Canadian Stimulus

Let's accept, for a moment, that what would benefit the economy in Canada most at the present juncture, would be a stimulus plan where the federal government runs up a big deficit.

What would be the ideal form of such a stimulus?

1) You'd want to make sure that the stimulus was temporary because otherwise you'd be setting yourself up for recurring deficits when (if) the economy recovers.

2) You'd want to make sure the stimulus money was spent, because otherwise it wouldn't do much stimulating

3) You'd want to make sure the stimulus money was spent *in Canada* because we're not so altruistic that we want to run up our debts to stimulate other countries economies

4) You'd want the money to be spent during period in which the economy (GDP growth, employment) is in a downward trend. Otherwise you won't mitigate the magnitude of the downturn.

5) You'd want the money to be spent productively so that once the stimulus is done, there is something to show for the money spent, ideally something that can support future productivity gains to help pay back the money borrowed.

So let's consider some two of the main options being considered for a stimulus, tax cuts and infrastructure spending, starting with tax cuts.

Tax Cuts

1) Temporary? Fail. More than any other government policy, tax cuts are likely to be the hardest to undo when times change because of the powerful opposition to raising taxes.

2) Will be spent? Fail. Will vary depending on who gets the tax cut, but there's no way to ensure that the money given in tax cuts is spent, and the experience with the U.S. stimulus package suggested that much of it wasn't.

3) Will be spent in Canada? Fail. Money given in tax cuts will presumably be spent in Canada at the same proportion as income is currently spent in Canada, no more. And if you've ever been to a store, you'll notice that a lot of what we buy is manufactured abroad (although shipped, wholesaled and retailed in Canada).

4) Spent during the downturn? Pass. Tax cuts / rebates can be timed to occur when you want them to pretty precisely with little lead times.

5) Will the money be spent productively to leave future assets in place for future growth? Fail. Obviously some of the tax cut money may be invested but a lot of it will simply be consumed. Some may argue that lower taxes will always lead to stronger economic growth, but unless they can provide a shred of empirical evidence for this claim, I'd be inclined to discount it entirely.

So, 1 for 5 for tax cuts.

Now, let's consider infrastructure spending.

1) Will be temporary? Yes. Once the projects funded are completed, the funding will naturally cease.

2) Will be spent? Yes. The government can ensure the money is spent.

3) Will be spent in Canada? Yes. Obviously some components of infrastructure projects will be imported, but a higher percentage of the spending seems likely to occur within Canada for infrastrucutre projects vs. tax cuts.

4) Spent during the downturn? Fail - at least that it was opponents of infrastructure spending will warn. Personally, I'm not so sure, but more on that later.

5) Spent productively? Pass. Infrastructure is what makes this country work. Better roads, rails, power generation, communications, etc. will all enable better economic growth when (if) the economy recovers.


So the only argument in favour of tax cuts is a timing argument. But is it really true that government can't ramp up infrastructure spending quickly (or that the downturn will be so short that we have a short window in which to act).

Take the Dokie Wind Project, for example. What could be better for preparing Canada for the future than a project which cuts our greenhouse gas emissions, diversifies our power sources, lessens our reliability on fuel sources with potentially volatile prices and a limited supply? Yet the construction of the project is on hold due to a lack of financing. How long would it take for the government to step in with enough financing support to ensure the project can continue? Not long.

Also, I hear that the city of Vancouver has an opening for an infrastructure stimulus, sure to be spent before 2010...

Aside from the availability of lots of short term infrastructure spending options, we might also want to consider that this recession is likely to be with us for a long time so there might not be as much need for haste as people seem to think.

To me, the case for infrastructure spending over tax cuts is pretty much a slam dunk for anyone who's not a marketthink zombie, and that's not even considering that government needs to build / repair infrastructure at some point, so doing it during a recession when labour and material is cheap just makes sense (see the NDP construction of the 407 in Toronto during the 90's recession for example, their investment was likely worth 4 times what they spent less than a decade later, even without counting all the spinoff benefits from reduced travel times around the area.)