Thursday, 26 December 2013

The Harper Government sees social programs as cost items not investments. The Canada Pension Plan payouts and Old Age Security create economic activity.

Federal Finance Minister Jim Flaherty: The Harper Government's 
re-election hope and chief fiscal ideologue 

The economics of the federal Canada Pension Plan  (CPP) and Old Age Security (OAS) programs are in the news. Below is a modest proposal to rethink these programs not as costs but as creators of economic activity.

The economy is not as “fragile” as federal Finance Minister Jim Flaherty says it is. There is good evidence for a US recovery.  It’s the 2015 election prospects for the Harper Government and the political need balance their budget that holds Flaherty back.

One of the biggest Canadian (in fact North American) demographic groups are Baby Boomers turning into ageing geriatrics. They are now and into the near future actively drawing pensions that some of them have built up working for the private sector and governments. 

Many others, however, are relying on the federal public purse. They have no savings or pensions  except The Canada Pension Plan (CPP) and Old Age Security.  Although they work often at two or more jobs they have not the resources to save for retirement. This demographic cadre is still growing as a percentage of the total Canadian population and many may have difficulty supporting themselves in old age unless changes are made.

All Canadians with an employment record have assets being paid out from the CPP and most Canadians draw the Old Age Security and those with lower incomes the draw the top up Income Supplement amount. Too many Canadians only have these federal programs in their old age and so hover on or live in poverty. The Provinces want to increase the premiums and the payouts of the CPP.

A week or so ago federal government Finance Minister Jim Flaherty met with provincial governments to discuss what should happen to the CPP in the near future. Many provinces in Canada want to build up this fund with escalating premiums shared equally by employers and employees increasing contributions over a reasonable time to ensure that those without work place pensions have enough or at least more money in their old age. Their ideas also include provisions so employers don’t see CPP increases as killers of business opportunities.

Ontario is particularly inclined to do this but Jim Flaherty said at the Meech Lake meeting that the economy is too fragile to take increases in premiums to build up a CPP with better payouts.  Since the CPP and Old Age Security are federal programs this means that the Stephen Harper Government has decided to do nothing. The provinces are unamused. The current Harper government may have lit the fuse of a social and political time bomb. 

I have a different view of the CPP and Old Age pensions provided by the federal government. I see these programs as net increasers of economic activity. Without them the economy would be greatly curtailed. Let’s look why that is.

The federal government can create money supply by printing what my laconic Estonian university economics professor called “Queen’s pictures”. During my brush with two economic courses back in the 1960’s the one dollar and twenty dollar bill had pictures of the Queen on them. Hence the name “Queen’s pictures”.

Currency printed on paper (or now that new dreadful plastic material) they only work because we accept them as a medium of exchange. They are worthless if the recipients say they are. In early Russian post Soviet currency markets Canadian Tire dollars were accepted as representing one Canadian dollar equally well as the real thing.

Today we accept the Canadian dollar, the Euro and the US dollar and the low pegged Chinese Yuan as useful and their relative values to one another make up an economy for the world. However the brutal truth of this situation is they are valued because they are accepted even when they are stressed by crisis like European countries recent near defaults and later the USA nearly defaulting on their national debt ceiling.

Now this is along way of saying that the government of Canada and other national governments create money by issuing pretty bank notes. Another way they create money is by issuing cheques that can be exchanged in a bank account for Queen’s or Prime Minister’s pictures. Whether you use your debit card or use pretty bank notes they create economic activity with nothing to back them except your belief that the system works for you and others.

It is my contention that CPP and Old Age cheques or electronic impulses sent to banks make a credit in your bank account that you can spend. These programs are wealth creators and they stimulate the economy when the money they create is used or distributed for goods and services. Most recipients of these programs tend to spend all of these value creators each month.

When Finance Minister Jim Flaherty says that the economy is too fragile I really don’t understand. Government currency printing and the issuance of cheques for the CPP and Old Age create economic activity. And the CPP is backed by employee and employer contributions.  Therefore it is possible to increase the contributions and the eventual payouts for these programs if it is carefully phased in over five years or so. In addition, when these federal government sit as a deposit in a Canadian chartered bank they can be lent out at a ratio of better than seven to one and that is really money creation.

Today business has pent up capital that sits in low interest investments waiting to be put to work. Jim Flaherty says the economy is fragile and it is because new business investment is tardy after the melt down in 2008. However in 2013 we are at the five year point and time and an economic breakout is in the air. The economy is as fragile as the Harper Government’s inability to risk anything on the cusp of the 2015 election. For them good fiscal health is their re-election prospects and so they are cutting back to look like responsible stewards of the economy after years of spending.

What is Jim Flaherty afraid of doing to the economy? First the CPP is solvent because it is a fund that constantly gets money paid into it. If that money is increased through higher employee and employer contributions the fund will grow. If self-employed people are also allowed to contribute that will also further build the fund for the future.

Young people saddled with educational debt and doing McJobs are a real drag on the economy and don’t build much equity in the CPP because minimum wage earners probably contribute at minimum levels. They are underemployed and often in jobs with no prospects or pension building opportunities. We need a radical look at how we fund post secondary education and put youth to work after graduation. 

Student loans are a poor idea. This money should not be loans.  These funds should be seen as an investment in human capital and the Canadian economy. The current funding of post secondary education or trades training is frankly set up as an economic negative with a low percentage going to grants.  

Vicious bureaucracies go after payment from new graduates within six months. Four years of post-secondary study can mount $30-40,000 of debt. The result is new grads take crappy jobs to keep money coming in. In expensive cities like Toronto GTA and Vancouver it is almost impossible to get out of the economic hole created by these student loans and it is just as bad elsewhere in the country. Let’s rethink this situation.

In my plan young people who are acceptable and perform well at a college or university get paid a grant each month. The university or college gets a portion electronically each month for its tuitions and operating costs.  The students get a living grant which is enough to live very carefully. If students want a larger lifestyle they fund it themselves or work part time. Parents who can contribute are encouraged to do so by generous tax incentives much better than the current tax credit percentage. This parental or grandparent tax advantage only lasts for four years per student.

Student needs are seen by stupid government bureaucracies and politicians as a debt. If the heat was taken off repayment and that repayment was seen as an increased CPP contribution, then we would be doing something in this country that recognizes that cheques cut by the federal government is the first stage of currency circulation creating economic activity. For the Harper ideologues this would be seen as rampant socialism. I argue that it is not socialism in the context of a knowledge-information society.

The funding of education as much as a CPP retirement and later the Old Age Security funds should be seen as generators of money circulation and economic health. They should not be debits for anyone if attitudes can be altered from the status quo and removed from the relocation prospects of short sighted politicians and bureaucrats. 

When we see BitCoin starting a web virtual currency I argue that governments have been doing this for a long time with CPP and OAS electronic impulses building credits at  Canadian Chartered Banks for their depositors and customers.

© Copyright 2013, Tom Thorne, All Rights Reserved

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