How much stimulus can we really expect?

Why the budget will generate only a quarter of the economic activity that the government told us it would


The new TD Bank Financial Group economic forecast, released yesterday, is mainly drawing attention for its worrying employment outlook. But the forecast is also worth paying close attention to for its skeptical view of the government’s predictions about how much the Jan. 27 budget will boost the economy.

As recently as late last year, TD’s economists were predicting about 250,000 Canadian jobs would be lost in 2009; this week they’re telling us to brace for 324,000 jobs to vanish. That would push the unemployment rate to 8.8 per cent, up from about 6.6 per cent today.

What caught my eye about this grim report is how the TD economists—who run one of the most closely watched forecasting shops in the business—discounted the government’s upbeat assumptions about the recent budget’s stimulus package.

(You remember the budget? Large sums, long speeches, hundreds of journalists locked up in a room reading charts and tables? Cut yourself some slack if it all slipped your mind: we in the news business tend to treat budgets like nothing matters more for a day, and afterwards as though nothing could matter less.)

Finance Minister Jim Flaherty claimed the budget would inject $29.3 billion in stimulus into the economy this year, or about 1.9 per cent of gross domestic product. How seriously did the TD economists take him? Not very: they figure his fiscal stimulus will amount to only 0.5 per cent to GDP in 2009.

I asked Beata Caranci, TD’s director of economic forecasting, why she’s assuming the budget will generate only about a quarter of the economic activity in 2009 that the government told us to expect. She cited several factors behind her lower estimate. Tax cuts meant to boost spending might actually go into savings. Provinces and municipalities might not come up with their expected share of infrastructure money as fast as Ottawa hopes.

Even the tax credit for home renovations, which was greeted with some enthusiasm, is viewed cautiously by Caranci. “That might just go to people who were already planning to renovate,” she said. “So how much additional spending that creates remains to be seen.”

That sounds sensible. And, more broadly, Caranci said the history of government bids to stimulate shows that politicians, not surprisingly, tend to be a tad too optimistic about how efficiently they can juice a slumping economy. “There’s always leakage that occurs,” she said. “So we’ve been more conservative.”

What was touted as big stimulus, requiring huge deficits, on Jan. 27 might not look so aggressive as lousy economic news drags on month after month.

Even if you accept Flaherty’s stimulus figures, Ottawa looks positively tentative compared to Washington. Stephen Harper’s government is planning 2.5 per cent of GDP in stimulus spending over the next two years, compared with the approximately 6 per cent of GDP being pumped out by the new-look U.S. government.

Jeff Rubin, chief economist and strategist at CIBC World Markets, told me the main number to watch, when it comes to predicting political reaction to economic news, is that troubling unemployment rate. As it rises above 8 per cent by the end of this year, he said, the public clamor for governments to spend even more heavily, to try to save and create jobs. will become impossible for politicians to resist.

And Rubin argues the pressure will mount even if the GDP is growing again by late this year or early 2010, as some forecasters, including the Bank of Canada, say it will be. That’s because unemployment is likely to remain high even after the economy starts healing, so any easing of public anxiety will lag the technical end of the recession.

“It’s not about the GDP forecast. It’s about the unemployment rate,” Rubin said. So how does he anticipate the Canadian government will adjust? Whether Conservative or Liberal, by spending enormous sums for years to come. “The era of surpluses,” Rubin said, “is over.”


How much stimulus can we really expect?

    • Credentials.

    • Nothing. But reporters listen to them more, which gives the *appearance* of validity.

      • Give your head a shake – the government has a huge political motivation to make their plan sound *awesome*!!!

        That’s like asking why you would trust a magazine’s review of a new car over that nice salesman at the dealership.

        Please people, start thinking *before* you start typing.

    • That’s a good point, why should we take what an economist has to say seriously?

      • Thanks for the link. I’d always assumed he had no actual work experience before becoming PM. It appears he did work in a mail room. I’m feeling reassured.

    • “Progressive economics” is an oxymoron. You ought to know at least that much before posting on the subject.

      Not that progressives are unique in that sense. If it helps, think of it this way:

      The bank economists are full of it. Progressive economists are full of it. Wall Street economists are charlatans. The very few economists who aren’t full of it will openly admit they don’t know much.

      Rare is the economist who will dismiss his own field’s pretense of mathematical “rigour”, but that economist just might be worth listening to. There have been a few over the years. Pitifully few.

  1. And that they give out a free toaster after every forecast.

  2. Come on people! this is quite simple.

    They have Baird in charge of a lot of this.

    Didn’t he say he would throw water on the fire that is global warming? Isn’t he the one that stood up and got that pesky transit strike fixed? Doubting this man is like doubting that the sun will rise tomorrow nite.

    • Someone remind me why a local transit strike is the concern of the federal government? Labour relations is provincial jurisdiction.

      • Ottawa’s transit runs across the river into Quebec and therefore becomes under Federal regulation.

