For faster recovery, less stimulus

Alberta’s provincial government is likely the most conservative in the country. So when it rolled out a hodgepodge of interventionist policies as its economic recovery plan in late June, that ought to have made taxpayers and workers across the country fearful of what the spend-happy federal government and other provincial legislatures might have in their own policy pipelines.

The Alberta plan calls for higher government spending for: agricultural support, childcare, skills training, business subsidies, decommissioning orphan oil wells, a new provincial agency to encourage business investment, arts and culture, and sundry economic diversification programs. Capital spending will increase by over $1 billion — this on top of the previously announced $1.5-billion Keystone XL equity investment and $963-million increase in capital maintenance and renewal, neither of which was included in the province’s February budget.

On top of the spending increases, the government throws in some protectionism for good measure. “Employers should not be seeking to fill available jobs through the Temporary Foreign Worker Program,” the recovery plan scolds, as if the economy will be helped by having the government dictate the hiring practices of private companies. Thus, the “vast majority of occupations” will be effectively removed from the program.

Fortunately, the Alberta plan is not uniformly bad. To the government’s credit, it promises some measure of deregulation and dropped the corporate tax rate from 10 per cent to eight per cent a year on Canada Day, 18 months ahead of schedule. Moreover, the damage to taxpayers from higher spending is mitigated by a modest but real effort in the pre-pandemic fiscal plan to restrain spending.

Meanwhile, the profligate pre-pandemic spending of the federal government and most provinces, including Ontario, makes their current spending sprees — and any forthcoming plans for longer-run spending-based “stimulus” — all the more harmful to taxpayers. Unfortunately, the federal government, which increased the carbon tax in April, has so far demonstrated no willingness to limit the size of government.

If politicians wanted to learn from economic history (which is improbable) and were willing to suppress their meddling instincts (we have now moved from the improbable to the miraculous), they would find that interventionist plans to revive the economy seldom work. One example from a period in fiscal history to which the current economic crisis is often compared is the Great Depression, and indeed, the Great Depression provides an excellent case study on the deleterious effects of interventionism.

After the stock market crashed in October 1929, unemployment in the United States rose to nine per cent in December before falling back down to 6.3 per cent by June 1930. “Only after politicians started intervening,” economist Thomas Sowell observed, “did unemployment reach double digits — and it stayed there throughout the rest of the 1930s,” exceeding 20 per cent for several years. The infamous Smoot-Hawley Tariff Act, signed into law in June 1930, was one of the policies intended to help the economy and protect domestic industries; instead it ended up protecting many workers right out of a job.

In contrast to the interventionist response from presidents Herbert Hoover and Franklin D. Roosevelt to the 1929 stock market crash, Ronald Reagan took a hands-off economic approach to the 1987 stock market crash. The happy result was a quick recovery and two decades of steady economic growth instead of a severe and lengthy recession.

The perils of interventionism and benefits of free markets have been confirmed time and again. In 2010, Harvard Prof. Alberto Alesina, a political economy expert who passed away earlier this year, concluded based on his extensive study of fiscal policy in developed economies: “The evidence from the last 40 years suggests that spending increases meant to stimulate the economy and tax increases meant to reduce deficits are unlikely to achieve their goals.” Instead, governments should cut both spending and taxes.

Government spending cuts rather than increases can improve economic growth by leaving more resources in the private sector and signalling a future lightening of the tax burden, which encourages business investment. This is exactly what happened in the 1990s when Canada’s federal and provincial governments, most notably in Alberta and Saskatchewan, sharply reduced spending. This enabled meaningful tax cuts that raised productivity and incomes. By contrast, the spending-based “stimulus” undertaken by Canada and other countries in 2009 left taxpayers with a huge fiscal burden and was followed by a decade of lacklustre growth.

As history has shown, the road to economic recovery is clear — and it is not paved with interventionist policies.

RONALD REAGAN TOOK A HANDS-OFF ECONOMIC APPROACH TO THE 1987 STOCK

MARKET CRASH.