I suspect, is that Canada is not in an economic crisis at all.

We are buffeted by a worldwide financial crisis, in which global banks loaded with bad loans are in paralysis and simply cannot or will not lend. That’s what triggered and has maintained the global economic misery. And none of the stimulus packages unveiled around the globe will have much if any impact without a drastic overhaul of a financial system that went haywire beginning in 2007 and plunged the world into recession – and is keeping us there.

One thing we know about government bids to kick-start an ailing economy: If, in the urgency of the hour, the money goes out too quickly, much of it is wasted on poorly thought-out projects and programs. And if instead wisdom prevails in the disbursements, necessitating some time and thought to ensure the funds are well spent, the money arrives long after the economy has recovered under its own steam.

Either way, the legacy is an enlarged national debt and debt-service payments; the prospect of “structural,” or permanent, annual deficits – and the likelihood of runaway inflation, as all that additional spending drives up labour and other costs – the fate of Albertans this decade during the height of the oil-sands boom.

The prescription for what ails a once spendthrift U.S. now confronted with a Great Reckoning is not appropriate to Canada. Our U.S.-dominated media intake has convinced many of us that we completely share our neighbour’s misery. Hence the popular belief that we need to weaken our own fiscal condition in emulating a U.S. stimulus package of unprecedented size and scope to be unveiled next month. Yet, conditions in the two nations are vastly different.

The Canadian employment level is expected to dip 1 per cent this year, with a loss of as many as 250,000 jobs. The U.S. is expected to lose roughly four million jobs in 2009, far higher on a per capita basis than Canada.

The Canadian housing market is comparatively stable, while it’s expected that 13 per cent of Americans with mortgages will default and lose their properties to foreclosure this year. The Bank of Canada last Thursday projected robust GDP growth of 3.8 per cent next year, which would make this downturn of briefer duration than the last two, in 1981-82 and the early 1990s.

Most important, our banks are sound, while the largest U.S. and European lenders either are on government-provided life support or are widely expected soon to be in need of government rescue.

Global banks already have suffered about $1 trillion (U.S.) in writeoffs, mostly on U.S.-originated subprime, junk mortgages taken out by folks who had ample reason to wonder if they could make their monthly payments.

But there’s another $1.2 trillion in so-called toxic waste hidden on the books of the world’s largest banks, according to a recent Goldman Sachs report, that has yet to be accounted for and written off, further eroding, or wiping out, the capital reserves of those lenders in the absence of a government bailout. (A second or third bailout, in the case of the biggest troubled lenders.)

The toxic contagion is so widespread among America’s thousands of lenders that the unlikeliest victims are emerging. Boston’s giant State Street Corp., ostensibly a sleepy custodial bank, discovered early last week that, previous assurances to the contrary, it has several billion dollars in toxic assets that must be written off. It appears no bank is safe from grisly surprises.

The bottom line is that the world financial system remains non-functioning, despite drastic bailout activity beginning last year. As with State Street, whose shares plunged 56 per cent in value in one day last week, the likes of Citigroup Inc., Bank of America Corp., Royal Bank of Scotland PLC (Britain’s largest lender), Switzerland’s UBS AG (Europe’s largest bank) and Italian banking giant Unicredito SpA cannot replenish their dwindling reserves by selling more shares because no investor will go near their radioactive stock.

Most global bankers thus will not lend. They’ve gone from acting as though risk did not exist, in the heady days of the U.S. housing and merger bubbles, to fearing even the most minimal risk in renewing loans to their most creditworthy clients. In order to shore up their reserves, and stave off illiquidity, they are hoarding rather than lending the hundreds of billions of dollars in bailout funds they’ve received from the U.S. and European governments.

And this is what keeps us mired in a global economic recession. Every chief financial officer of a major U.S. or European corporation – along with everyone else who deals with banks, from art galleries and orchestras to the millions of corner grocers and beauty salons – is understandably fretful of being turned away in attempting to renew financing for day-to-day operations, never mind expansion plans.

Many firms count themselves lucky to have renewed their bank financing at steeply higher rates. (You’ve noticed that the most layoff-prone Canadian firms are branch plants of foreign companies, whose fate is in the hands of troubled foreign banks.)

It doesn’t help that alternate credit suppliers – hedge funds, private equity, venture capital, pension and other institutional investors – have gone into turtle mode.

