Please, No Grand Bargain; Just Muddle Some More

By Jim McNiven

A few things popped up in the news recently that got me thinking about where economic policy in the US ought to go. Having weathered the ‘fiscal cliff’ plunge fairly well, the media are now going into a frenzy over the debt ceiling. But I’m starting to think that not only should there not be any big deal related to its solution, but that it might be a good thing if Washington just put off any Grand Bargain and just settled for a bit of muddling through for the next year or two.

The first piece of news is that the European authorities are relaxing their capital requirements for their banks a bit. This suggests to me that this is their attempt to pull those banks back from the edge of disaster and give some stability to the EU’s economies. It should mean that credit for businesses may become a bit more available, taking the edge off the nasty recessions that places like Greece and Spain are enduring. Perhaps the bottom (for now) has been reached and trade within Europe and between Europe and the world may start to revive.

In the US, Governor Jerry Brown of California announced that the state’s budget should balance this coming fiscal year. Now, California was one of the most hard-hit States in terms of housing defaults and general economic decline. In the first year or two of the recession, Obama’s stimulus program did a lot to support public sector employment in California, as elsewhere. When it stopped, the States had to start shedding employees. They also began to cut transfers to municipal units, which added to the unemployment rolls. The result was that, while private sector employment began to revive, this growth was largely offset by public sector job losses. What Jerry Brown’s announcement meant to me was that cuts at the State and local governments may be hitting a bottom. Just having no further public sector losses means that future private sector job growth will have that much more impact on the overall unemployment numbers.

As well, the stock market was steady through 2012 and hardly quivered during all the fiscal cliff drama. It doesn’t seem to be taking the impending debt ceiling crisis, followed by whatever crisis comes after, very seriously either. Now there are only two areas in the global society where we spend a lot of money trying to predict the future. The first is the stock market and the second is the weather. Most people who follow the market tend to feel that it has a pretty good record, when taken as a whole, for a period up to 6 months out. That’s better than weather forecasting and probably reflects how much is at stake in the market. Looks like ‘steady as she goes’ is the operating slogan right now.

What these things imply is that maybe coming up with some new Grand Bargain that leads to cuts in federal expenditure is the wrong thing to do right now, unless the cuts that are included happen more than a couple of years down the road. With the wind-down of the Afghanistan war, expenditures ought to decline in any case, but since a good part of that item has been spent abroad, that decline should have little impact on the domestic economy. Cutting other things like food stamps or unemployment benefits would be counterproductive, because that money generally goes right into the economy as purchases. On the tax cut side, we don’t need more money in the pockets of those who might just save it. The savings rate seems to be high enough at present and more money put aside for safety’s sake would only help slow the economy down. Further, the American banks seem to have a lot of excess liquidity that is not being tapped by borrowers, but should be put to use. New businesses supplying new consumers ought to be the mantra.

In effect, leaving well enough alone right now is probably the wisest course, given that the likely alternative seems to be more cutting and more unemployment, just as the economy seems to be slowly turning the corner.

What does this mean for us in Canada? Well, we pride ourselves on having avoided the problems that Americans have, but managing our financial affairs well is a necessary condition, but not a sufficient one to maintain our prosperity. Our economy relies a lot on merchandise exports, meaning we need the US as a market. If the US economy is working well, then we do well. In other words, if the US economy does not continue to grow, neither will we. So we need to hope that Americans ‘kick the can down the road’ on big financial issues for a good while longer. Faster growth can translate into a lower deficit and that will allow for some of the changes to entitlements that have to be made. But, please, not now.        


James D. McNiven is Professor Emeritus at Dalhousie University and Senior Policy Research Advisor with Canmac Economics Ltd. He was the Fulbright Research Professor at Michigan State University’s Canadian Studies Center in 2010-11. 

Until his retirement from Dalhousie, he held the R. A. Jodrey Chair in Commerce in the School of Business Administration and was a Professor of Public Administration. From 1988 to 1994, he was the Dean of the Faculty of Management at Dalhousie.  Prior to that, he was the Deputy Minister of Development for the Province of Nova Scotia (1981-88) and the President of the Atlantic Provinces Economic Council (1977-81).

He has been the CEO of a small technology company and has been a member of a number of corporate and government boards, including the Blue Cross of Atlantic Canada and the federal government's International Trade Advisory Committee. He was a member of the federal government's Royal Commission on National Passenger Transportation. 

Dr. McNiven has a PhD from the University of Michigan.  He has written widely on public policy and economic development issues and is the co-author of three books. His most recent research work has been about the relationship of demographic changes to Canadian regional economic development. He also has an interest in American business history and still continues to teach at Dalhousie on a part-time basis.

His email address is j.mcniven (at) dal.ca.