Guns and butter: Why Donald Trump poses a threat to the Canadian economy

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      "Guns and butter" was a term often heard during the 1960s when the U.S. government ramped up its spending on the Vietnam War.

      Then president Lyndon B. Johnson wanted to invest in his Great Society social programs while buying more B-52 bombers to pursue his military objectives.

      A nation has finite financial resources. And it will spend part of it on military goods, represented in this catch phrase as "guns". And some of these resources are allocated on goods to promote the civilian economy, which is represented by the term "butter".

      Problems can arise when a government decides to do crank up military spending while maintaining or increasing spending on social programs, including health care. This is especially so if not enough taxes are raised to cover the cost.

      In America, the mania for both guns and butter in the late 1960s contributed to the stagflation of the mid 1970s when unemployment and inflation rose simultaneously.

      Huge deficits can lead to higher interest rates

      The military establishment, including weapons manufacturers, is always a winner in a guns and butter scenario. Most of the rest of society loses.

      That's because governments end up running huge deficits, which require them to borrow more money.

      This, in turn, leads to higher interest rates as governments compete with the private sector for financial capital.

      When interest rates go up, homeowners with variable-rate mortgages see their shelter costs increase. Some can even lose their houses or condos if they can't pay these higher mortgage payments.

      It's also possible for rising interest rates to depress housing prices. That's because higher borrowing costs put the price of a home out of reach, stifling demand, slowing sales, and ultimately leading to a reduced sticker price. 

      The higher borrowing costs can result in some homeowners owing more on their mortgage than the value of their dwelling.

      When these borrowers go "underwater" with their mortgages, the temptation increases to walk away from the home, leaving it in the hands of the bank.

      That can fuel a housing crash, like we saw in the United States in late 2008 and 2009.

      Central banks may respond to this economic environment by loosening up the money supply. They may engage in quantitative easing, basically flooding the system with cash to ensure government bonds are purchased.

      But a looser money supply raises risks inflation. That's because more cash is chasing the same number of goods. This lowers the value of people's savings.

      So far, we've avoided serious inflation because the world's economic woes are largely demand-driven.

      There's simply not enough consumer buying power to purchase all the goods that can be created with increasing automation of industry.

      But if inflation arises under a guns and butter scenario, it will hit seniors on fixed incomes the hardest. And seniors are often the people most likely to vote in elections.

      Justin Trudeau is under pressure from President Trump to increase military expenditures.

      Trump is trying to boost U.S. military exports

      What does all this have to do with U.S. president Donald Trump?

      Trump is demanding that NATO members spend two percent of their gross domestic product on the military.

      According to the Wall Street Journal, only five of the 28 countries in the western alliance are doing this now.

      Canada is one of the laggards, according to those who think it must jack up military spending.

      That's because one percent of Canada's gross domestic product goes toward national defence. It ranked 23rd on the NATO list last year. 

      If Canada were to meet Trump's demand, it would have to raise spending on the military from $20 billion to $40 billion a year.

      If Canada did this, the big winners would be weapons manufacturers, many of which are based in the United States.

      Here's the real game that's unfolding: America can't afford to buy more U.S. weapons with its deficit. So Trump is going to force other countries to support the U.S. military-industrial complex at considerable cost to their economies.

      Canada spends about one percent of its gross domestic product on national defence.
      Charlie Smith

      Trudeau is in a fiscal straitjacket

      Canada has projected a $29.4-billion deficit this fiscal year, which ends on March 31.

      Some have predicted it could rise to the $35-billion range by the time the final numbers are reported.

      If Canada were to spend another $20 billion annually on the military, something would have to give.

      The Trudeau government would have to make large cuts on the "butter" side of the ledger—health care, pensions, employment insurance, or transfers to provinces for postsecondary education, for example. Or Finance Minister Bill Morneau would have to jack up taxes, which could dampen consumer demand.

      To simply spend a lot more more on guns while maintaining spending on "butter" would prove inflationary over the longer term. It would hurt Canada's seniors, who vote in large numbers.

      And spiralling inflation could also cost Canadians their homes if this led to higher interest rates.

      Canada consistently outperforms America on the Program for International Student Assessment tests for reading, math, and science.
      Organisation for Economic Co-operation and Development

      U.S. pays a price for its military spending

      South of the border, the United States spends 3.62 percent of its GDP on national defence.

      In dollar terms, it amounts to about US$650 billion, which is more than all other NATO countries combined.

      That leaves less money available for education and social services in the United States.

      This is a factor behind America's poor educational performance on international standardized testing, its higher infant mortality rate than Canada, and its lower life expectancy than Canada.

      Canada was 18th in life expectancy in 2015; the U.S. ranked 43rd.

      According to the U.S. Census Bureau, America's infant mortality rate is 6.2 per 1,000 live births, compared to just five infant deaths per 1,000 live births in Canada.

      In effect, Trump's demand for Canada to spend more on the military has the potential to narrow these gaps by shortening Canadian life expectancies and driving up the infant mortality rate.

      But if the Trudeau government goes along with Trump's wishes to raise military spending and doesn't cut spending in other areas, the national deficit will balloon to a record figure.

      That would lead to higher interest rates. This could drag down the economy and push up unemployment.

      Keep in mind that this scenario could also play out in Germany, Italy, and other western countries as Trump ramps up pressure for them to divert more economic resources to their militaries.

      In the midst of this, U.S. media outlets are focusing a great deal of attention on Trump's buffoonish news conference yesterday.

      But there is a more serious issue at play.

      U.S. arms manufacturers are quietly cheering his aggressive moves to force other countries to fatten their bottom lines at the cost of these nations' own economic well-being.

      That's the real story of the Trump presidency. And you can be sure that these same weapons manufacturers will continue pursuing this goal even if Trump is eventually impeached and Vice President Mike Pence moves into the White House.