The fact that banks now are additionally girding for the usual recessionary uptick in soured credit-card debt and car loans adds to the pressures on lending.

So, just as banks are hoarding rather than lending, employers as varied as Intel Corp., Sony Corp. and Microsoft Corp. – which on Thursday announced layoffs of 5,000 employees – have been engaging in pre-emptive, anticipatory layoffs in desperate bids to save cash and become self-financing until the global credit crisis is somehow resolved.

This in turn results not only in income loss for laid-off employees, but fear among remaining workers that their jobs will be the next to go. Naturally, both categories of Americans have closed their wallets.

With both U.S. business and consumers fearful of sudden loss of credit or income, all of the fiscal stimulus in the world won’t lift the world economy out of its malaise. Recovery will happen only when global banks have been well and truly rescued and made to resume normal lending operations.

This will occur through short-term nationalization, or the Obama administration’s suggested new “bad bank” to acquire all toxic assets from troubled banks, presumably accompanied by regulatory oversight to ensure the assisted lenders are back to conducting business as usual.

The red herring of stimulus packages is a distraction from the central front in the economic crisis – the need to purge the banking system and to force lenders, if necessary, to resume providing the credit that is the lifeblood of capitalism.

By: Terence Corcoran:

Give Jim Flaherty high marks for rhetorical restraint: The words “shovel” and “ready” do not make it into the Finance Minister’s budget speech and appear only once in his massive 360-page budget plan. That’s where restraint ends, however.

Otherwise, there’s a shovel on almost every page. Within weeks, all Canadian taxpayers can expect delivery of summary budget documents accompanied by a shovel with a tag that says: Dig a hole, throw in $85-billion, and then hope you can get out of it when its all over, sometime in 2014, unless the fiscal winds shift and it gets deeper and you have to dig some more.

And it will get deeper. A federal budget is more than just a federal budget; it’s a fiscal blueprint for the nation’s politicians. Even if by some miracle of forecasting accuracy never seen in Ottawa’s budgetary history the federal government pulls out of deficits by 2014, by then the provinces and municipalities will have dug their own deficit holes.

Add in the looming provincial and local deficits that have been mandated by Ottawa, and the 2014 net national debt will have risen by another $30-billion or $40-billion on top of the $85-billion in cumulative deficits Ottawa forecast on Tuesday.

It’s the nature of the Canadian fiscal system, a tangled interlocking web of federal-provincial-local politicians whose spending and borrowing feed on one another. Here’s $500-million to build new arenas, says Ottawa to the provinces and the cities. But you have to throw in your own $500-million to get the money.

Since the provinces currently have no surplus money, and are in fact heading for their own deficits due to the economic downturn, they and their municipal governments will have to run their own $500-million matching deficits, thereby doubling the increase in the national debt by $1-billion.

Mr. Flaherty’s budget calls this “leverage.” Ottawa estimates that its economic action plan will add $40-billion worth of “stimulus” to the economy. The leverage factor, by the budget’s numbers, will boost provincial and local government deficits by at least another $12-billion over the next two years.

But even before the provinces begin to look at borrowing to pick up their share of Ottawa’s infrastructure, housing and other programs, they are already looking at billions in deficits. Last October, Ontario forecast a $500-million deficit. With the collapse in the auto industry and other sectors since then, Ontario could be heading for a pre-infrastructure deficit of up to $5-billion. If Ontario takes up its share of Ottawa’s infrastructure burden, Ontario taxpayers could again find themselves in Bob Rae territory. As NDP premier, he ran Ontario into a $9-billion deficit back in the 1990s.
Other provinces may not be in as rough shape as Ontario, but recent Canadian fiscal history shows that where Ottawa goes, so go our provinces. In 1995, when Ottawa last had a $35-billion annual deficit, other levels of government racked up $16-billion in deficits, for a grand total $51-billion.

All of which might be bearable or even welcome if such deficit spending actually contributed to long-term economic growth and job creation. Mr. Flaherty’s budget documents contain numbers that appear to show how various “expenditure and tax multipliers” will turn the deficit spending into more growth and jobs. The whole plan, they say, will increase Canada’s GDP by 1.9% by 2010 and create 189,000 “net new jobs.”

