The Money Hole

The Money Hole

Wednesday, June 15, 2011

America is falling deeper into debt. We're long past the point where drastic action is needed. We're near Greek levels of debt. What's going to happen?

Maybe riots — like we've seen in Greece?

We need to make cuts now.

Some governors have shown the way. You know about Chris Christie, Scott Walker, Rick Scott, John Kasich, etc. But you probably don't know about Luis Fortuno.

Fortuno is governor of Puerto Rico. Two years ago, he fired 17,000 government workers. No state governor did anything like that. He cut spending much more than Walker did in Wisconsin. In return, thousands of union members demonstrated against Fortuno for days. They clashed with police. They called him a fascist.

Fortuno said he had to make the cuts because Puerto Rico's economy was a mess.

"Not just a mess. We didn't have enough money to meet our first payroll."

Fortuno's predecessors had grown Puerto Rico's government to the point that the state employed one out of every three workers. By the time he was elected, Puerto Rico was broke. So the new conservative majority, the first in Puerto Rico in 40 years, shrank the government.

What was cut?

"Everything. I started with my own salary."

The protesters said he should raise taxes instead of cutting spending.

"Our taxes were as high as they could be, actually much higher than most of the country. So what we've done is the opposite." Fortuno reduced corporate taxes from 35 percent to 25 percent. He reduced individual income taxes. He privatized entire government agencies.

"Bring in the private sector," Fortuno said. "They will do a better job. They will do it cheaper."

Fortuno's advice for leaders who want to shrink the state: "Do what you need to do quickly, swiftly, like when you take off a Band-Aid. Just do it. And move on to better things."

Canada did that years ago.

When I think Canada, I think big government. I'm embarrassed that I didn't know that in the mid-'90s, Canada shrank its government. It had to. Its debt level was as bad as ours is today, almost 70 percent of the economy. Canada's finance minister said: "We are in debt up to our eyeballs. That can't be sustained."

Economist David Henderson, a Canadian who left Canada for the United States, remembers when The Wall Street Journal called the Canadian dollar "the peso of the north." It was worth just 72 American cents. "Moody's put the Canadian federal debt on a credit watch," Henderson said.

The problem, he added, was that Canada had a government safety net that was more like a hammock.

"When I was growing up in Canada, people who went on unemployment insurance were said to go in the 'pogie.' You could work as little as eight weeks, taking the rest of the year off."

So in 1995 Canadian leaders cut unemployment benefits and other programs. It happened quietly because it was a liberal government, and liberals didn't want to criticize their own. The result was that Canada's debt stopped increasing. As the government ran budget surpluses, the debt went down.

"The economy boomed," Henderson said. "Think about what government does. Government wastes most of what it spends, and so just cutting government and having that money in the hands of people means it's going to be used more valuably."

Canada fired government workers, but unemployment didn't increase. In fact, it fell from 12 percent to 6 percent. Canadian unemployment is still well below ours. And the Canadian dollar rose from just 72 American cents to $1.02 today.

Canada also raised some taxes. But the spending cuts were much bigger, six to one: agriculture was cut 22 percent; fisheries, 27 percent; natural resources, almost 50 percent.

"We should learn from Canada's experience that you can cut government substantially," Henderson said. "It is so wasteful. There's so much to cut, without causing much real pain — not causing pain, but helping your economy grow, helping people become better off."

Henderson added, "We need to move more quickly than the Canadians did. Unfortunately, we're moving more slowly than the Canadians did."

If we're moving at all.

While Canada thrives, we pour more money down the hole.

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