Categories: Andrew Coyne, Capital Read

News flash: no free lunch after all

by Andrew Coyne on Wednesday, March 24, 2010 10:05am - 116 Comments

Fraser Institute study confirms what was already plain as day: fiscal “stimulus” had nothing to do with the recovery. Using Statistics Canada data, they find:

Of the 1.1 percentage point improvement in economic growth between the second and third quarter, government consumption and government investment each contributed only 0.1 percentage points. Business investment contributed 0.8 percentage points and was the driving force behind the improvement in economic growth.

Of the 1.0 percentage point improvement in economic growth between the third and fourth quarter, government consumption and government investment contributed nothing. Over this period, increased net exports were the primary reason for the improvement in economic growth.

This, as I say, was obvious enough already. The recovery began at the end of Q2, long before any shovels hit the ground. Fiscal stimulus, besides ineffective, was unnecessary: the extraordinary infusion of monetary stimulus by the Bank of Canada was bound to trigger a revival in total spending. With inflation expectations knocked flat, it was to be expected that this would translate into gains in real output in the short term (though with inflation already showing signs of life, the Bank will need to be quick to withdraw the liquidity it injected).

Fiscal policy’s chief impact is on the composition of demand. It does not ultimately expand it. As was more or less the consensus in the economics profession, before the “policy panic” of 2008.

So all we got for all that federal spending was a $160-billion increase in the national debt, a pile of dubious make-work projects and a fistful of photo-ops for grinning Tory MPs. Which, after all, was always the point.

Tags: conservative party, deficits, financial crisis, fiscal policy, stimulus

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http://intensedebate.com/people/andrewcoyne Andrew Coyne

Fine, if you will likewise consider the impact of a 2% prime rate — which unlike fiscal stimulus, was in place, in effect and in time to have some impact on these numbers.

ex canuck

Point taken. Thank you. We must wait for the next batch of statistics and their interpretation by Fraser, whatever that is worth, to see what the stimulus has meant. One has always assumed that the great fear of all governments was rapidly increasing unemployment and that this fear was a prime justification for stimulus spending. Make work projects are as Canadian as the sentiment behind King's "conscription if necessary, but not necessarily conscription".

http://intensedebate.com/people/Crit_Reasoning Crit_Reasoning

Serious question… is there any room for Canada to back down on some of the stimulus projects that haven't broken ground yet? Couldn't we save a few billion that way?

http://intensedebate.com/people/sourstud sourstud

I've thought the same thing. I've also read somewhere (can't remember) that the gov't was 5-6bn BEHIND on stimulus spending. I could see the Harper gov't keeping some of the $ behind, and then claiming a massive savings on the "stimulus program" once the economy was in full recovery mode. They'd be able to say that they saved the economy on the cheap, while the rest of the world is still burning. Harper would be a national hero.

http://intensedebate.com/people/FVerhoeven FVerhoeven

I don't get this.
When At Issue, on December 2008, it was Coyne, when asked who was the most underrated politician, he mentioned Ignatieff. Not once did Coyne, when he had a national audience in front of him, say: " Hey, listen up! You know what?? Harper was onto something when he tried to downplay the severity of the recession."

I did not hear Coyne talk about the differences between monetary and fiscal policies then, nor did I hear from him then that perhaps Harper could very well understand those differences.

Why complain about all of this after the fact, if more of the MSM personalities could just as easily have made common sense when it was needed?

" Which, after all, was always the point."

http://intensedebate.com/people/LynnTO LynnTO

Maybe because the recession was severe, and the voting public decided in their collective wisdom that something needed to be done.

Even if it wasn't the most effective or appropriate solution.

Holly Stick

I note no answer to my question about believing the Fraser Institute. Have any of the economists working for the Fraser Institute had their work published in academic journals? Have they passed any peer reviews?

http://intensedebate.com/people/LynnTO LynnTO

the D of C for the Fraser Institute posted a reply, above, which would indicate that just about all the economic stuff they publish is peer reviewed by field experts internally and externally.

Much though I'm not ideologically aligned with them, I'll give them props for that.

Holly Stick

Well, I would wonder what the criteria for calling someone an expert would be and who applies that criteria.

Craig O

*Physics geeks alert*

Depends if the cliff the the Tories drove us off is high enough for the car to reach terminal velocity. Otherwise, yeah, the ground would be approaching faster when going off the Liberal's slightly larger cliff, at least when we all hit that ground, in this completely hypothetical and disturbingly morbid scenario…
Craig O

*Physics geeks alert*

Depends if the cliff the the Tories drove us off is high enough for the car to reach terminal velocity. Otherwise, yeah, the ground would be approaching faster when going off the Liberal's slightly larger cliff, at least when we all hit that ground, in this completely hypothetical and disturbingly morbid scenario…
http://www.progressive-economics.ca/2010/03/24/fraser-institute-stimulus/ Erin Weir

The Fraser Institute’s report is deeply flawed. It does not actually examine stimulus as a share of economic growth. Instead, it compares the rate of increase in stimulus between quarters, which is interesting but in no way supports the Fraser Institute’s (or Coyne’s) conclusion. My blog provides a detailed critique.
David

I don't know where all these "dubious make-work projects" are located because in my city (Ottawa) all the infrastructure stimulus projects have been pulled from the city's long term capital plans. I know it's the same in some of the other major cities. Projects that had previously been put off for years for lack of funds are now being built. We have a massive infrastructure deficit in this country and all that this stimulus funding does is put a small dent in it, but I suppose it's easy to forget the problems we had before the recession. Moreover this infrastructure spending comes at a time when the cost of construction and materials is somewhat lower than it has been, or has everyone conveniently forgotten the cost inflation for infrastructure projects in 2005-2007 since government and the private sector were competing like crazy to get stuff built? It was particularly wild in Alberta. It's just too bad that this didn't seriously get underway last year, but being a year late should not be used as an excuse to put if off for a few years until we discover we needed it all along and it's a lot more expensive to build.
Holly Stick

Problems with the Fraser Institute report, including:

Government's "…job is to smooth out economic fluctuations by spending counter-cyclically and this is precisely what they did this time. The Fraser Institute researchers does not find evidence of that because they do not look. They focus their attention exclusively on the last two quarters of 2009, when recovery is starting to take hold…"

http://www.progressive-economics.ca/2010/03/24/ta…
Orson Bean

So the Progressive Economics Forum is now on record as confirming that the Harper Government made exactly the right choices as it steered the Canadian economy through the global economic meltdown and into the recovery. Who'd have thunk it?
Holly Stick

Of course the Harper minority government had to be forced to make the right choice.
Orson Bean

Yes, sometimes that happens in life. Some would argue that that's an example of a minority Parliament working as it should.

To me, the bottom line is that the Fraser Institute study is a bit of an exercise in bean-counting and number-crunching, with the virtues and shortfalls inherent in that. It's virtually impossible to quantify, in a retroactive cause-and-effect manner, the extent to which these measures inspired the confidence among business and consumers that was necessary to arrest the potential economic meltdown we were facing.

Whether this much spending resulted in that much growth (or did not) — while I'm glad that economists look at that and consider it, to me, it's a bit of a mug's game.