KRUGMAN: Boring Canadians win—again—by going their own way

Canada has a reputation for dullness. Back in the 1980s, The New Republic famously declared “Worthwhile Canadian Initiative” the world’s most boring headline. Yet when it comes to economic policy, the reputation is undeserved: Canada has surprisingly often been the place where the future happens first.

And it’s happening again. Last month, Canadian voters swept the ruling Conservatives out of power, delivering a stunning victory to the center-left Liberals. What strikes me most is the clear rejection of the deficit-obsessed austerity orthodoxy that has dominated political discourse across the Western world. The Liberals ran on a frankly, openly Keynesian vision, and won big.

In the 1950s, everyone considered it essential to peg their currency to the U.S. dollar, at whatever cost—everyone except Canada, which let its own dollar fluctuate and discovered that a floating exchange rate actually worked pretty well. Later, when European nations were scrambling to join the euro—amid predictions that any country refusing to adopt the common currency would pay a severe price—Canada showed it’s feasible to keep your own money despite close economic ties to a giant neighbor.

Oh, and Canadians were less caught up in bank deregulation. As a result, Canada was spared the worst of the 2008 financial crisis.

Which brings us to deficits and public investment. The Liberal Party of Canada platform said, “Interest rates are at historic lows, our current infrastructure is aging rapidly, and our economy is stuck in neutral. Now is the time to invest.”

Does that sound reasonable? It should, because it is.

Strange to say, however, that hasn’t been happening. Across the advanced world, the modest fiscal stimulus programs introduced in 2009 have long since faded away. Since 2010, public investment has been falling as a share of GDP in both Europe and the United States, and it’s now well below pre-crisis levels. Why?

In 2010, elite opinion somehow coalesced around the view that deficits, not high unemployment and weak growth, were the great problem facing policymakers. There was never evidence for this view; after all, those low interest rates showed that markets weren’t at all worried about debt. But never mind—it was what all the important people were saying, and all that you read in much of the financial press. And few politicians were willing to challenge this orthodoxy.

Most notably, those who should have stood up for public spending suffered a striking failure of nerve. Britain’s Labour Party, in particular, essentially accepted Conservative claims that the nation faced a fiscal crisis and was reduced to arguing at the margin about what form austerity should take.

And having bought into deficit panic, center-left parties found themselves in an extremely weak position of arguing that austerity wouldn’t inflict quite as much pain.

Now come Justin Trudeau’s Liberals, who are finally willing to say what sensible economists (even at places like the International Monetary Fund) have been saying all along. And they won a stunning victory.

So will the Liberals put their platform into practice? They should. Canada can borrow for 10 years at only 1-1/2 percent, and its 30-year inflation-protected bonds yield less than 1 percent. Furthermore, Canada probably faces an extended period of weak private demand, thanks to low oil prices and the likely deflation of a housing bubble.

Trudeau has an opportunity to show the world what truly responsible fiscal policy looks like.•

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Krugman is a New York Times columnist. Send comments on this column to ibjedit@ibj.com.