Can Stimulus Spending Stimulate the Economy?

Governments are pouring funds into stimulus packages to boost the economy, but a focus on long-term infrastructure renewal might be a wiser way to go.

In the wake of the “Great Recession” of 2009, the concept of stimulus – government tax cuts designed to promote spending and boost the economy – has been both praised and denounced in Canadian and U.S. politics. Taxpayers love the extra cash, but some worry about the long-term effects of the rebates. A friend of mine, who has some 30 years of experience in commercial real estate development, recently suggested that this kind of infrastructure-based stimulus spending could be interpreted as a kind of “right-wing plot,” especially in the American context. His point, I think, is that ad hoc investment specifically designed to boost consumer spending can take focus away from the larger issues, from the growing income gap to investments in infrastructure with long-term payoff, such as transit, green energy, and energy-efficient construction.

My friend’s colourful remark may be short on analysis, but its sentiment recalls the concerns about Canadian stimulus spending recently expressed by Liberal MP John McCallum, as well as the more wide-ranging critiques of U.S. stimulus spending made by economist and former U.S. labour secretary Robert Reich.

The concerns expressed by McCallum and Reich ask two simple questions: whether the money being spent is necessary to fix the economy, and whether it is being invested in infrastructure that meets long-term social and economic goals. Reich has suggested that the answer to these questions is no, criticizing stimulus as it relates to job growth, macroeconomic policy, and structural change in the global economy.

John McCallum does makes some valid points: if you have a time limit (which we do) and a stimulus program where most of the money isn’t yet out the door, then questioning the program’s effectiveness is a no-brainer. But stimulus spending cannot be written off this easily – doing so would be like saying that Toronto’s St. Clair streetcar initiative proves that all streetcar and LRT plans don’t work just because this one happened to take too long and cost too much. The Harper government has let politics and bureaucracy interfere with the timely implementation of infrastructure spending. Unfortunately, this is not uncommon; however, it needn’t be used to argue against wise and well-executed stimulus spending.

McCallum suggests that the government should have used the federal gas tax to pour additional funds into municipalities and, ideally, reduce some of Canada’s overwhelming infrastructure deficit. In 2007, the Federation of Canadian Municipalities (FCM) estimated that the country’s municipal infrastructure deficit sits at around $123 billion, and at the time, the Canadian Construction Association added that this figure did not take into account the billions of dollars that had gone into new infrastructure. To combat the growing municipalities deficit in Ontario, the provincial Infrastructure Ontario program was designed in 2005 to implement the ReNew Ontario infrastructure program, a $30-billion, five-year strategic investment plan. Meanwhile, more money is scheduled to be rolled out in the near future.

And what has the federal government done? With $2 billion allocated and having spent only $493 million so far, the Federal Infrastructure Stimulus Fund is a mere trickle where we need a flood. The provincial programs are where the real action is taking place, but even with these efforts, Canada’s major infrastructure needs – deficit reduction, new sustainable infrastructure, and a platform for stable job growth – remain only partially met, at best.

We need to ensure that we have a trained workforce to participate in new, green, high-tech, value-added, innovation-driven jobs. We have to realign the income disparity to protect the middle class by encouraging spending and recovery. Finally, we must develop sustainable, permanent strategies to manage our investments in infrastructure. These are all challenges that the federal government needs to address.

Although short-term stimulus funding has created some useful and necessary projects, it is unable to fulfill the country’s long-term needs. On a provincial level, Ontario’s infrastructure program has been much more effective, investing in health, transportation, and energy. It’s on its way toward building a productive, sustainable, and future-driven economy, but there is plenty more to be done. Take public transit, for example. We need to de-politicize our buses and subways and instead find methods to fund predictable, ongoing investment – no matter how boring that may be. As a Torontonian, I look to Vancouver with envy, admiring the city’s ability to build transit lines at a reasonably steady pace; Expo 86 and this year’s Olympic Games bookended the transit system’s development spectacularly. A non-political regional transit agency that actually expands is a compelling and almost foreign concept to a 416-er wondering if another round of bickering between the municipal and provincial governments will once again delay the rollout of new transit lines.

As any number of experts have suggested, infrastructure investment needs to be shifted away from stimulus spending and toward necessary, long-term planning. And it’s not only our municipalities that we need to worry about – our social infrastructure and the economic security of our workforce also need our attention. Federal gas tax transfers are necessary, but certainly not sufficient, and Canada’s federal systems for employment insurance and training and skills development are both in desperate need of expansion. If the federal government is looking for inspiration, it might examine the efforts of successful regional and provincial programs – sometimes it’s the little guys that can produce the best results.