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Canada and the U.S. are experimenting with two radically different responses to the great recession of 2008-09. The Obama administration has opted for a massive increase in government spending and government debt. It enacted a colossal stimulus package, followed by a topped-up supplemental budget for the second half of the 2009 fiscal year and an even more extravagant budget for 2010. U.S. federal budget deficits are exceeding a trillion dollars a year; over the next 10 years, the country will accept more debt relative to national income than at any time since the end of Second World War–and that’s before counting the cost of the President’s ambitious health-care plans. (Obama insists his plans will save money but nobody believes it–not even the Democrats’ own Congressional Budget Office.)
Recovery has to come to the U.S. eventually. But everybody expects that recovery to be sluggish, especially since the post-recession U.S. economy will have to shoulder heavy new taxes; the Bush tax cuts expire in 2010. The top federal income tax rate will return to 39.6%. Taxes on dividends and capital gains will rise. Middle-income families will lose half their per-child tax credits.
And more tax increases seem certain to follow. The version of health reform making its way through the House of Representatives includes a payroll tax of up to 8% on businesses that do not offer health insurance to their employees. A surtax on high-income individuals would raise the top combined federal-state income tax rate past 50% in California, New York and other high-tax jurisdictions.
Only about 10% of the Obama stimulus money has been spent. The Democratic Congress that wrote the plan timed most of the spending to occur in 2010–15 months after the onset of the recession, but just in time to ensure lots of ribbon cuttings leading up to the November 2010 congressional elections.
Canada, by contrast, adopted a much more modest and short-lived stimulus plan–$40-billion, almost all of it to be spent within a single year–and has held the line on spending in the medium and long term. Assuming both governments have projected accurately, Canada will emerge from the recession with a debt burden under 30% of national income, while America’s debt-GDP ratio will approach 100%.
In the last three months of 2008, the Canadian economy lost 273,000 jobs more than it gained. Canadian unemployment has reached 8.6%, the worst level in 11 years. But Canadians can now feel some hope that things will get no worse: In the three months that ended June 30, Canada lost only 13,000 jobs more than were created. And on Thursday, the Bank of Canada predicted that the Canadian economy would resume growth in the second half of this year. Unemployment may take a while to return to a satisfactory level. Households may not feel prosperous again until later next year. But if the bank is right, the worst is past.
Not in the United States. The American recession started earlier than Canada’s, and unemployment looks likely to continue rising into the fall, probably past 10%. While the economy is not shrinking as rapidly as over the winter, growth staggers along in negative territory.
Under the contrasting Harper and Obama plans, Canada looks likely to become in the 2010s what the United States has been since 1980: the English-speaking world’s beacon of enterprise and limited government. Canada now seems poised to collect its due reward.
In the Bush years, the agitprop documentary maker Michael Moore released film after film demanding to know why the United States did not follow Canada’s example. If Canada is returning to growth, that question will gain new urgency south of the border. Of course, now that Canada is setting a good example, don’t expect Michael Moore to maintain his interest. But Moore is not the only one with a camera. There must be somebody else who knows how to tell this story–and teach its lesson?
David Frum is a resident fellow at AEI.
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