  3. People might want to take note that the TD Group forecast John points to, or at least the part of it that interests him here, is not an attempt to mystically discern the effect the “stimulus” will have on the economy; it’s just an attempt to add up the number of “stimulus” dollars the budget will deliver. It offers arithmetic, not some higher-order soothsaying, and as such it does not require any particular magic powers.

    • But if he needs them Baird has magic powers!

      • Most Conservative MPs are afraid to even talk to Harper… Baird went ahead and dated his wife.

        • Get a life, Stewart. And try to post on-topic for once. And stop being a troll.

          • “Provinces and municipalities might not come up with their expected share of infrastructure money as fast as Ottawa hopes.”

            This is Baird’s area, constitutes the bulk of the stimulis and will not happen

        • They aren’t dating. She’s his beard.

    • No problem with Mr. Geddes nor his post.

      It’s just I think I have PTSD. I wake up screaming in the night. Sherry Cooper flashbacks.

    • “There’s always leakage that occurs,” she said.

      I don’t suppose, then, that since these public “stimulus” dollars will be so inefficient, that we might choose not to bother going waaay back into debt and just call this nonsense off instead?


      Sigh. I thought not.

  4. It is hard to credit anything that the banks say after the last six months. And as for “higher order soothsaying”, I would be included to look for a second opinion if they told me the sun would come up tomorrow.

    • I used to manage archiving for one of the major chartered banks for western & northern Canada. This bank wouldn’t give mortgages to its own employees below a certain level. They didn’t meet its requirements for job security.

      And we wonder why the economy is tanking . . .

  5. When comparing the relative merits of this economist versus that economist, I would like to point out that (a) nearly all of them can add 2+2 successfully, therefore it’s easy to determine if the Cons’ pie in the sky stimulus claims add up, and (b) only economists of the Austrian school have a theory of money and credit which is based on fundamental axioms and solid logic. The other economists (that is to say, almost 100% of all economists you will ever see quoted in the press, and most of all bank economists) use as their stock-in-trade centuries-old fallacies which have been sadly revived and amplified by the Keynesian School.

    It is only the Austrian economists who predicted the crash which you are seeing right now. The other schools of economic thought seem to think that paper money backed up by nothing is not only generally harmless, but downright beneficial when pumped into the economy in just the right amounts at just the right time. Clearly this is baloney, because injecting counterfeit money in a “just right” way is exactly what Greenspan, Bernanke and their foreign counterparts claimed that they have been doing for decades now, and the result is a catastrophe. In fact the counterfeiting was nothing but a ploy to help politicians win elections and to enrich bankers. The economists who provide intellectual justification for this racket are playing the role of cynical courtiers at best, and courtesans and jesters at worst.

    The so-called “stimulus” measures are only going to exacerbate the problems, because they are going to pile up the debt on governments, corporations and individuals who are already practically drowning in debt. The bailouts will keep alive insolvent and unprofitable companies, preserving a few jobs in the short term but causing long term poverty by delaying the re-allocation of capital and other resources into fundamentally profitable activities. The infrastructure projects are nothing but political pork.

    The only correct prescription is to stop the bailouts and subsidies, cut welfare, cut govt spending of all kinds, cut taxes, cut regulations and either issue a gold-backed currency or issue no currency at all and let the free market issue its own. Throughout history the countries which followed this prescription most closely have been the richest and most free. Those which do the opposite have been the most impoverished and unfree, and when pursued for too long the policies of taxing, spending and intervention always lead to totalitarianism, revolution and war.

    • I prefer C.H. Douglas. Seems more fair.

    • Huh. You had me onside right up to the last paragraph.

      Suddenly, cut welfare, cut taxes, let the free market issue its own (what, money???), cut regulations, cut government spending.

      Where is your control of greed in this scenario? Because I can now confidently state that without the control of greed, along with some compassion and empathy, this will amount to five percent of the population having absolutely ALL of the money. And if you don’t think that will cause a revolution, I suggest you turn to the history books again.

      • My first question would be, “Which Austrian school?”

        I think that for the Austrian school predictions to be accurate, we would have had to see a shortage of available consumer goods and a resultant rise in prices, while we seem to have the opposite.

        We’re seeing a collapse of consumer demand creating the underutilization of capital good,s resulting in layoff of employees, at the moment, and that’s more of of a Keynesian interpretation of the business cycle.

        For people who don’t stay home Friday nights reading this stuff, the Austrian school (or Continental school or whatever) had more influence on Reform & Libertarian conservatism, while the post-Keynesian Anglo-American school (Friedman et al) was favoured by neocons, including PMSH. Although PMSH is trying to pretend be a Galbraithian-Keynesian in this budget.

        I tend to disagree with any theory that insists on the existence of an absolutist “economic equilibrium” state that should be strived for. They all sound too much like numerological religious dogma & not enough like science.

  6. everyone and their dog has a economic prediction for this year….the best is to stop worrying and let things happen how they are going to happen. Hope for the best, expect the worst.

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