Fresh Takes

Will All Those Billions Stimulate Growth?

What if governments’ recovery plans—both US President Joe Biden’s and Canadian Prime Minister Justin Trudeau’s—don’t stimulate the economy such that it grows in the medium and long term?

South of the border, President Biden’s $2.3-trillion infrastructure plan is applauded by economists like Joseph Stiglitz, who said recently that it “will create more demand and that should give people more confidence to invest.”

Here at home, the Trudeau government has just announced over $100 billion in spending in its latest budget to restart the Canadian economy.

But if economic growth is what we’re after, it’s investment and savings that we should stimulate, not spending and consumption.

As a recent Wall Street Journal article explains, whether public or private, spending does not generate permanent growth. Instead, growth is based on an increase in the supply of goods over time. We can’t spend if goods have not first been produced. Now, supply increases as technology and production processes improve. Such improvement requires savings and investment rather than consumption.

Moreover, as the author explains, President Biden’s plan includes substantial tax hikes for businesses, which will also hurt households, savings, and especially investment. It’s safe to assume that in Canada, new taxes will finance the Trudeau government’s astronomical spending also.

Of course, repairing roads and bridges can help improve the productivity of our economies. There will surely be, among all of these expenditures, some viable and necessary projects. But investors and the market are generally better than governments at growing savings by investing them wisely. And with the enormous sums that will be spent by these two governments, certain blunders and inefficiencies are to be expected.

Most importantly, we must remember than all of this spending will have to be financed by taxes one way or another, which will have the opposite of the desired effect. Indeed, by undermining individual and corporate savings, these will reduce investment, and so productivity, and at the end of the day, economic growth as well.

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