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Flahernomics

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Topics: Economics, Legacy
Flahernomics April 23, 2014  |  By Ray Pennings
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The passing of former Finance Minister Jim Flaherty has prompted a bit of an elbowing competition regarding the definition of economic conservatism. The Globe and Mail described Mr. Flaherty as "a tough-talking politician with a heart," noting that he "changed fiscal conservatism in Canada." John Robson, a self-described "doctrinaire conservative," took issue with this in his Sun column

"But he did not save our economy by running deficits because he was slick enough to fool the rubes with right-wing blather but smart enough not to believe his own rhetoric. Nor, frankly, do I see how it would be an honourable legacy if true."

One ordinarily does not turn to eulogies to settle debates on economic definitions but Prime Minister Harper's positioning of Flaherty's unique approach to economic stimulus as the defining feature of his legacy is worth highlighting. Recognizing that the global uncertainty required stimulus, Flaherty did "not merely allow a modest deficit, but deliberately engineer[ed] as large a deficit as could reasonably run, as a response to a collapsing marketplace."

Less noticed than the amount of spending but equally important, suggested the Prime Minister, was that simultaneous with getting the dollars out of the government door and into the economy, Flaherty focused on longer-term government expenditure policies to "reduce their growth path." Preventing the build-up of new bureaucracies, new programs, increased taxes or enhanced entitlements along with "constraints on any excessive experimentations in monetary policy" was as much part of Flaherty's program as the spending, argued the Prime Minister, that garnered the laudatory results.

"While, at one time, Canada was no better than middle of the pack, today in an uncertain world, Canada will have a balanced budget years ahead of others, with low debt and low taxes, and is recognized to be the best managed major developed economy. That, my friends, is Jim Flaherty's legacy for this country."

How this fits into common understandings of Keynesian economics and precisely what adjective one should put in front of Flaherty's conservatism takes more than a blog. In the absence of consensus, I'll call it Flahernomics. That said, if I were to summarize the totality of the eight federal budgets and two Ontario Provincial budgets as a philosophy of economics, I would suggest there are at least five key ingredients to Flahernomics:

  • A core focus on balancing the books in the long-term as the number one priority. Flaherty became Finance Minister in Ontario when there wasn't a clear plan to balance the books and he proceeded to develop and implement one, earning him charges of ruthlessness from his critics. Federally, as noted above, the willingness to engage in stimulus spending was accompanied by a resolve to return to surplus in relatively short order.
  • Recognize that the markets do require some managing. Doctrinaire conservatism avoids this at all costs and suggests the markets will always sort things out better themselves. Flahernomics recognized that there were occasions when the market's invisible hand needed a hand and he was not adverse to use the state's power to do this.
  • Government support for the disabled. The priority that Mr. Flaherty made for including measures in support of the disabled have been widely lauded. An Enabling Accessibility Fund supporting capital costs to make buildings safe and accessible; a Registered Disability Savings Plan providing a means for the long-term financial security of the disabled; and ardent support for the Special Olympics affirming the dignity and respect for those with different abilities are just a few of the initiatives which he championed. The principle he celebrated was of a social obligation for those who are truly disadvantaged and in need of a hand.
  • Encouraging individual savings and self-reliance. The Tax-Free Savings Account, introduced in the 2008 budget, has been lauded as having "big and fascinating" economic implications. The capacity to generate significant funds which can be withdrawn without further taxation. It's still early days but it's reasonable to anticipate TFSAs to have an impact on personal savings similar to the 1957 introduction of RRSPs, which today are utilized by the majority of Canadians.  
  • Using the Capacity outside of government. The tax credit approach preferred by Mr. Flaherty in his budgets have been criticized by some as social engineering of the right, complicating tax filing and "sticking the government's nose in the choices people make." However, it might also be argued that this approach was an alternative to a big government solution where new programs and bureaucracies are created and instead, incentivized desirable behaviours utilizing the private sector and community organizations to deliver them.

Economists will continue to debate the particulars of Mr. Flaherty's legacy and the wisdom (or lack thereof) of the choices that he made. I heard one TV pundit wondering whether Flaherty's death might do for conservative economics what Jack Layton might arguably have done for the progressive political movement in Canada. Undoubtedly, Canadians will differ as to whether that is a good thing or what exactly constitutes economics that deserve the conservative label. From my perch, whatever the label, we could do a lot worse than having future Finance Ministers continuing to implement Flahernomics.

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