In 2008, the mainstream media sold candidate Barack Obama as the ultimate pragmatist.
Whoever wins the upcoming presidential election should focus on jobs and growth — not just in rhetoric, but in reality. He should do so not as an ideologue, but as a pragmatist. That means he should ask: What works to increase employment? What works to expand the economy?
When comparing the results of different policy approaches, a good place to start is Canada.
In 1993, Canada’s economy was in some ways worse than that of the United States today: Unemployment was 11.4 percent. Canada’s federal government was consuming 21.5 percent of GDP, running a deficit equal to 4 percent of GDP, and carrying a national debt approaching 80 percent of GDP. Canadian bonds were downgraded, losing their triple-A rating.
In 1994, Canada’s Prime Minister Paul Martin took bold action, announcing a spending freeze. The government closed some tax loopholes (Canada has no mortgage-interest deduction), but the ratio of spending cuts to tax hikes was seven-to-one. Canada slashed the number of federal employees by 14 percent over two years, cutting real program spending by 14 percent – from almost 22 percent to 19 percent of GDP.
The Canadian government did other things, such as eliminating wasteful and inefficient federal regulations, and devolving greater responsibility to provincial governments.
As a result of these reforms, in 1998 Canada ran its first budget surplus in nearly three decades. This allowed the government to cut taxes starting in 1998 and make “one of the largest tax cuts—both corporate and personal—in the history of the country in 2000.” By 2004, federal spending was down to 15 percent of GDP. The government would continue to run surpluses for 11 years. Canada’s debt is now just 34 percent of GDP.
What would it mean then to apply the Canadian solution to the United States today?
In the U.S. this year, the federal government employs 4,356,178 full-time equivalent workers; federal spending will consume an estimated 22.6 percent of GDP, producing a deficit equal to 3.9 percent of GDP and a national debt exceeding 74 percent of GDP.
Reducing the federal workforce by 14 percent would mean firing more than 600,000 bureaucrats. Reducing federal spending – in constant (2005) dollars — 14 percent below current levels over three years would mean eliminating some $450 billion in spending (meaning that the federal budget would still be greater than it was in 2008). That would reduce the estimated deficit in 2017 by a whopping 92 percent.
Closing tax loopholes and lowering rates commensurately will eliminate inefficient distortions and wasteful investment, producing more growth and revenue. The trick will be to convince the American people – who have been burned before – to trust politicians not to raise tax rates again after taking away their deductions. This may require some mechanism of taxpayer protection and enforcement, such as a supermajority, a referendum, or even a constitutional amendment.
The Canadian solution would involve compromise, cutting every program across the board, including conservative sacred cows such as defense, and liberal sacred cows such as Social Security, Medicare, and Medicaid. But conservatives and liberals alike must understand that for these programs to continue at all, the United States must remain solvent. As Mary Anastasia O’Brien writes in the Wall Street Journal, “What drove the left-of-center Liberals to shoulder the burden of downsizing government,” according to Martin, “was not ideology but arithmetic.”
The United States has different laws than Canada, but the laws of arithmetic are the same everywhere. For the U.S. to climb out of its economic doldrums will require our politicians to apply the same laws of arithmetic as Canada’s politicians did a decade ago. That won’t necessarily require “the smartest guy ever to become President,” but will require one who, when it comes to “math stuff,” doesn’t find himself “pretty lost.”