Talking stimulus with economist Dale Orr - Macleans.ca
 

Talking stimulus with economist Dale Orr


 

Today brings a belated new tone of realism in high places about the state of the economy. Finance Minister Jim Flaherty—who predicted, in his absurdly upbeat Nov. 27 economic update, no recession and no federal deficits—now allows that the GDP will shrink by 0.4 per cent next year and the federal government will post a deficit of at least $5 billion.
Flaherty’s overdue frankness injects greater urgency into deliberations about how he might try to pump some stimulus into the Canadian economy in his Jan. 27 budget. In Washington, detailed discussion about spending $600 billion on economic recovery measures over two years, maybe $1 trillion, is well advanced. In Canada, one of the few detailed reviews of the options came earlier this week from Dale Orr, managing director of Canadian macroeconomic services at the economics forecasting firm Global Insight.

Orr spoke with Maclean’s about what might work. An edited version of the conversation:

Q. How much would the Canadian government have to spend to make a difference in 2009?

A. The rule of thumb is one per cent of GDP.

Q. Around $16 billion then. Are you saying at least that much?

A. No, not ‘at least’—I would say that’s a reasonable number. For the January federal budget, that’s a very high number.

Q. How should they spend it?

A. It has to be timely, in other words, get in there and get going quickly. It has to be temporary, in other words, get it out when we don’t need it anymore, so we don’t run up the deficit and cause inflation. It has to be targeted pretty much on consumption and investment. You can’t just give people money so they can pay down their debts. And it has to be targeted on things that will increase productivity. We’re going to be passing on debt burden to future generations, so they should get some of the benefits because they are going to pay for it.

Q. So based on those guidelines, what did you conclude would work best?

A. Small infrastructure projects rated the highest, and a temporary reduction in the GST targeted to consumer durables, especially autos.

Q. Why only small infrastructure?

A. New infrastructure projects are hard to get going quickly. Large infrastructure projects—watch out if you’re accelerating those. Even if you overrun costs by five per cent, that’s a lot of money. Very risky.

Q. Why not income tax cuts?

A. With income tax cuts, a lot of that money people just use to reduce debt. Some of it goes into savings.

Q. Doesn’t an auto industry bailout, or special support for other hard-hit industries like forestry, count as stimulus?

A. It’s really on a different track. We wouldn’t want an auto bailout decision to be made on the basis of how much boost it’s going to give to economic activity in 2009. This is a problem that’s been a decade in the making and it will take a decade to sort it out. Different criteria should be applied to industry bailouts.

Q. One idea that’s being discussed in government circles is enhancing Employment Insurance benefits. Would you approve?

A. As long as what it’s doing, at the end of the day, is increasingly labour productivity. Most of the proposals that come up just make more people eligible, and probably have people sit in unpromising labour markets for even longer than they do.

Q. But if you give more money to people who have just lost their jobs, or folks who don’t earn much to begin with, they’ll surely spend it. Isn’t that as good a way as any to juice up the economy?

A. Social policy of all sorts you can obviously spend on. There are people coming from all over the place who thought these were a good idea a year ago, five years ago, and they’ll still, no matter how much money you put it, believe you should put in more money. The problem is making this temporary.When the economy is recovering at a good pace, are the politicians going to be able to remove it? It could be really difficult.

Q. How easy would it be to reverse a GST cut?

A. One would think it wouldn’t be overly difficult to say the cut was there as a stimulus and then remove it. But the feedback I’ve been getting is, ‘If you think politicians…’ And I say, in that case, don’t go near [a GST cut] with a ten-foot pole. It would be really a bad move if you couldn’t get it back up again and we’re stuck collecting even less revenue from the GST.

Q. You say the stimulus has to come fast. But if this recession is really deep and long, wouldn’t stimulus that rolls out more slowly, in the later stages of a prolonged slump, be equally worthwhile?

A. What they should do in this upcoming budget is get it in as soon as possible. If stimulus is still going to be there until mid-2010, that allows for an awful lot more bad news.

In our forecast, we certainly see the first quarter of next year as very negative. Second quarter, we see zero growth. Third quarter, probably slightly positive, and fourth quarter even a bit more positive. By 2010, we might be growing between two and three per cent, and 2011 should be a good recovery year.

Q. But what’s the harm in assuming things will be worse that you expect, and embarking on a longer stimulus program?

A. What would happen is the stimulus wouldn’t be doing what it was supposed to do, and we’d be building up a deficit. One of the acid tests of these [stimulus] proposals is they should be out of there by 2012-13. We could have had a decent pace of growth in 2010, 2011 and 2012. So if they are not out of there by then, they are needlessly adding to debt.