That might sound like a lot, but in the scheme of Canada’s economy, these are small changes. The 1.9% gain in growth, for example, is about the same size as the current economic growth forecasting difference between the Bank of Canada and the Department of Finance.

What these numbers don’t show is even more important. First, they don’t factor in the impact of the massive politicization of infrastructure and other spending that inevitably follows panicky government scrambles to build arenas, fund broadband networks and finance extravagant public transitprojects.

Second, the calculations behind these “multiplier” effects fail to take into account the cost to taxpayers and the loss of other more profitable andbeneficial investment opportunities that will be squeezed out by the surge government spending and borrowing.
If government deficit spending is such a great contributor to growth and jobs, then Ottawa and the provinces could adopt deficits and big spending budgets as a matter of routine. But they don’t, and for good reason. Even the budget’s multiplier numbers show that they have no lasting impact on growth. By the second year, the impact of the stimulus spending barely exists at 0.2%.

The jolt is gone by 2010, even if one accepts the analysis. The money will have been spent, and taxpayers will be left holding the shovel they will need to dig themselves out.

National Post January 28, 2009

Almost 20 years ago, I found the following story, as I recall, in one of those kid entertainment booklets at a McDonalds. I have always loved it, but think I have only just begun to understand why.

The Pig and the Bear decided to go into business. “We’ll make lots of money!” they thought.

The Pig baked a bushel of potatoes and the Bear fried a heap of doughnuts.

They went to the market place early in the morning to get the best spots. Nobody was around yet. The morning was clear and chilly. The Bear had a nickel in his coat. After a while, he went over to the Pig’s stand to warm up a little

“How much for a potato?” he asked.

“A nickel for you.”

The Bear was about to say that he’d just wanted to ask, but then he changed his mind. He fished in for the nickel in his fur, took the biggest steaming potato in his paws, and crossed the road back to his stand.

The business is moving, rejoiced the Pig. But there were no more customers for a while and he hadn’t eaten since they started at dawn so he crossed over to the Bear’s stand and bought himself a black raspberry doughnut for the nickel.

The Bear was happy to make his first sale.

He felt he should eat something before the customers started to flock to his stand. So he went over to buy another backed potato. The move brought him luck. He had hardly finished eating when the Pig was over for another doughnut.

Then business slacked off again until the Bear bought a potato. Soon the Pig was over again and the bear went right back with him to his stand to spend the earned nickel. The Pig returned for a doughnut and soon they were going back and forth until they had sold everything.

The counted the money, but, strangely, the Bear had only a nickel and the Pig had nothing at all. They couldn’t believe it!

“We have sold all our merchandise,” they kept saying, “but we have no money.”

In vain they counted and recounted: They had only a nickel between them after the whole day of busy trading.

The moral buried in this story is that the velocity of money does not generate wealth. You cannot spend your way to prosperity. Suppose each of the entrepreneurs began with 10 units of product. Their GDP would have been $1.00 over the course of the day, but neither feels much better off.

Wealth is determined by the extent to which one has capital and resources to produce something more efficiently. The farmer with an ox is wealthier than the farmer without because he can do more with less – grow more food in a season than the farmer without.

The wealth of a nation is not determined by sales, the accumulation of consumer products, or the extent to which money is sloshing around. It is plants, factories and infrastructure that make us wealthy. It is our ability to do more with less. If we can make more widgets at a cheaper price than the next guy, we are wealthier than he.

It may be that the only wealth is in manufacturing, but there is a case for service. In the above story, if the Bear were a bookkeeper and the Pig a plumber, an exchange of services would have been mutually beneficial. The Bear has neither the skills nor the tools necessary to install a toilet and the Pig has little interest in figuring out debits and credits. Each can make more money by working in their skill area and paying someone to do the other things.

We need, therefore, to spend more on education. But many students graduate from university with skills that no one will pay for. They may know who Max Weber was or be able to find the derivative of a polynomial or explain the periodic table, but there are few who would pay for that knowledge.

The “Greatest Generation” did not become so by spending. Tested by the Depression and war, they were great savers. They created the capital that allowed the building of wealth in North America. It is us Boomers who cannot delay gratification and are so willing to go into debt not just for big items like a house and a car (my father never had a car loan), but for a 42” flat panel TV screen, a vacation, whatever.

Ron Turley. January 2009.

