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Politicians Are Economically Illiterate

November 30th, 2011

Do you ever wonder how we got ourselves into this mess? How western countries, rich beyond all human experience, are so broke. How countries, any country, can owe so much money, and it’s leaders can seem so blasé about the fact.

Maybe, probably even, the problem is the politicians are all economically illiterate.

Oh sure, they all know about interest rates, monetary policy, the value of the dollar and the difficulty in budget projections. But they also live in an information bubble, being fed ideas and figures from self interested sources all day, every day. Then they go to the office and make decisions to spend amounts of other peoples money greater than even the richest politician could dream of spending without access to the public purse. Even the most money conscious politician loses touch the what real money is worth.

Case in point: Currently in Toronto, there is a mayor – complete with minions – who believe that spending is out of control. Their goal, “stop the gravy train.” The Budget Chief on this governing body, i.e. the guy who’s good at the math, is Mike Del Grande .

The Toronto Sun’s Sue-Ann Levy has had a bug up her flue recently about Toronto’s public art. How can a city that is $700-million in the hole spend money on art for the park &tc. Last week she ran a story on a piece of public art she calls the Yorkville Rock. Eighteen years ago, the June Rowlands led City of Toronto spent $284,000 buying, shipping and installing a 500-tonne piece of the Canadian shield in Toronto’s uber-trendy Yorkville.

Mike Del Grande , she tells us, says the $284,000 rock would “easily be $800,000 in 2011 dollars.” That’s an increase of a factor of 2.8, or approximately 180%, roughly 10% per year (I know, I know, I haven’t taken the magic of compounding into consideration). Does that seem right?

Back in 1994 we bought our first house, a small bungalow for $120,000. Now granted there’s been a major housing bubble in the last ten years, and Canadian prices, unlike American ones, have not abated. That style of house, in that neighbourhood are currently listed for $219,000, a less that %100 increase.

We can all agree gas prices are crazy – I mean, holy crap we pay a lot for gas than we did back in the 90’s crazy? From the end of the Gulf War until almost Y2K, gasoline stayed stable at 60-cents a litre. Today, according to gas busters, it is a whopping $1.14 to $1.20 a litre, more or less double. If gas had increased $180%, it would be $1.68 a litre. Even when gas was going through the roof, did you pay $1.68 a litre? Nor would you pay $336,000 for a 1,000 square foot bungalow in Hespeler, the cost of that first house if it increased by a factor of 2.8 over the last twenty years.

I know, I know, your sitting there saying to yourself, so he cherry picked a couple of items to prove some point or another. But according to the Bank for Canada, inflation has run at 41% between 1993 and 2011. My examples are both high, not low. A $284,000 rock in 1993 should cost $400,000, half of what Mike Del Grande suggests it would cost.

Don’t get me wrong, I like what these guys are trying to do, get control over spending in the City of Toronto. But how do you do that when your fiscal hawk budget chief has no basis in financial reality? Getting your financial house in order is not just about deciding what’s wasteful and what’s not, it’s also about knowing the value of something when you decide to spend on it.

If everybody in government thinks inflation has been running at 10% a year, is it any wonder the worlds in such a financial mess?

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