Does Canada Really Need Economic Stimulus?

Great Debates
21

Logically, though, infrastructure spending should happen anyway. Society’s needs for infrastructure are relatively predictable and aren’t useful if done independent of the need for it (e.g. Bridges to Nowhere.) If southern Ontario needs a high speed rail network, or Calgary needs a new expressway, or highway overpasses need rebuilding, then those things would need to be done irrespective of economic conditions. In fact, you’d think we’d need them even more when the economy picks up.

Keynesian theory aside, roads should be built because the road will deliver economic and social benefits. These things have to be planned very, very far in advance, and suddenly deciding to purcahse them and throw them up because you’ve made a first decision that you have to spend some money on something carries an increased risk of waste, corruption, and white-elephant-building.

22

Many good points in your post. I can’t argue that you’re wrong about this or anything else.

It’s worth keeping in mind, though, that just because something logically should happen doesn’t mean that it does happen. Sometimes good projects get unnecessarily delayed. It happens. (Maybe less often in Canada?) But when you consider a strict cost-benefit analysis, even borderline infrastructure projects are more appealing than other kinds of stimulus. If Calgary gets a new expressway that’s a bit larger than necessary, it’s not quite the problem that it would be in normal economic times. This might sound wasteful, but it’s less so than most alternatives.

Should stimulus unquestionably become necessary, other types of spending typically only provide value one time. The bombs and guns built during WWII didn’t serve a lot of good afterward. Sure, military spending triggered growth of more than 10% a year (as I said, it nearly got up to 20% for a time), but after a bomb explodes there’s nothing to show for it but a large hole in a foreign country.

In contrast, building big things serves a bigger cause than just priming the pump. Big projects also continue to be valuable afterward. Yes, there’s a risk of smaller-than-expected future returns, but smaller-than-expected returns are still more valuable than a one-time stimulus that creates no lasting value beyond the stimulus itself (which is to say, avoiding the opportunity cost of an economy that is stagnating indefinitely below its potential output level).

As for the time frame: we’ve already had a year of recession in the US, with the situation getting worse and worse. For a normal recession, the window would in all likelihood be too short to matter, but we are most probably looking at the long haul here, an extended worldwide slump. Maybe Canada will avoid the worst of it. I really hope you do. But you might be looking at a situation where you got plenty of warning to prepare for big projects.

Of course, I can’t be 100% certain about that. It might indeed be worth waiting and choosing a stimulus policy only after you’re absolutely sure you’ll need it, which would mean doing without the long term benefits of a well timed project. There are reasonable arguments on both sides.* I’m not trying to tell you all what to do, I’m just saying that this stuff is worth thinking about. Projects can be fast-tracked, delay can be reduced. If there is any potential construction that would add real value in the long term, but which you’d be hesitant about in normal times for whatever reason, now is the time to seriously consider getting the process started.

*Ignoring the misinformation that’s continually spread about previous economic crises.

23

As for preparing big projects, surely municipalities already have planned projects awaiting funding. I know Saskatoon would love to put two bridges up over the South Saskatchewan to ease the traffic bottlenecks at existing river crossings. One has been officially announced as going ahead, but the second is a decade or more away. I would be shocked if other cities didn’t have similar projects mapped out. An infrastructure stimulus project wouldn’t have to come up with ideas for new projects - it could just accelerate the timetables on various existing plans. Or it could pump a bunch of money into the extremely unglamourous infrastructure maintenance budgets. Repairing old bridges isn’t nearly as sexy as building new ones, but it’s just as necessary and frequently budget-constrained.

Any which way you look at it, it’s got to give us more value for the dollar than giving money to the automakers.

As for escaping the recession, oil is down enough that the oilsands are getting very close to only breaking even. The oil companies have already canceled or put on hold a bunch of multi-billion dollar projects, and while at the moment we’re still fine out West as that part of the economy is all still supply-constrained, at some point an extended slump in oil prices is going to move us from boom to bust too. It’s Alberta and Saskatchewan that are driving the economy at the moment, but if commodity prices remain low that can’t continue indefinitely.

24

Could someone put economic stimulus in perspective from a Canadian policy perspective? Does Harper’s government have some stimulus packages in the works, does the Coalition have some particular economic plan, or are we basically blue-skying here?

