Using Canada as a Future Indicator for the U.S.
Republicans and Democrats can both agree on the fact that the coronavirus is costing the US economy a substantial amount of money. Stimulus is nearly entirely funded through government issued debt, or bonds. Debt has been a gargantuan issue for the US government for the last decade, which leaves Democrats and Republicans fighting over the size of stimulus bills. Canada’s rationale and commentary behind their recent stimulus measures may prove insightful to the United States in deciding how to proceed. The stakes are rising as countries get deeper into debt and the economic horizon is still uncertain. One strategist commented, “Canada could come off as heroic if this spending is done right…If Canada fails, all the emergency spending might have been done in vain because we won’t have the capacity to power the post-vaccine recovery” (Vieira and Mackrael, 2020). As the United States legislature debates another stimulus bill, lawmakers should consider the reasons behind Canada’s recent economic actions.
Canada is one of many nations across the globe rolling out massive debt in hopes of lifting the population out of recession. The International Monetary Fund estimated that governments around the world have dealt out $12 Trillion worth of stimulus to soften the economic blow from COVID and economic damage inflicted by government-sponsored lockdowns (Vieira and Mackrael, 2020). Incurring historic amounts of debt at a time where the world is in economic catastrophe not seen since the Great Depression comes at a price. In June, before Canada unraveled their latest stimulus plan, Fitch downgraded the country’s credit rating from AAA to AA+. Fitch is an independent agency that provides ratings on various debt securities ranging from AAA to D. These ratings are dependent on the company/ country’s ability to pay back their debt. Downgrading a country’s credit rating is always a noteworthy action, as in theory stable countries should be considered “risk-free” as they can always raise taxes to pay off debt.
Looking at the rationale behind Canada’s recent debt issuances, US legislators should take these cautions into account. It is largely agreed that some level of stimulus is necessary given the 6.9% unemployment rate as of November 6 (Bureau of Labor Statistics) and hundreds of thousands of new jobless claims weekly. While some Americans believe Canada and other developed countries’ borrowing signals that we should spend without worry, topics like this deserve to be examined more closely. One Canadian economist pointed out that total government debt in Canada in addition to household debt will now put their debt-to-GDP ratio at over 400%. In the United States, public debt alone is standing at nearly 140% of GDP. Adding in household debt would put this number much higher, as household debt to GDP for the US is 85% (FRED). These numbers put Canada in the same fiscal conversation as Italy and Greece, as these countries are on par with a debt-to-GDP ratio of 400%; both Italy and Greece fell to financial ruin in recent years due to debt crises (Vieira and Mackrael, 2020).
Many contrarily argue the leading reason to ignore concerns raised over public debt in Canada is because of vastly different financial circumstances. Those would argue that even if there is cause for worry about public debt in Canada, the worry is not transferable to the United States. The primary argument here is that Canada’s lowered credit rating derives from higher debt-to-GDP ratios, and less confidence in their ability to pay debt back due to already high taxes. According to this logic, the United States would not have to worry because we can raise taxes and have not yet reached the levels of Canada’s debt ratios.
While the opposition makes valid points, the US is not nearly as safe as many believe. Americans traditionally oppose the higher tax rates seen in countries like Canada and across Europe due to the lack of government services. The notion of “just paying it off later” is not nearly as simple as it sounds. Additionally, while the US’ debt-to-GDP ratios have not yet reached that of Canada, they are inching closer and closer beyond already astronomical levels. The US debt is on track to reach record levels not seen since World War II (Vieira and Mackrael, 2020). After World War II, the US was able to climb out of these troughs because most worldwide factories had been decimated in the war. This would not be possible now because most manufacturing is outsourced.
The escalation of debt around the world in developed countries, specifically Canada has caught the eye of legislators in their decision-making processes. While the country is in need of fiscal aid, politicians should make these fiscal decisions carefully as they could impact generations to come. One economist claimed that the only way Canada would be able to repay their debt is if interest rates remained near zero forever (Vieira and Mackrael, 2020). While some argue that the level of spending is unimportant, the US is approaching debt-to-GDP ratios of Canada, which is similar to those of European nations who have entered financial disarray. Regardless of the extent to which stimulus is passed in the United States, generations to come will have to deal with this massive crisis.
Sources:
"Bureau of Labor Statistics, U.S. Department of Labor, Occupational Outlook Handbook, The Employment Situation, on the Internet at https://www.bls.gov/news.release/pdf/empsit.pdf (visited 12/3/2020).
"Federal Reserve Bank of St. Louis and U.S. Office of Management and Budget, Federal Debt: Total Public Debt as Percent of Gross Domestic Product [GFDEGDQ188S], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/GFDEGDQ188S, December 3, 2020.
Vieira, Paul, and Kim Mackrael. “Canada's Covid-19 Response Is to Spend Heavily and Ignore the Deficit-for Now.” The Wall Street Journal, Dow Jones & Company, 1 Dec. 2020, www.wsj.com/articles/canadas-covid-19-response-is-to-spend-heavily-and-ignore-the-deficitfor-now-11606825162.
