Recovery First, Fiscal Discipline Second

In my column for the National Post, I explain why long term deficit reduction needs to happen after the economy recovers, not before:

That's why the bottom of a bad recession is a bad time to worry about deficits. The recession makes the deficit problem look bigger than it really is.

Worse, the actions a government might take to reduce its deficit - cutting spending, raising taxes - can prolong the recession. In which case, premature deficit-cutting can make worse the very deficits the deficit-cutters are trying to shrink.

Government budget deficits are not only a source of economic demand. They also counteract shrinkage of the money supply. The extra bonds created by a government are often purchased by banks, where they expand the bank reserves that support lending to private businesses.

OK, OK, you know all this.

But even as you know it, serious people in the United States are overlooking this familiar fact - and advocating actions likely to weaken America's already weak recovery.

Canada's success could be a useful corrective to this kind of misleading American thinking. The positive Canadian example can give Americans hope that their fiscal problems can be, to a great extent, self-correcting. The Canadian example can also give hope that as recovery accelerates, opportunities open to cut government spending at a more appropriate time.

A decade ago, American conservatives derided Canada as "Soviet Canuckistan." Now, all is forgiven, even Medicare and the GST. Texas Governor Rick Perry has built his jobs plan upon energy development, and Perry's supporters regularly cite the Canadian example as evidence their plan will work.

American conservatives would do well to learn from the Canadian example in its entirety. Deficit reduction must follow economic recovery. Get the sequence wrong, and you get neither recovery nor deficit-reduction.

Click here to read the full column.