Regarding the unemployment insurance - I understand that our EI is running huge surpluses and has been for a long time, because hardly anyone qualifies for EI any longer. Surely one of the first steps a government would take would be making it easier to get EI again if we headed into serious recession.

25

Harper’s government is supposed to be coming up with some stimulus package for Jan 2009, but aside from saying that has not said anything specific yet to the best of my knowledge. In his speech at the Asia-Pacific Economic Co-operation Forumin November, he indicated that he is aware that economic stimulus may be needed and that he is prepared to go into deficit if necessary.

The proposed Coalition has put some thoughts and framework out there, but not much. The blurb in this article says:

"Based on a policy framework the coalition released, the stimulus package would focus on: accelerating existing spending, and introduce new cash, on infrastructure, with particular focus on the needs of aboriginal people; housing construction and retrofits; and investments in the ailing automotive and forest products sector, on the condition the sectors can produce restructuring plans that ensure their future viability.

There is also mention in the coalition’s policy framework of the need to “facilitate” skills training by ensuring all Employment Insurance premiums are used on those efforts, and implement an income-support program for older workers who have lost their jobs – issues that have long been championed by the Bloc Quebecois."

26

I can’t imagine the NDP hasn’t had that exact same position on job training, but I’d have to check.

27

I saw this articlein the Globe and Mail today, suggesting that not all economists agree with the spend hard and fast approach. Opinions/thoughts?

28

I agree with the article. The big negative points against a ‘stimulus’:

  • a one time injection of huge amounts of capital will distort the economy. Companies that don’t get a bailout (i.e. - the good ones) will be put at a competitive disadvantage. Price signals will be distorted, leading to oversupplies and shortages.

  • Any large stimulus package will take a long time to get going. By the time the multiplier effects kick in (if there are any), the economy may well be on the rebound, and the stimulus will act as a positive reinforcement, which is the opposite of what Keynesians want.

  • It’s tough to figure out where to spend the money. If you give it to consumers, they may just spend it on imported goods, which means we’d be borrowing to help provide a stimulus to other countries.

  • This is not a typical business cycle recession of the type Keynesians try to smooth with counter-cyclical spending. It’s a ‘balance sheet’ recession of the type Japan has gone through for the past decade. Basically, as the low value of the debt was uncovered, real wealth was wiped out, and companies and individuals found their balance sheets way out of whack (i.e. too much bad debt, not enough savings). The market is responding rationally - individuals and companies are cutting spending and saving their money. Not only is this a necessary correction to the excessive debt-driven growth of the past decade, but it means that any stimulus money the government provides may just be absorbed into the balance sheets of the population and not spent. So you’ll get no stimulus, but you’ll also short-circuit the necessary correction - the debt will still be there, but transferred to the government.

  • a rapid acceleration of infrastructure spending is a sure-fire recipe for waste, fraud, and abuse. Everyone will have their hand out. There will be labor shortages of certain types of skilled labor, which will drive up prices. Unnecessary projects will be green-lighted.

It’s important to remember that long-term economic growth depends on increasing productivity and the creation of real value through new products and services. When the economy corrects as it’s doing, it’s shedding low productivity jobs and unstable business models. It sucks for the people losing their jobs, but out of the chaos comes opportunity. If we can find the ‘bottom’ of the recession and keep government from mucking about in the economy and making it hard to plan, new businesses will spring up to take advantage of the increased labor pool. As companies start to recover, their stocks will start to be under-valued, and investment money will pour back into the markets. But if government prevents the correction from happening by pouring billions of ‘stimulus’ dollars into the economy to prop up failed businesses, the necessary corrections and reinvestments can’t happen.

This is what caused the depression to drag on so long - the government kept meddling in the economy, kept changing the rules, kept thwarting market forces with subsidies and tariffs, and prevented natural market forces from working. I sure hope we don’t make the same mistake.

Finally, it may be hard to believe, but even governments can run out of money. It just happened in Iceland, and it’s happened in Argentina, and in New Zealand and other countries. The result of that kind of collapse would be devastating. Canada will almost certainly avoid that because we’re in a very good position with our tight fiscal stewardship. We should remember what got us to the position we’re in (strongest economy in the G8, and maybe the world), and not change course just because it’s fashionable to do so.