By Vaclav Klaus, from the Financial Times as printed in the Financial Post, 01/09/09.

It is a common feeling that the Czech Republic is taking over the European Union presidency at a rather complicated moment, even though almost all “moments” can eventually be called “complicated”. We should not panic and must say “No” to people who – by describing the current moment as an historically unique one – want only to manipulate us.

There are, of course, highly publicized (if not over-publicized) problems. The world is in the midst of a deep financial and economic crisis. The EU has growing troubles with its increasingly visible democratic deficit and is gravely divided as regards its own institutional arrangements. The global climate is basically not changing, but global warming alarmists have succeeded in persuading politicians (and some ordinary people as well) that a doomsday is coming and on this false assumption they have tried to restrain our freedom and curtail our prosperity. The long-existing nucleus of armed conflicts accompanied by immense suffering of millions of people – in places such as Afghanistan, Iraq, Israel-Palestine and some African regions – does not promise any quick solution.

The economic crisis should be regarded as an unavoidable consequence and hence a “just” price we have to pay for immodest and overconfident politicians playing with the market. Their attempts to blame the market, instead of blaming themselves, are unacceptable and should be resolutely rejected. The Czech government will – hopefully – not push the world and Europe into more regulation, nationalization, de-liberalization and protectionism. Our historical experience gives us a very strong warning in this respect.

Looking foe ways out, we should – to use an analogy – strictly differentiate between fighting the fire and drafting fire protection legislation. We have to concentrate on the first task now; the second one can be done gradually, without haste and panic. A big increase in financial regulation, as is being proposed so often these days, will only prolong the recession. Growth in the global economy is falling rapidly, the banks have ceased to give credit and confidence is ebbing. Radically changing regulation governing financial institutions in the midst of recession is counterproductive.

Aggregate demand needs strengthening. One traditional way to do this is to increase government expenditures, probably in public infrastructure projects, on the condition that these are available. It would be much more helpful, however, to have a great reduction in all kinds of the restrictions on private initiatives introduced in the last half-century during the brave new world of the “social and ecological market economy”. The best thing to do now would be temporarily to weaken, if not repeal, various labour, environmental, social, health and other “standards” because they block rational human activity more than anything else.

Our historical experience gives us a clear instruction: We always need more of markets and less of government intervention. We also know that government failure is more costly than market failure.

We can also count on the fact that the Czech government will hopefully not be the champion of global warming alarmism. The Czechs feel that freedom and prosperity are much more endangered than the climate. The uniqueness of current levels of global warming is not a proven phenomenon. The explanation of factors that are contributing to global warming is not very clear or persuasive. Moves to mitigate climate change by fighting CO2 emissions are useless and, what is most important, human beings have proved themselves to be sufficiently adaptable to an incrementally changing climate. We should turn our attention to other, really daunting issues.

The world in the year 2009 will not be spared armed conflicts, international terrorism and territorial and religious disputes, which – no matter how geographically distant they may be – will have consequences for all of us. We know that peace cannot be declared unilaterally and that long-lasting solutions are usually not the ones that are imposed from abroad. The Czech government will not support external interventions into the domestic affairs of sovereign countries. We should resist being seduced by philosopher-king ambitions.

The pragmatic Czechs – with all their criticism of European decision-making mechanisms – will not attempt to initiate a pan-European “velvet” revolution”, but will promote their interests and priorities. We will treat others as we expect to be treated: with respect for different views. We will be happy if a common denominator in – at least – some cases can be found. Reliance on negotiations and on the positive effect of the diversity of views is what makes Europe Europe.

The EU presidency might give us a chance to make use of some of our views to the benefit of the citizens of all EU member states. Their welfare and happiness will be maximized in a free, democratic, decentralized, open and liberalized Europe.

Vaclav Klaus is the president of the Czech Republic and has just assumed the rotating presidency of the European Union. Would that the leaders of Canada and the United States shared his clarity of vision!

Congress and the current Administration will soon determine whether to provide immediate support to the domestic auto industry to help it through one of the most difficult economic times in our nation’s history. Your elected officials must hear from all of us now on why this support is critical to our continuing the progress we began prior to the global financial crisis………………….

As an employee or supplier, you have a lot at stake and continue to be one of our most effective and passionate voices. I know GM can count on you to have your voice heard. Thank you for your urgent action and ongoing support.

