Lib­er­als’ fis­cal plan all for show

National Post (Latest Edition) - - CANADA - An­drew Coyne

When the Lib­er­als un­veiled their pro­posal for mod­est, tem­po­rary deficits last Au­gust it was in the im­me­di­ate wake of the rev­e­la­tion that the econ­omy, ear­lier in the year, had de­clined for sev­eral months. This was read­ily spun into “Canada is in a re­ces­sion,” which be­came the jus­ti­fi­ca­tion for the deficit, with­out whose stim­u­la­tive ef­fect the econ­omy would surely never re­cover, or not soon enough.

True, there was also talk of how “in­vest­ing” bor­rowed funds in in­fra­struc­ture would pay off in long- run gains in pro­duc­tiv­ity. But the em­pha­sis was on, as Justin Trudeau put it, “kick­start­ing the econ­omy.” And yet the deficit was to be only $ 10 bil­lion an­nu­ally, for two years, from an as­sumed start­ing point of near bal­ance. Even in a re­ces­sion.

Now here we are si x months later, and we are not, in fact, in re­ces­sion. The econ­omy is grow­ing more slowly than was fore­cast a few months ago, but it is grow­ing more rapidly than the Lib­er­als claimed it was — since they claimed it was shrink­ing. Yet the deficit has some­how bal­looned to $ 18 bil­lion, with­out any of the Lib­eral stim­u­lus plans hav­ing been en­acted.

Econ­o­mists are try­ing to puz­zle out how it could pos­si­bly be that large, even af­ter tak­ing into ac­count the now no­to­ri­ous $ 6- bil­lion “fudge fac­tor.” But let’s as­sume it’s le­git: for fed­eral rev­enues to have come in so far un­der pro­jec­tions sug­gests the Lib­er­als were in fact as­sum­ing far stronger growth for the cur­rent year than they let on. As in­deed they were. The re­ces­sion claim was al­ways just for show.

And yet, so far as deficits are sup­posed to be stim­u­la­tive, we surely have all we could ask for: at $18 bil­lion, the deficit is nearly twice as large as the one the Lib­er­als pre­scribed, for an econ­omy that is, again, not in re­ces­sion, but merely grow­ing slower than we’d like. Yet the Lib­eral fis­cal plan ap­pears to be un­changed: the same $10 bil­lion will sim­ply be added on top.

OK. So for­get about stim­u­lus. Let’s talk about pro­duc­tiv­ity: growth in the long run. As we should. Be­cause un­less we do some­thing to put in­comes on a sharply higher growth track for the next 20 or 30 years, we won’t be able to bear the costs, mostly for health care, of the ter­ri­fy­ing num­bers of el­derly com­ing our way.

In re­cent decades we’ve been able to raise in­comes, not by mak­ing each worker more pro­duc­tive, but by putting a lot more peo­ple to work: we had the fastest labour force growth in the western world. Lat­terly we were given an ad­di­tional boost from high oil prices. Nei­ther of th­ese ap­ply any longer. So we re­ally have no al­ter­na­tive but to get se­ri­ous about rais­ing pro­duc­tiv­ity.

The prob­lem with Canada’s econ­omy, then, is not so much that growth is below po­ten­tial as that po­ten­tial growth it­self is less than it might be. Short- term de­mand stim­u­lus won’t help that. But in­vest­ments that en­hanced the econ­omy’s pro­duc­tive ca­pac­ity — ag­gre­gate sup­ply — might.

Ex­cept only a frac­tion of the Lib­er­als’ planned new spend­ing — about a third — is for “in­fra­struc­ture,” much of which is ear­marked, not for the sort of projects that are ac­knowl­edged to have po­ten­tial pay­offs in higher pro­duc­tiv­ity, but for “so­cial” and “green” in­fra­struc­ture. Even if you ex­cluded them, the like­li­hood that such politi­cized “in­vest­ments” will be sub­ject to gen­uine tests of risk and re­turn must be rated as slim.

But never mind. As­sume the govern­ment means what it says. To re­in­force the mes­sage, the govern­ment an­nounced it had ap­pointed an “ad­vi­sory coun­cil on eco­nomic growth,” headed by man­age­ment con­sul­tant Do­minic Bar­ton.

To take this se­ri­ously, you are obliged to ab­sorb two rather charm­ing as­sump­tions. One, that slug­gish growth is a prob­lem that just cropped up, some­thing the party has not had time to con­sider be­fore this. And two, that all that has been miss­ing in our ap­proach to this prob­lem to date has been the re­port of an­other ad­vi­sory coun­cil.

In fact it’s not that com­pli­cated. What is needed is less of the kind of ag­gre­gate so­lu­tions the Lib­er­als favour — in­ject more in­fra­struc­ture or R&D sub­si­dies at one end, out comes higher pro­duc­tiv­ity at the other — and more sys­tem­atic in­cen­tives for ev­ery­one, across the econ­omy, to make more ef­fi­cient use of pro­duc­tive re­sources.

To get them to do this, it is nec­es­sary only to do two things: a) let them, and b) force them. Let them, as in re­mov­ing the im­ped­i­ments to ef­fi­cient re­source use: need­lessly high tax rates, that de­ter in­vest­ment; sub­si­dies and other price dis­tor­tions, that mask the true costs of things; and so on.

And force them, as in ex­pos­ing them to greater com­pe­ti­tion. The real gains in pro­duc­tiv­ity do not typ­i­cally come from star­tling tech­no­log­i­cal break­throughs, but from thou­sands and thou­sands of in­cre­men­tal gains, in busi­nesses large and small. Of­ten th­ese amount to no more than adopt­ing prac­tices al­ready in place else­where. Still, hu­man na­ture be­ing what it is, peo­ple are dis­in­clined to do so, un­til they have to — un­til they fear that if they don’t, their com­peti­tors will eat their lunch. The so­lu­tion — more com­pe­ti­tion — seems ob­vi­ous enough. Yet large sec­tors of our econ­omy re­main in­su­lated from com­pe­ti­tion in var­i­ous ways, from for­eign own­er­ship con­trols to reg­u­la­tory bar­ri­ers to en­try.

Much of this is in the re­port by for­mer BCE chair­man Red Wil­son (“Com­pet­ing to Win”) that the Tories com­mis­sioned, then ig­nored. Much else is in the count­less stud­ies on pro­duc­tiv­ity that have al­ready been com­piled.

But much of it, frankly, could be found in any eco­nom­ics text­book. If Do­minic Bar­ton does noth­ing more than to get the govern­ment to read one, the whole ex­er­cise will have been worth­while.


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