The Globe and Mail is hosting a debate on the economy among the leaders of the three main political parties on Thursday at 8 pm (ET). Click here for more details.
As I listen to the party leaders debate "stimulus" in the current election campaign it occurs to me that the word's very meaning has become strangely truncated, a mere shadow of its true rich self. The Shakespearean formula applies: A stimulus by any other name would smell as sweet.
Our politicians seem to believe that stimulus can only mean government borrowing money to spend directly on public sector projects in an effort to prop up flagging consumer demand. Thus to "stimulate" more economic activity government should spend more on "infrastructure" or social services (e.g. childcare). The money thus spent then gets spent again by its beneficiaries and a virtuous circle is created that puts the economy on a sustainable growth path. Or that's the theory.
There are a number of problems with this theory, especially right now. First, there are lots of reasons to think that the economy is growing, meaning stimulus is misplaced. One of the most reassuring signs was the announcement that Ottawa balanced its budget a year ahead of schedule. Because government revenues are highly sensitive to growth (or its absence), higher-than-expected revenues are a concrete sign of an economy headed in the right direction. Ditto for our better-than-expected economic growth in June, and our unemployment rate around 7 per cent. We'd all like it to be lower, but this is modest unemployment at best. If we measured unemployment the way the Americans do, it would be a full percentage point lower.
But back to the bewildering variety of stimuli. For example, instead of government borrowing the money and deciding how to spend it, an alternative is to cut taxes. One reason to prefer this is that governments get captured by politics and end up spending "infrastructure" money wastefully (gazebos in cabinet minister's ridings and endless hockey rinks come to mind), not to mention the fact that projects are often chosen on the wholly arbitrary basis that the plans for Project X happen to be ready to go, whereas Project Y isn't ready. Tax cuts, by contrast, empower individuals and companies to decide what spending would be most valuable to them. And since it's their money rather than someone else's, they tend to spend it prudently rather than for flashy political benefit.
The left decries tax cuts as "trickle down economics" forgetting that it was a signature policy of one of their darlings, U.S. President John F. Kennedy. More recently Sweden broke with the developed-country consensus during the last recession and devoted most of their stimulus package to tax cuts rather than government-directed public works. The great and good duly warned that this policy would be a disastrous failure. It was the critics, not the government, who had to feast on crow as Sweden outperformed virtually all its peers.
Tax cuts aren't the only alternative to infrastructure or social services of course. For example, the fall in the loonie relative to the U.S. greenback has a stimulative effect on our huge export sector, which is beginning to show up in recent trade figures.
Then there is the fall in oil prices. What has devastated the Alberta economy has put more cash directly in the pocket of every consumer in the country, as the price of gasoline at the pump, for example, is roughly a third lower than it was a scant few months ago.
Then there are low interest rates. Falling mortgage and loan rates are again leaving more money in consumers' pockets to spend on what they will.
In fact when you add it all up – low interest rates, cheap gasoline, a falling federal tax burden and continued high government spending (Ottawa has never spent more than it is spending today) – it is hard to see the case for yet more stimulus.
If we are unhappy (as we should be) with today's sluggish growth, a better question might be how we can remove obstacles to growth in the economy. Here there is a lot to choose from.
We should continue aggressively to pursue access to foreign markets through free-trade agreements, including the EU and the Trans-Pacific Partnership. The inexcusable barriers to trade that separate Canadians should be banned. Both taxes and social programs should be reformed to better reward work and investment while discouraging dependence. The entry of new well-capitalized competitors in sectors such as banking, telecoms and air travel, and new technologies that lower costs for consumers (Uber anyone?) should be embraced. The path should be smoothed for productivity-enhancing investments such as new pipelines that could literally add hundreds of billions of dollars to the GDP. Finally, reconciliation with aboriginal people would greatly improve the prospects for investment on the natural resource frontier.
Every party can find something to embrace on this list. And they'd be getting stimulus without the tears.
Brian Lee Crowley is the managing director of the Macdonald-Laurier Institute, an independent non-partisan public policy think tank in Ottawa.