You can make a better case for a stimulus in the U.S., since their bottom could be pretty damned deep. Canada doesn’t have anywhere near that level of risk, so our need for a stimulus is much lower. Just say no.

29

Voting for Liberals? :wink:

30

I’ve got no problem giving the Liberals credit. Canada’s been running a pretty tight fiscal ship through several governments, both Liberal and Conservative. There’s plenty of credit to go around for that.

But actually, we probably owe more to our style of government. Tight party discipline has its bad sides, but one of the good things about it is that it isolates individual politicians from the pressures of having to bring home the pork to get re-elected. In the states, politicians live and die by how much money they can shovel home, and this creates constant pressure to inflate the budget. Also, the wrangling required to get anything passed when every representative has a free vote, means that bills almost always wind up as pork-laden compromises.

31

Sam Stone for PM.

32

Ironically, Mulroney is probably a good part of the reason. Not for any good economic stewardship on his part, but by destroying the Tories he gave the Liberals enough political capital that they could actually deal with the deficit.

33

We’re seeing that in the company Jim works for - a huge construction company that was barely able to keep up in the boom of the past three or four years, they just laid off 40 workers, but those workers were workers who had been kept on in spite of their incompetence because of the need for warm bodies able to swing a hammer. This puts the company in a better position because they have enough work instead of too much work, and they have good workers instead of warm bodies.

34

Barely keeping up? If projects I’ve been involved with bear any resemblance to theirs, they weren’t even doing that. I’m currently doing some work on a building in Meadow Lake that was supposed to be completed in August. It looks to me like it should be pretty close by the end of the month. I’m unaware of any major project in this province in the past couple years that’s completed on time.

So far our little company is doing fine. I’m told we have lots of work lined up for 09 already. But the larger electrical contractors we’re often subbed to are reporting things slowing a bit. I’m sure most of them won’t mind being able to lay off a few of their more useless employees.

35

“Keeping up” is a relative term - I do know that they were recruiting workers from Germany and Mexico at points this summer, though (but not from the US, for some reason). I’ve been trying to get Dopers from depressed areas of the US to come here and work for them, but they won’t come because of the cold. Wimps. :slight_smile:

36

No kidding. It barely even gets cold in Calgary! :stuck_out_tongue:

37

Do construction projects EVER get done on time?

38

:smack:

Pogey used to be a maximum of 48 weeks and its been 23 weeks for the longest time now, so the newer rules were meant to force people to look for work, rather than allowing them to take a glorified sabbatical on the public dime.

If there were anymore onerus rules attached, i was not made aware of them when i claimed last time, about six years ago. At least in ontario for the next few years, the job market is going to look like a wasteland. Younger people can head west, but its going to hit the 50’s and 60’s hard.

I have no concrete suggestions for what to do, but this is probably going to be the seminal event in a lot of ontarians lives.

Declan

39

Rarely. But there are overruns, and then there are overruns. When a 6 month project completes a year later than planned, you have issues.

40

Alberta has tens of billion of dollars of projects sitting on the sidelines because there is no labor or infrastructure to the support them. Here in Edmonton, the job market is still extremely tight - tight enough that fast food restaraunts are eliminating shifts and closing early because they cannot find staff. Stores are looking more rundown because they’re not maintaining enough staff to organize merchandise and clean. We have 12 year old clerks in our stores now, because the demand for labor is so high, and these kids are getting signing bonuses and 10 bucks an hour.

Assuming oil doesn’t fall through the $30 floor, there is going to be a lot of work going on in Alberta for a long time to come. It makes no economic sense for the government to prop up failed eastern businesses to protect non-profitable jobs when there are serious labor shortages in other parts of the country.

That may sound harsh, but the world changes, and you can’t fight it. Huge demographic shifts happen all the time. Look at Detroit. Look at the rise of Silicon Valley. Or more to the point, look at the heavily subsidized Maritimes provinces. I don’t see that maintaining an oversupply of fishermen through subsidies has really helped the lives of the people. It’s simply prevented the diversification of the economy or a needed relocation of some of the people to a region that could better support them.