Troy Clarke President General Motors North America

Response from:
Gregory Knox, Pres.
Knox Machinery Company
Franklin, Ohio
Gentlemen:

In response to your request to contact legislators and ask for a bailout for the Big Three automakers please consider the following, and please pass my thoughts on to Troy Clarke, President of General Motors North America.

Politicians and Management of the Big 3 are both infected with the same entitlement mentality that has spread like cancerous germs in UAW halls for the last countless decades, and whose plague is now sweeping this nation, awaiting our new “messiah”, Pres-elect Obama, to wave his magic wand and make all our problems go away, while at the same time allowing our once great nation to keep “living the dream”. Believe me folks, the dream is over!

This dream where we can ignore the consumer for years while management myopically focuses on its personal rewards packages at the same time that our factories have been filled with the world’s most overpaid, arrogant, ignorant and laziest entitlement-minded “laborers” without paying the price for these atrocities. This dream where you still think the masses will line up to buy your products for ever and ever.

Don’t even think about telling me I’m wrong. Don’t accuse me of not knowing of what I speak. I have called on Ford, GM, Chrysler, TRW, Delphi, Kelsey Hayes, American Axle and countless other automotive OEM’s throughout the Midwest during the past 30 years and what I’ve seen over those years in these union shops can only be described as disgusting.

Troy Clarke, President of General Motors North America, states: “There is widespread sentiment throughout this country, and our government, and especially via the news media, that the current crisis is completely the result of bad management which it certainly is not.”

You’re right Mr. Clarke, it’s not JUST management. How about the electricians who walk around the plants like lords in feudal times, making people wait on them for countless hours while they drag ass so they can come in on the weekend and make double and triple time for a job they easily could have done within their normal 40 hour work week. How about the line workers who threaten newbies with all kinds of scare tactics for putting out too many parts on a shift and for being too productive.

(We certainly must not expose those lazy bums who have been getting overpaid for decades for their horrific underproduction, must we?!?)

Do you folks really not know about this stuff? How about this great sentiment abridged from Mr. Clarke’s sad plea: “Over the last few years we have closed the quality and efficiency gaps with our competitors.” What the hell has Detroit been doing for the last 40 years? Did they really JUST wake up to the gaps in quality and efficiency between us and them? The K car vs. the Accord? The Pinto vs. the Civic? Do I need to go on? What a joke!

We are living through the inevitable outcome of the actions of the United States auto industry for decades. It’s time to pay for your sins, Detroit.

I attended an economic summit last week where brilliant economist, Alan Beaulieu, from the Institute of Trend Research, surprised the crowd when he said he would not have given the banks a penny of “bailout money”. “Yes, he said, “this would cause short term problems but despite what people like politicians and corporate magnates would have us believe, the sun would in fact rise the next day. And the following very important thing would happen – where there had been greedy and sloppy banks, new and efficient ones would pop up. That is how a free market system works. It does work if we would only let it work.”

But for some unknown reason we are now deciding that the rest of the world is right and that capitalism doesn’t work – that we need government to step in and “save us”. Save us my ass. Hell – we’re nationalizing, and unfortunately too many of our once fine nation’s citizens don’t even have a clue that this is what is really happening. But, they sure can tell you the stats on their favorite sports teams! Yeah – THAT’S really important, isn’t it.

Does it ever occur to ANYONE that the “competition” has been producing vehicles EXTREMELY PROFITABLY, for decades, in this country? How can that be???

Let’s see? Fuel efficient? Listening to customers? Investing in the proper tooling and automation for the long haul? Not being too complacent or arrogant to listen to Dr. W. Edwards Deming four decades ago when he taught that by adopting appropriate principles of management, organizations could increase quality and simultaneously reduce costs. Ever increased productivity through quality and intelligent planning? Treating vendors like strategic partners, rather than like “the enemy”? Efficient front and back offices? Non union environment?

Again, I could go on and on, but I really wouldn’t be telling anyone anything they really don’t already know down deep in their hearts.

I have six children, so I am not unfamiliar with the concept of wanting someone to bail you out of a mess that you have gotten yourself into – my children do this on a weekly, if not daily basis, as I did when I was their age. I do for them what my parents did for me, (one of their greatest gifts, by the way) I make them stand on their own two feet and accept the consequences of their actions and work through them. Radical concept, huh? Am I there for them in the wings? Of course – but only until such time as they need to be fully on their own as adults.

