Why the Reinhart-Rogoff glitch doesn’t matter for Canada
By Stephen Gordon - Monday, April 22, 2013 - 0 Comments
If you’ve heard about Carmen Reinhart and Kenneth Rogoff’s much-cited conclusion that economic growth rates deteriorate once debt-GDP ratios go beyond 90 per cent, you’ll have heard by now that this result appears to have been produced by a coding error (as Econowatch explains here). My initial reaction was the same as that of any other economist who does applied work: an empathetic sinking feeling. This is the sort of mistake that could happen to anyone.
But my second reaction was to shrug. The Reinhart-Rogoff (R-R) result is was most pertinent in the debates about fiscal austerity being conducted in the U.S., the U.K. and Europe, where people are making the case for fiscal contraction before the recession is over. To the extent that there’s a debate about fiscal austerity in Canada, that’s not the one we’re having.
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What to expect from the federal budget
By Stephen Gordon - Thursday, February 7, 2013 at 1:28 PM - 0 Comments
Minister of Finance Jim Flaherty gestures as he delivers a speech to the Economic Club of Canada Wednesday February 6, 2013 in Ottawa. (Adrian Wyld/CP)
Finance Minister Jim Flaherty told us yesterday not to expect much in the way of important changes in the direction of fiscal policy, and I think we can take him at his word. In budget after budget, the government has been very clear about where it wants to go.
Firstly, they will want to limit growth in transfer payments to persons — things like elderly benefits, Employment Insurance and child benefits — to the rate of growth of GDP. The last three budgets projected that these transfers would converge to around 4 per cent of GDP and then stay there:
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A different take on Canada’s deficit-fighting story
By John Geddes - Monday, August 15, 2011 at 4:53 PM - 40 Comments
With the United States and European Union staggering under debt burdens, Canada’s success in sorting out its fiscal problems a decade and a half ago is often held up as an example to emulate. But it’s a model I often don’t recognize, even though I covered the turnaround story back in the 1990s.For instance, there’s this recent Washington Post piece, which touts the “Maple Leaf Miracle.” “Facing an unprecedented fiscal crisis, Canada got down to work,” it says. “The country passed a landmark budget in 1995. The plan tilted heavily towards cutting expenditures but also included some new revenue (the ratio was about $7 in cuts for every $1 of revenue). Canada cut the civil service by about 25 percent and overhauled its pension program. The plan worked.”
An American or, say, German fiscal hawk might well perk up at that prescription—cut public spending ruthlessly, laying off one in four government workers, while boosting the tax haul only very modestly by comparison. Sounds like a plan. Except it’s not the one that actually transpired in Canada.
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News flash: no free lunch after all
By Andrew Coyne - Wednesday, March 24, 2010 at 10:05 AM - 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.
