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The debate around short-term stimulus: where will Canada stand?


 

Back in the panic-stricken fall of 2008, the G20 emerged as the saviour of the global economy, with Canada joining in as the major economies joined forces to ramp up spending and keep an international recession from deepening into a depression.

Simpler times.

In the run-up to the G20 finance ministers’ meeting later this month and the leaders’ summit in early November, there’s no sign of that sort of unity of purpose. The fundamental divide: stimulus doves vs. austerity hawks. Finance Minister Jim Flaherty this week continued to position Canada squarely in the latter camp:

“In the absence of an external shock to the Canadian economy, we’re on the right track. Accumulating deficits and creating a large public debt over time is the worst thing you can do to an economy and to the people of a country, and we have no intention of going in that direction.”

Now, it’s important to note that Flaherty gives himself room to switch course, but only “if we had some sort of world recession.” So basically he’s saying the Canadian government would turn to stimulus spending only in response to a recession, not as a measure to stave one off. Similarly, his British counterpart has lately ruled out both stimulative spending hikes and tax cuts, saying, “Right now, temporary tax cuts or more spending are two sides of exactly the same coin, a coin that has to be borrowed—more debt that has to be paid off.”

But other voices are sounding the alarm. Today the International Monetary Fund warned of a possible European recession, which could spread, and urged governments that aren’t in the worst fiscal shape to ease off on shrinking their deficits. The IMF says deficit-cutting “should not come at the expense of risking a widespread contraction in economic activity” and countries with relatively strong balance sheets “should consider delaying some of their fiscal consolidation.”

Canada would surely count as a country with a manageable deficit. The issue, it seems to me, is whether Flaherty and Prime Minister Stephen Harper will want to play ball if the G20 settles on some sort of moderate stimulus program in the next few weeks. Given the Harper government’s heavy investment in making Canada a credible player at the G20 and G8 tables, I wouldn’t have thought they would want their government to be seen as an outlier.

And, after all, the case for short-term stimulus for the sake of shoring up the world ecnonomy, combined with credible medium-term plans to rein in deficits, is solid. The Economist sums it up this week, criticizing politicians who place “overwhelming emphasis on short-term fiscal austerity over growth,” and concluding that  “the collective obsession with short-term austerity across the rich world is hurting.”


 

The debate around short-term stimulus: where will Canada stand?

  1. YOU CAN’T FIX THE ECONOMY BY FIXING THE DEBT, BUT YOU CAN FIX THE DEBT BY FIXING THE ECONOMY!!!!

  2. And, after all, the case for short-term stimulus for the sake of shoring up the world ecnonomy, combined with credible medium-term plans to rein in deficits, is solid. The Economist sums it up this week, criticizing politicians who place “overwhelming emphasis on short-term fiscal austerity over growth,” and concluding that ”the collective obsession with short-term austerity across the rich world is hurting.”

    I see you’re still behind the times, Mr. Geddes. As has been repeatedly stated by Justice Minister Nicholson, this government isn’t one that uses facts or statistics in its governing. It goes by what the average people on the street who’ve received no sort of training or education in the area are telling them.. or at least, as we know by the long-form census, what they think those people secretly want to be telling them.

  3. Wall St Journal ~ Why Americans Hate Economics:

    Economic bimboism is rampant in Washington. The Center for American Progress held a forum earlier this summer arguing that raising the minimum wage would create more jobs. For this to be true, you have to believe that the more it costs a business to hire a worker, the more workers companies will want to hire.

    A few months ago Mr. Obama blamed high unemployment on businesses becoming “more efficient with a lot fewer workers,” and he mentioned ATMs and airport kiosks. The Luddites are back raging against the machine. If Mr. Obama really wants to get to full employment, why not ban farm equipment?

    Or consider the biggest whopper: Mr. Obama’s thoroughly discredited $830 billion stimulus bill. We were promised $1.50 or even up to $3 of economic benefit—the mythical “multiplier”—from every dollar the government spent. There was never any acknowledgment that for the government to spend a dollar, it has to take it from the private economy that is then supposed to create jobs. The multiplier theory only works if you believe there’s a fairy passing out free dollars.

    How did modern economics fly off the rails? The answer is that the “invisible hand” of the free enterprise system, first explained in 1776 by Adam Smith, got tossed aside for the new “macroeconomics,” a witchcraft that began to flourish in the 1930s during the rise of Keynes. Macroeconomics simply took basic laws of economics we know to be true for the firm or family—i.e., that demand curves are downward sloping; that when you tax something, you get less of it; that debts have to be repaid—and turned them on their head as national policy.

  4. Sure, why not, just keep spending and borrowing. Can’t see how that will go wrong.
     
    And eventually, when the good times return, we can increase the size of our public service, expand our social services, and nationalize our industry with all of our borrowed money.
     
    Then, we’ll all be able to enjoy the splendor of living in a socialist utopia like Greece.
     

    • Or you could use economics instead of bumper stickers.

  5. But Flaherty and Harper already have a stimulus strategy in play called reducing corporate taxes. The problem is it’s a strategy that has already been demonstrated to be a failure because the companies that benefit aren’t investing thier windfall in R + D, aren’t using it to retool and creating jobs and, especially in the case of banks, aren’t even lending capital to other other business. They’re sitting on cash or paying out bonuses and at the same time we’re impairing our ability to pay for critical government services.

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