I don’t want to oversimplify a complex situation, but there certainly are unmistakable parallels here between the proper role of parenting and government. Detroit and the United States need to pay for their sins. Bad news, people, it’s coming whether we like it or not. The newly elected Messiah really doesn’t have a magic wand big enough to “make it all go away.” I laughed as I heard Obama “reeling it back in” almost immediately after the final vote count was tallied. “We really might not do it in a year, or in four.” Where the Hell was that kind of talk when he was RUNNING for office.

Stop trying to put off the inevitable folks. That house in Florida really isn’t worth $750,000. People who jump across a border really don’t deserve free health care benefits. That job driving that forklift for the Big 3 really isn’t worth $85,000 a year. We really shouldn’t allow Wal-Mart to stock their shelves with products acquired from a country that unfairly manipulates their currency and has the most atrocious human rights infractions on the face of the globe.

That couple whose combined income is less than $50,000 really shouldn’t be living in that $485,000 home.

Let the market correct itself folks – it will. Yes it will be painful, but it’s gonna’ be painful either way, and the bright side of my proposal is that on the other side of it all, is a nation that appreciates what it has, doesn’t live beyond its means, gets back to basics and redevelops the patriotic work ethic that made it the greatest nation in the history of the world.

Sorry – don’t cut my head off, I’m just the messenger sharing with you the “bad news”. I hope you take it to heart.

Gregory J. Knox, President
Knox Machinery, Inc.
Franklin, Ohio 45005

Just like on the good old WWE grunt ’n groan Battles Royale of good vs. evil on TV Wrestling, we’ve got a knock down drag out tussle over our Canadian banks’ lending practices, at this time of financial stress and market illiquidity. It seems that the Canadian banks are not following the government’s script of cranking out bank loans to whatever customers come along, creditworthy or otherwise.

In the one corner is the tough guy team of Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney (do I hear a chorus of boos?). And in the other corner is the masked duo of the Rating Agencies (read S&P, Moody’s, DBRS), and the Regulators (read OSFI), both of whom believe in sound lending practices, and the banks’ fiduciary responsibility to its depositors. At stake in this morality play are nothing less than the banks’ independence in assessing risk, and the shareholders’ confidence in the responsible operation of the banks’ day to day lending activities.

The guys in the dark trunks want the banks to step up their lending activities to jump start the economy. Lend, lend, lend they say. Get that money out the door as fast as you can. That way people and companies will have lots of borrowed money to spend, and borrow and spend, and get this house of cards going again.

The other team says hey wait a minute there you villains! Isn’t that what got us in all this trouble in the first place? Namely granting loans at a breakneck pace to every Tom, Dick, & Bernie(Madoff) who could fog a mirror? We think you banks should exercise a little old fashioned judgement, prudence, and due diligence. Where’s the ref? These nasties want us to break the rules, compromise our good guy status at serious risk to shareholders and depositors alike. No way Messrs. Flaherty and Carney. We’re not knuckling under to your submission hold.

And so it goes. The fact is that the rate of growth in bank lending has far exceeded the rate of economic growth in Canada for years. Additionally banks are beginning to feel the sting of loan losses that accompany any recession. Loan delinquencies and defaults have begun to show a remarkable upsurge, and the banks have rightfully re-examined their credit assessment and lending practices in an effort to restore a stronger risk profile to their books of assets. Depositors and shareholders expect banks to lend, but only to those from whom they expect a reasonable prospect of being repaid in a timely fashion.

The pressures the banks are now experiencing from politicians and bureaucrats in this country are simply a knee-jerk spillover from the bailout program for U.S. and European banks, many of which have now to a large extent been nationalized. Canadian banks must stand their ground against the forces who do not understand the old horse to water parable. The Canadian Bankers’ Association has recently come out in support of the chartered banks and agreed that lending standards should not be relaxed simply to artificially jumpstart another round of reckless lending and another asset bubble of the future.

The Canadian banks have not been the cause of the lending freeze. They are more than willing to make good sound loans to Canadians and their businesses. Politicians and bureaucrats should stay out of the business arena especially in this tag team match where their nefarious motives are so transparent to the paying customers.

Richard G. Scott. January 6, 2009.