Analysis| Raising taxes and rebuilding roads will save economy

"Madmen in authority who hear voices in the air are distilling their frenzy from some academic scribbler of a few years back." J.M. Keynes

And it's not just the madmen.Keynes said that even practical politiciansareslaves to some dead economist.

We see itthis weekin the United States,asthe congressional "debt panel" faces another deadline to cut $1.2 trillion USfrom thecountry's deficit.

It's as if a doctor, having treated a patient so long for obesity,just can'tbear to change the treatment oncefatness fades and the victimis emaciated by awasting disease.

It is rational in a way.The economic treatment proposed by our political leaders and most of their advisorsreallywould be effective, if only the world had not changed so much since the ideas were proposed.

Making radical changes in your thinking is especially difficult when times get tough. Even liberals get conservative.Uncertaintysends us harkingback to the formula that worked last time even if it is wrong.

WWII propelled U.S. boom

This isn't a recentphenomenon. We've been doing it repeatedly. In the 1960s and 70s, the dead economist in question was Keynes himself.

Keynesian stimulation, in the form ofthe Second World War,had beenahuge success at pulling the U.S. out of theGreatDepression.So, as North America was reveling in a postwar growth boomof a type never before seen in history, what did governments do?

Well, more stimulation, of course!More arms spending, the race to the moon, increased social services, big government.

The obese patient was being fed six meals a day.

Just as with humans, that was a recipefor inflation. But the feeding continued.

Each time, we discovered the next favoured economist's solutionjustas it hit its best-before date:

• Arthur Lafferfamously scribbled hiseponymous curveon a table napkin showing high taxes on wealthy people discouraged them from making money, just as rich people were making more money than ever before.
• Reaganomicsand the deregulation of the Clinton and Bush years came along just as Wall Street creativityhad become overly creative.
• Alan Greenspan, an academic scribbler-turned-central bank chairman,was lionized for cutting interest ratesmore and more,just as cheapmoney andirrational exuberance were creating an enormousborrowing bubble that finally popped in 2008, getting us into our current mess.

Give or take a few academic scribblers, that's about where we are today.

Business storing money, not spending it

So, here we are still using Laffer and Greenspan economics to bring our economy back from the brink. Unfortunately, thereare some flies in the ointment.

The first fly is that Laffer's predicted taxrevenues never grew enough to cover spending, resulting in huge and growing governmentdebts that remain with us today.

The second fly is thatdespitecheap money and low taxes, neither rich people, whom we have allowed to keep more of their income, nor businesses, which we have allowed to keepmore of their profits, are using that money tofuel a newjob-creating economic boom.

'Most people and businesses with money aren't interested in restarting the economy. They are too busy desperately looking for some place safe to put their cash.'

Instead, I'll tell you what's happening. And it's no secret. You can find it in the daily business pages.

Most people and businesses with money aren't interested in restarting the economy. They are too busy desperately looking for some place safe to put their cash. With all that money chasingthe samesafe storage places, assets are getting bid up.

The price of gold rises even though gold produces no income.

In Canada, where houses are seen to be keeping their value, house prices arebid higher and higher, rising much faster than inflation.

Despite fear for the economy and little new investment,share prices stay relatively high.

Companies buy their own shares, which, instead of increasing investment in factories, equipment and jobs, merely increases the cash value of the shares themselves.

And most bizarre of all, money of all kinds is pouring into U.S. government bonds, despite an interest rate close to zero.

Wrong prescription

Contrary to the theory that every economist"knows," low interest ratesaren'tstimulating real new investment. Some people call ita "liquidity trap."

It should be absolutely clear by now: the low-interest, low-tax strategy isn't working.I think it is pretty obvious why.

Politicians and their advisors are frozen in time, stuck once again following the prescription of the wrong defunct economist.

When an economy is humming along, asit wasa few years ago,it is quite reasonable that cutting interest rates and taxes would stimulate spending and new investment. After all, when you feel rich and secure, you spend.

When a business is expanding from strength to strength, who would not want to lend their money to those businesses? Better yet, why notbuy a pieceof the companyto share in the profits?

But not now. Instead, we pay down debt; we sit on cash; money stops circulating in the economy. And when it comes right down to it, the circulation of money is all thatan economy is.

There is a solution at hand. And I think onlyconservatives can make it work. Here in Canada, it is because the Conservatives have a majority government. In the U.S., the conservatives and liberals are wrestling on a cliff edge, hands on one another's throats, with the possibility that both will fall andcarry their country with them. In the perfectly balanced death grip that is the current makeup of the U.S. Congress, only conservatives, who control the House of Representatives, can make this decision.

But this solution is very difficult and painful for conservatives, because it involves wrenching themselves out of one long-established conviction: that taxing and spending is an absolute evil.

Tax the richand not so rich

In the great economic cycles that govern all of our lives, we are in a place much closer to that of the mid-1930s than perhaps anytime since. It was not the private sector that pulled us out of thatmalaise.

Then as now, the giant anthill of the private sector economy had begun to crumble. Then as now, government budget cuts were further weakening the global economy.The onlything that got things going again and reignited the economywas a Big Idea. Unfortunately, in that case theBig Idea was war.

The private sector is not good at creating big ideas. Business only has one single big idea: to make a profit. That does not mean it isn't good at solving problems once they have been proposed. For both the Axis and the Allies, business and its leaders were inspired tonew heights of creativity and efficiency in the war effort.

But there's a solution to Canada's and North America's economic crisis that involves a different type ofwar effort: the war on our crumbling infrastructure.

As you will see inthis week's CBC special report,The Big Fix, infrastructure spending has declined to a fraction of what it should be to keep the continent's roads and bridges and pipes and ports functioning and earningusmoney.

And as we see in Europe and America right now, borrowing money is no solution.

We must bite the bullet and allow our governments to tax us, to tax and to spend justas we would in a time of war. We must tell them totax notjust the one per cent, not just the rich, but all of us. Because we all will benefit. And it's a heck of a lot better than waiting for the madmen hearing voices inthe airto bring us anotherwar.