Over the past couple of months, Canada’s finance minister Jim Flaherty has repeatedly said that he isn’t ruling out another stimulus spending package like the one we had in 2008-2009 in the event of a deterioration of the global economy.
“What has been done before can be done again,” he told the Canadian Press in August.
Before we embark on another spending binge, shouldn’t we first evaluate if stimulus plans work, if they are necessary, and if they are grounded in sound economic logic?
After four years of this regimen in many countries, some of which are now on the verge of bankruptcy, it should be clear that stimulus spending doesn’t “stimulate” much, except the market for government debt.
Canada’s stimulus package was relatively modest by international standards. Canada is also one of the rare developed countries which should be able to return to a balanced budget within a couple of years. And, lo and behold, we went through the recession relatively unscathed and came out of it with better results that most others.
If the logic of stimulus spending were correct, we should be the ones still mired in recession, while others who spent way more should be firing on all engines.
There is a fundamental reality that fans of government spending, taking their cue from economist John Maynard Keynes, seem to forget: whenever government tries to stimulate the economy, it can only do so by taking away resources from the private sector.
For example, public building projects bid away trucks, manpower, steel and bricks. It make them more expensive and leaves fewer of them available for private entrepreneurs who have different projects.
This is true at any time. But it is even more crucial in times of crisis. During a recession, businesses face bigger challenges. Many of them need to restructure their operations, in a context where clients are becoming more difficult to find and everyone is hesitant to spend.
This restructuring is necessary to get the economy back on a firmer footing. This is no time for the government to compete with private firms who want to use the same resources.
Of course, it’s easy to see the immediate impact of government spending, which seems to create economic activity. What you don’t see is the continued misallocation of resources and the uncertainty about future conditions that keep private businesses from investing as much as they would like to. Which explains why, despite piling stimulus spending upon stimulus spending, the U.S. and Europe seem unable to revive their economies.
But, don’t we have evidence that “austerity” doesn’t work either, as the cases of Greece, Great Britain and other countries illustrate?
Actually, most of these countries did not cut spending in absolute terms – they simply slowed down the rate of growth of their spending. And they also increased taxes to avoid sinking further into debt. In both cases, this means they keep taking away more resources from the private economy, which is the opposite of what they should be doing.
Austerity for citizens and businesses certainly doesn’t work. What would work, though, is a real austerity package for governments, which hasn’t really been tried.
Michel Kelly-Gagnon est président et directeur général de l'Institut économique de Montréal. Il signe ce texte à titre personnel.
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