 

Talking stimulus with economist Dale Orr

  1. I tend to agree that the best move would be to spend on small infrastructure and EI. EI is an automatic stabilizer, and spending on it will decrease when employment recovers. What I would personally prefer is a less on/off EI scheme, where there is some decay (gradual decrease) in the stream of payments in order to provide incentive not to be on it the maximum X weeks allowed by the program. Cutting GST will stimulate consumption, of which a lot will just leak out of the country in imports.

  2. Fast, temporary, and helps the future?

    Forgive all current student loans. Boom. All of a sudden a generation poised to start the next wave of expansion in our economy finds the weight of student debt taken off of them and their credit ratings.

  3. The Frazier
    Auto and Economic Recovery Plan

    As an observer of the economic recovery efforts currently underway I must say I have not heard a single plan that seems to be working. We have funded banks that are not loaning money. We have a scared populace that won’t borrow money we have looming layoffs and worsening conditions. Not to mention the denial by executives getting bonuses and out right fraud that is being exposed by the failing markets. So here is the “Frazier Plan”

    I was ordering a Coupon to get my Digital TV converter for my analog set and realized this program could be the answer. Briefly the government is giving me a $40.00 coupon to purchase a $50 to $60 converter box. Then it occurred to me the government could do the same thing with autos. Think about it. Here is how I see this idea working in an auto environment.

    First rule the car must be built in the US.
    Second Rule the car must be rated at 30 MPG Hwy
    Third it can not cost more than $17,000.

    Each card carrying tax payer that is a US citizen could apply on line for a coupon valued at $8,000 to $12,000.

    The difference in the purchase price of the auto would be paid by the coupon holder, for example 20% of the purchase price.

    This brings in the rest of the private sector to start the economy moving.

    This plan does not prop up the auto makers waiting on the economy to turn around. What they need is sales. The proposed loans to the auto makers does not help the rest of the industry if no one is buying cars, and what about dealers, suppliers, shippers and lenders. The auto industry is large enough to completely jump start the economy.

    The tax payer is funding the whole thing anyway so why not let the tax payer be the principal beneficiary?

    GM has three models that qualify
    Ford has three models
    Chrysler has one
    Toyota has three

    Customers would visit their local show room to order the car they want. They can upgrade with their own cash as long as the car meets the mileage requirement.

    I estimate it will cost about 700 billion dollars. It will leverage another 700 billion in private money.

    It will reduce oil imports by about 1/3. So what are we waiting for? Send this on to your friends and to your congressman.

    The Frazier Plan

    Ed Frazier Author

    • It makes every bit as much sense as the great “financial experts” plans, at least to me. We had somebody in these comments last week talk about a similar plan involving the Chevy Cobalt. Personally, I’d remove or expand the restriction on total vehicle cost–the cost from the government would remain the same, and as long as the emission standards were met, what do I care if someone wants to pull more money out of their own pocket? Plus it may spread the stimulus out a bit more between car plants.

  4. I can’t believe they haven’t started small infrastructure stimulus already, it’s such a universally held good thing.

    I’m not entirely sure I understand changes to EI. For instance, just because A LOT of people are losing their jobs, why would you need to change the individual’s waiting period? I’ve heard that suggested, and I simply don’t get it.

    Another really easy one, I think, is deferring the tax-free savings account due to start January 1. Sure, the banks will be mad, but I don’t care. But it seems silly to me to encourage money hoarding at the exact time we need people with extra cash to spend it!

    Sadly, I no longer have any faith whatsoever in ‘financial experts’ since those “really smart people” absolutely caused this mess in the first place. I think my suggestions are just as worthy of consideration. Yes, I know I’m disrespecting an entire industry, several, probably. and my brain knows that’s unfair. But my heart says every one of them either had some responsibility for causing the disaster, or they had some responsibility for not preventing it.

  5. Imagine you were managing a pension fund with specific payments to make over the next 30 years. In order to meet your obligations, you need to earn an average of 6% on the funds. Where to invest? Stocks? Bonds? Real estate?

    Why not lend the money to municipalities wishing to build roads, bridges, sewers or other “hard” infrastructure. The feds wouldn’t have to spend a penny. They would simply agree to guarantee the debts incurred for municipal projects that meet federal criteria.

    Municipalities would repay the loans over the next 40 years, which would more or less correspond to the useful life of the infrastructure being created.

    If municipalities need a long term source of funds to repay the loans, the feds could dedicate a portion of the federal fuel tax to the municipalities in which the tax was collected. This would effectively convert fuel tax to a user fee. I suspect people would mind fuel taxes if they knew the funds were being used to build & maintain roads in their own municipality.

    Winners: pension funds and their beneficiaries
    municipalities and their ratepayers
    contractors and their employees
    federal government (big stimulus, no deficit)

  6. Rexjeep,

    That’s good plan you’ve got there, asking foreign taxpayers to subsidize American cars. I don’t know if you’re going to get any traction on this Canadian Web site (since we have our own car industry). Have you tried Haiti?