The Mark 2010

There's a right way and a wrong way for the government to intervene in the economy.

In late 2008 the Liberal Party had already recognized the seriousness of the recession and was calling for an economic stimulus package that was timely, targeted, and effective. Although the Conservatives were among the very last people in the country to recognize that we were in fact in a recession, they did eventually come around and in early 2009 put together a stimulus package focused primarily on infrastructure to increase economic activity in the absence of private sector growth.

Reports like the Fraser Institute’s recent analysis of Statistics Canada however show that the stimulus package was neither timely, nor effective. Worse, their findings suggest the government failed to think ahead of time about the inevitable need for an economic hand-off to the private sector.

Think of the transition from government stimulus spending to private sector growth as a standard draw play in football. If the quarterback doesn’t time the hand-off just right, the running back either has to adjust his run, slowing him down while his opening closes meaning he hits a wall of defensive linemen, or it results in a fumble and some ensuing chaos on the field. When a government decides to stimulate economic growth to fight a recession, it has to time the hand-off to the private sector in the exact same way.

Because of the slow rollout of the Economic Action Plan, the government is set to unleash most of the infrastructure spending this coming summer, at which point the government will likely be competing with the private sector for limited resources, driving up costs for everyone.

The Liberal Party for its part had urged the government to transfer infrastructure money through the gas tax mechanism that we had established in 2005. This would allow municipalities, which obviously know where their own infrastructure deficiencies are, to begin construction right away. By getting the projects started at the height of the recession, it would have been both timelier and more effective.

Instead, we were treated to a very complex set of negotiations between all three levels of government. Then we had to wait for Conservative MPs to make their way out to future construction sites to pose for a photo op and announce that the work would begin soon. All of this needlessly delayed each and every infrastructure project funded by the Economic Action Plan.

There are of course drawbacks to other forms of stimulus as well. In late 2008 some people and organizations were suggesting that permanent or at least temporary tax cuts were the best way to stimulate our economy, which was already mired in recession.

During previous recessions Canadians have tended to increase their savings or reduce their debt levels with the disposable income that was available to them. While this is an important goal and also contributes somewhat to growth, there was no way to tell if tax cuts would lead to Canadians using their increased purchasing power to really stimulate the economy or if they would simply save the money. While we can have an economic discussion about the merits of tax cuts generally, there is no way to know if they will act effectively as near-term stimulus.

The exception of course is low income Canadians who tend to spend a much larger portion of their disposable income on necessities. Had the government chosen to take a tax cut route to stimulating the economy, lowering taxes for these Canadians would have been the best way to provide the economic jolt.

Needless to say, at this point all of this amounts to little more than academic discussion and provides a chance for us to consider the best course of action for future governments. As it stands, events have already been set in motion: all three levels of government have agreed to the infrastructure projects and shovels will finally be hitting the ground in the coming months. All we can do is wait to see if the hand-off gets fumbled or if the running back can scramble to avoid a crushing hit.