The Bruce Report

Three economists went hunting, and came across a large deer. The first economist fired but missed, by a meter to the left. The second economist fired but also missed, by a meter to the right. The third economist didn’t fire but shouted in triumph, “We got it!”

            That one always cracks them up in the dank warrens of Statistics Canada, where hollow-eyed numbers-crunchers try not to take themselves too seriously. But any good joke also bears an element of truth.

           Last week, according to a Report on Business story, the country’s “leading private economists” exhorted Finance Minister Jim Flaherty to keep the fiscal taps open. The nation, they argued, is only crawling towards a convincing recovery. Now is not the time to shut off the spigot.

“The dominant theme here is that unlike recoveries from previous recessions, this one’s going to be fairly slow and drawn out,” said Craig Alexander, deputy chief economist at Toronto-Dominion Bank. “I don’t think the government should be tightening fiscal policy before the recovery has gained traction.”

Not so fast, blurted the Fraser Institute’s Niels Veldhuis and Charles Lammam in an article for Business in Vancouver two weeks ago. “An economic recovery is occurring despite the fact that most of the stimulus spending has yet to be implemented,” they wrote. “In fact, the risk to a continued economic recovery in 2010 lies in governments continuing to push forward with their stimulus spending plans [as they] will compete with the private sector for scarce resources.”

Well, now, it’s good to clear that up. But whether your aim trends towards the right or left of whichever target is in your sightline, can we still agree that the underlying issue is the economic efficacy of government spending regardless of the circumstances?

Let’s not forget that the past two years has upended the norms. Today, legions of formerly right-wing, market-loving economists embrace Ottawa’s $60-billion Economic Action Plan (and its U.S. counterpart, the $800-billion Troubled Asset Relief Program) like socialists at an industrial planning seminar. Conversely, many others tremble at the prospect of prolonged, systemic public deficits.

The reason has nothing to do with global shifts in economic theory, and everything to do with forced government pragmatism in a crisis. A paramedic doesn’t ask a bleeding man whether he had a good breakfast; and finance ministers don’t bother with such arcane notions as productivity improvement when millions of jobs circle the drain.

Ironically, though, emergency stimulus funding may be the least effective way for governments to spark economic growth. According to the Institute of Public Affairs, a U.S.-based think tank, “Every economist who has won the Nobel Prize in Economics for his work in macroeconomics after 1981 has either dismissed or deeply questioned the crude prescription of fiscal expansion to sustain or increase economic activity and employment. In contrast, they have argued that fiscal policy is either useless or weak because forces are set in motion that counteract any direct stimulatory effect.”

Indeed, in his latest quarterly report to Congress, special inspector general Neil Barofsky said that the Troubled Asset Relief Program has failed to boost bank lending as well as halt the spread of foreclosures. “Whether these goals can effectively be met through existing TARP programs is very much an open question at this time,” he wrote.

Stimulus spending is, at best, a short-term fix. How governments can play a far more productive role in the economy – and thereby ameliorate the more catastrophic effects of cyclical recessions – is by cutting personal and corporate income taxes, raising consumption taxes on certain items, and making strategic, targeted investments that help the private sector obtain capital for investment in training, exporting and research and development.

Of course, if you talk to three economists, each will give you a different opinion. But, then, when was the last time any of them proved he could shoot straight? 

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