The economists and bankers on Bay Street are anything but neutral in recommending Ottawa go into debt to finance new spending, write Brian Lee Crowley and Sean Speer.
By Brian Lee Crowley and Sean Speer, April 25, 2016
Conflicts of interest are everywhere these days. Whether it’s ministers raising money for their party by selling access or real estate agents in British Columbia exploiting vulnerable homeowners, the criticism is always the same. When someone’s private and public interests conflict how can we be confident it’s the public interest that will prevail?
Yet, there’s an obvious conflict of interest going unnoticed and uncriticized, even by the normally hyper-vigilant media for whom a good conflict is their bread and butter. And this conflict is having a major impact on public policy in Canada.
We’re referring of course to the influence of Bay Street economists and financial markets on the fiscal course chosen by the federal government. After all, the stimulus-friendly prebudget commentary of those economists, plus the laid-back post-budget reaction of markets, has been widely interpreted as licensing the government’s plunge into major deficit financing during a time of economic growth.
This conflict is having a major impact on public policy in Canada.
Where’s the conflict of interest in all this? There are actually two. First, financial institutions and markets aren’t disinterested commentators on fiscal policy. They stand to make big money from government borrowing. Second, they don’t suffer the same risks and rewards from deficits as taxpayers do. Yet where are the disclaimers, the codes of conduct, the independent watchdogs, that help us avoid such blatant conflicts of interest in other areas?
Helping Ottawa rack up debt is a lucrative business. Our financial sector helped governments and their agencies raise $125.4-billion in 2012 and earned fees and interest in return. These amounts will rise as Ottawa returns to deficit. That’s how Bay Street can afford to hire all those economists who say borrowing isn’t a problem.
Importantly, it’s not just that their employers will make a lot of money if their advice is followed by the federal government. It’s also that financial institutions and markets don’t see debt the same way that taxpayers do. The only thing that markets care about is whether debtors can pay the interest on the money they’ve borrowed. But just because the government can afford to borrow, doesn’t mean it should.
Borrowing for borrowing’s sake is how we end up with a growing share of scarce public dollars going to unproductive interest, as was the case in 1994 when 30 cents out of every dollar in revenue collected by Ottawa went right back out the door as interest on the debt. And today the Ontario government’s fast-growing expense is interest costs. In fact, investors do better when government debt climbs because the extra risk justifies a higher interest rate.
Yet taxpayers have to care about the value they’re getting for the money that’s being borrowed and not just about whether they can afford to carry the extra debt. Ottawa’s sunny optimism that the money will “kick-start” the economy, though, is based on extremely shaky economics. That’s not the business of markets because they know Ottawa will be good for the interest. But it is in the interest of taxpayers who are ultimately stuck with the bill.
The link between financial institutions and markets on one hand and government borrowing on the other is pretty clear.
Financial institutions urging Ottawa on to bigger deficits is rather like those salespeople always trying to entice you into buying something you don’t want or need on the grounds that it’s really cheap and therefore will “save” you money. But you can’t save money paying for something you don’t need.
Thus the link between financial institutions and markets on one hand and government borrowing on the other is pretty clear: Ottawa’s profligacy may not serve taxpayers very well, but it’s good news for those invested (literally and figuratively) in government borrowing.
And given their direct stake in the financial upside of budget deficits – what the media would surely call a conflict of interest in any other context – their assessments ought to be met with a healthy skepticism.
This is the key take-away. It’s not that we should stop banks or investment firms from participating in bond auctions or advising the government. But it’s only prudent for politicians, public servants and media commentators to take their public commentary on such government decisions with a grain of salt. Their manifest conflicts of interest in counselling the public on the advisability of government debt are just too big to ignore.
Brian Lee Crowley is managing director of the Macdonald-Laurier Institute; Sean Speer is a senior fellow at the institute.