SPEND ALL THAT MONEY? WHY AND ON WHAT?
Liberals are picking a number first, then finding projects to justify it after
Let’s get the politics out of the way first. Is Justin Trudeau’s plan to double federal spending on infrastructure and run deficits of $10 billion annually for the next three years, as a Winnipeg Sun headline had it, “POLITICAL SUICIDE”? Not likely.
If deficits were the political hemlock they’re made out to be, Kathleen Wynne, whose political philosophy Trudeau seems to have closely copied, would not be in power. For that matter, neither would Stephen Harper. Both made a policy choice to run large deficits, and both were subsequently re-elected. A taboo is only a taboo until it isn’t.
But that doesn’t mean it’s a good idea. No, it won’t “wreck” the economy, as the Conservatives would have you believe — any more than it will it “kick-start” the economy, to use a verb the Liberals might prefer. Government policies, as a rule, simply don’t have that kind of transformative effect, for good or ill — certainly not in the mild doses the Liberals have in mind, i.e., deficits of one-half of one per cent of gross domestic product.
So it’s not that any great calamity would befall the country if the Liberals were to carry out their plan. The debt would rise, it is true, but not enough to prevent the debt-to-GDP ratio from falling. It’s just that it’s all so pointless and ill-conceived: unnecessary, at best, and likely to involve considerable waste of public funds.
There is a legitimate and longstanding debate over the efficacy of fiscal stimulus as a means of pulling economies out of recession. A skeptic would point to the signal absence of real-world examples of the success of this approach, versus the long string of failures where it has been tried — the U.S. in the 1960s, the U.K. in the 1970s, France in the 1980s, Japan in the 1990s, and so on.
But never mind. On paper, at least, it is still possible to describe a set of conditions in which fiscal stimulus might be of some use. But even its strongest advocates would concede that one of these should be that you are, in fact, in a recession.
As opposed, say, to now. We shall see next week whether the first two quarters of the year met the famous “technical” definition of a recession. Suppose it did: we are talking about conditions that applied anywhere from three to nine months ago. Even if we were in recession then, there is nothing to suggest that we are now.
The circumstances that created that early-year downturn — a sudden 50 per cent drop in the price of oil — have had whatever negative impact, largely confined to the energy sector, they were going to have. From here on in we are more likely to see the positive impact of cheaper oil, and the cheaper dollar that went with it, in terms of the competitiveness of central Canadian manufacturing.
There may be a case for fiscal stimulus in a recession, recognizing that it might well be over, as was our experience in 2009, by the time the stimulus is applied. There is none whatever for pulling a lever marked “deficit” any time the economy is growing a little slower then we might like.
Yes, yes, yes, some defenders of the plan sigh impatiently. But it’s not really about short-run stimulus. It’s about increasing the long-run productive capacity of the country. Interest rates are at historic lows. At such a time, it only makes sense to borrow to invest in infrastructure, of a kind that will pay returns — in higher productivity, and consequently higher government revenues — far into the future.
The use of terms such as “investment” and “infrastructure” are intended to distinguish this from traditional tax-and-spend liberalism. This isn’t borrowing to buy the groceries; it’s borrowing to fix the roof. If only it were that simple.
For starters, the Liberals are rather loose about their definition of infrastructure. The word came into use as a more impressivesounding name for what used to be called public works: roads, bridges, transit, hard assets with an obvious connection to output and efficiency. But look in the Liberal plan, and you find much of it is to be spent on “social infrastructure” — for example, daycare centres — and “green infrastructure,” such as water treatment centres.
Even roads and bridges are not self-evidently worth investing public funds in, just because you call them infrastructure. The economic answer to “How much should we spend on infrastructure?” is not “more” or “twice what the Tories spent.” It’s “as long as the social return still exceeds its social cost.”
We know the cost well enough. But how do we measure the social return? All kinds of things with all kinds of backers are forever clamouring for governments to spend money on them. Why this project and not that? As it happens, when it comes to roads and bridges, we have a very good measure of the value people put on them: the amount they are willing to pay to use them. By
Even if we were in recession then, there is nothing to suggest that we are now.
their nature, they are the sorts of things you can charge people to use — and if you can, you probably should, to limit overconsumption, reduce congestion and so on.
But if you can charge for them, they aren’t really public goods: the sorts of things that can be paid for only by taxes. Private investors should be willing to finance and build them, in return for the revenue stream they would yield. And if governments needn’t fund them, they probably shouldn’t: taxes, being finite, should be reserved for those things that cannot be paid for in other ways.
Probably there are some things that only government can pay for that are not at present being adequately funded. But it would be nice to see those identified and listed in order of priority, with a sum attached below, rather than, as one suspects in this case, picking a number first, then finding the projects to justify it after.