INSTITUTE OF INTERGOVERNMENTAL RELATIONS WORKING PAPER SURPLUS RECYCLING AND THE CANADIAN FEDERATION: Reassessing the Allocation of Money and Power by Thomas J Courchene*
[email protected] Adjunct Professor School of Policy Studies and Senior Scholar, IRPP April 2013 Institute of Intergovernmental Relations School of Policy Studies, Queen’s University Working Paper 2013 - 03 2 I: INTRODUCTION1 In his 2011 book, The Global Minotaur: America, the True Origins of the Financial Crisis and the Future of the World Economy, Yanis Varoufakis makes a convincing case that effective surplus-recycling mechanisms (SRMs) are essential for maintaining the internal stability and resiliency of macro-economic systems. While his analysis both novel and insightful, it is nonetheless the case that the role of surplus-recycling mechanisms has long been centre-stage in ensuring international macroeconomic equilibrium. Arguably the most familiar SRM was the “rules of the game” under the gold standard or, more instructively, under the price- specie-flow mechanism. Countries running balance-of-payments surpluses will experience inflows of gold (specie) that in turn will increase domestic wages and prices thereby eroding their balance-of-payments surpluses by decreasing exports and increasing imports. Balance-of-payments-deficit countries will experience the opposite impacts, with the result that the system will re-equilibrate. However, if the balance-of-payments-surplus countries sterilize the gold or specie inflow, then the surplus-recycling mechanism is stymied and the burden of adjustment is shifted to the deficit countries in the form of austerity or exchange-rate depreciation, both of which significantly increase the political and economic adjustment costs, and undermine the principles of the system.