Quotulatiousness

April 5, 2012

Why government stimulus is usually a bad idea

Filed under: Cancon, Economics, Government — Tags: , , — Nicholas Russon @ 09:12

Mike Milke of the Fraser Institute:

Frum’s praise for Ottawa’s go-slow approach on balanced books is premised on the perception that if Ottawa actually cut spending (as opposed to slowing the rate of growth) such actions would endanger our prosperity: “If you reduce spending too fast, you crimp your economy,” wrote Frum.

But that’s a mistaken notion.

To use just one example from a large body of research, in 2009, leading fiscal policy expert and Harvard University professor Alberto Alesina and his colleague Silvia Ardagna reviewed stimulus initiatives in Canada and 20 other industrialized countries from 1970 to 2007. In the 91 instances where governments tried to stimulate the economy, it turned out the unsuccessful attempts generally were the ones based on increased government spending. Alesina noted that “a one percentage point higher increase in the current [government] spending-to-GDP ratio is associated with a 0.75 percentage point lower growth.”

In other words, stimulus spending doesn’t increase economic growth; it harms it.

To see how Ottawa’s own stimulus spending was unnecessary, consider how Canada emerged from the last recession and how government stimulus spending had nothing to do with it. Our recession ended in mid-2009; it was only about then that federal and provincial governments started spending extra (borrowed) stimulus cash.

To credit stimulus spending for the end to Canada’s recession, one must argue that extra (borrowed) dollars mostly spent after June 2009 somehow magically rescued the Canadian economy before June 2009.

All the borrowing did have one effect: It added to the existing large federal debt mountain, forecast to hit $614-billion in 2015, up from $457-billion in 2008.

The government’s stimulus spending was demanded by the opposition, but evidence since then indicates that the minority Tories would probably have passed a stimulus budget even if the opposition didn’t give them political cover.

5 Comments

  1. It’s like borrowing money to spend your way out of debt, don’t work no how, no time.

    And I don’t think the evidence indicates the Tories would have done what you say. The economic update in November did not lean in that direction.

    Catalyst: November 2008 fiscal update
    On November 27, 2008, Finance Minister Jim Flaherty provided the House of Commons with a fiscal update, within which were plans to cut government spending, suspend the ability of civil servants to strike until 2011, sell off some Crown assets to raise capital, and eliminate the existing CAD$1.95 per vote subsidy parties garner in an election.[8] Since money bills are matters of confidence,[9] the opposition was forced to consider whether to accept the motion or bring down the government. Flaherty’s update was ultimately rejected, purportedly on the grounds that it lacked any fiscal stimulus during the ongoing economic crisis,[10][11] for its suspension of federal civil servants’ ability to strike, for suspending the right for women to seek recourse from the courts for pay equity issues, and for the change in election financing rules.[12] http://www.fin.gc.ca/n08/data/08-106-eng.asp

    This is from Wiki, but the link take you to the economic statement.

    Comment by Dwayne — April 5, 2012 @ 21:14

  2. The CPC would not have passed a stimulus budget, in fact, their economic statement had them cutting spending… until the opposition stepped in.

    Catalyst: November 2008 fiscal update
    On November 27, 2008, Finance Minister Jim Flaherty provided the House of Commons with a fiscal update, within which were plans to cut government spending, suspend the ability of civil servants to strike until 2011, sell off some Crown assets to raise capital, and eliminate the existing CAD$1.95 per vote subsidy parties garner in an election.[8] Since money bills are matters of confidence,[9] the opposition was forced to consider whether to accept the motion or bring down the government. Flaherty’s update was ultimately rejected, purportedly on the grounds that it lacked any fiscal stimulus during the ongoing economic crisis,[10][11] for its suspension of federal civil servants’ ability to strike, for suspending the right for women to seek recourse from the courts for pay equity issues, and for the change in election financing rules.[12]http://www.fin.gc.ca/n08/data/08-106-eng.asp

    Yes, I know this is from Wiki, but you can find the actual economic statement at the fin link. Had the opposition not stepped in and demand that we match the USA in spending, I think that the CPC would have stayed their course. But the pressure from the media and the opposition made it impossible to try and remain fiscally prudent. Had they not emulated (to a much lesser degree, thank God) the USA I think the media and opposition parties would have voted non-confidence and then there would have been an election, which the CPC would have lost. They would have lost because Canada was high on Obama at that time. The empty suit that robotalks from a teleprompter was the media, and lefties, darling. The Liberals and NDP would have ridden on the socialists coat tails, I think.

    Comment by Dwayne — April 5, 2012 @ 21:19

  3. Dwayne, sorry for the posting issue. Your original comments were flagged as spam, because they had embedded URLs. I’ve marked them as non-spam and removed your later (shorter) comments on the same topic. The vast majority of comments that contain URLs are from spambots, so the filtering software automatically marks comments with URLs as spam for me to review.

    Comment by Nicholas — April 6, 2012 @ 10:14

  4. Ah, I see. I try and use URLs like footnotes to support my ramblings. That way others can look at the material I was quoting. Good to know what was going on. I thought it was my end! Anyway, it is funny how many “progressives” forget that the idea of stimulus was pushed really hard after Obama was elected and made his pronouncement on how his administration was going to fix all of George Bush’s mistakes.

    Comment by Dwayne — April 6, 2012 @ 13:47

  5. Yes, stimulus was the flavour of the month for quite some time. Bush was certainly guilty of the biggest government stimulus ever … until Obama took over and out-did him.

    Comment by Nicholas — April 6, 2012 @ 13:52

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