Stimulus spending risky, wasteful

While the Obama administration is looking for ways to fight the 10% unemployment rate in the United States with its “job summit,” Finance Minister Jim Flaherty’s consultations in preparation for the next federal budget will soon be under way. The minister has already said he does not intend to make any new government spending commitments to stimulate the economy. This is the correct position to take. Starting now, government priorities must become a return to balanced budgets, progress on free trade and a lower overall long-term tax burden. The minister must resist calls for assistance from various groups that will be coming to beg for funds with no concern for the state of public finances.

In general terms, rather than intervening directly in the economy, governments should focus their efforts on rebuilding confidence among consumers and investors and developing conditions favourable to efficient market operation. This is the conclusion of a recent Montreal Economic Institute research paper in which I discuss the economic crisis and its impact on employment. In particular, I have analyzed the U.S. labour market based on data from the Bureau of Labor Statistics.

It is often forgotten that the data on job creation and job losses we hear in the news are expressed on a net basis. When the dynamics of jobs and establishments created and lost are assessed in gross terms, one sees the economic crisis in a whole different light. Indeed, despite substantial net job losses during the recession, millions of jobs have been created in the U.S. private sector during these difficult months. More than seven million jobs have been created on average in each of the last four quarters for which figures were available when my research paper was prepared (from the fourth quarter of 2007 to the third quarter of 2008).

When these data are compared to the number of jobs allegedly created or saved by the U.S. government’s recovery plan (about 650,000 after two quarters, according to the White House), we can only observe that this is relatively insignificant compared to gross job creation in the private sector. Moreover, many observers find this estimate generous because the rules for calculating jobs are rather nebulous and favour an overestimate of jobs created or saved. Remember that the cost of the recovery measures enacted by the U.S. Congress in February 2009 is estimated at US$787-billion.

Furthermore, although more jobs are created than lost in periods of growth, millions of jobs disappear nonetheless each quarter. In the 65 quarters from the third quarter of 1992 to the third quarter of 2008, each net job created in U. S. private sector establishments was the result of an average of 21 jobs created and 20 jobs lost. This actually led to strong labour market growth in the United States. Meanwhile, each net new establishment that was opened was the result of an average of 19 establishments opening and 18 closings. Economists call this process “creative destruction.”

In reaction to the recession, governments have inflated their deficits to stimulate the economy. However, not only do the supposedly beneficial effects of these “stimulus package” policies arrive too late, but the improvised nature of each set of proposed measures also risks creating significant waste and harmful incentives by making businesses more concerned with their political representatives than with their markets.

In times of recession, as in times of growth, a strategy of budget deficits, protectionism and widespread subsidies can only cause more harm than good. Deficits will have to be financed and eventually repaid in some way or other. Moreover, this process consumes substantial real resources, channelling them into programs that often make financial sense only on paper.

Eliminating its chronic deficits in the mid-1990s enabled Canada to improve its economic performance compared to countries that continued to show large budget deficits. Considering the questionable effects of stimulus packages and their hefty cost, the federal government should make a firm commitment to avoid increasing their scope and aim to reach a balanced budget as soon as possible.

Marcel Boyer is Senior Economist at the Montreal Economic Institute.

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