In Brief: AIMS Research Fellow Harry Koza wrote this op-ed that appeared in the Montreal Gazette on the government’s stimulus plan. Based on his Commentary, Who’s irrationally exuberant now: Debt shy consumers or pump priming politicians?, Koza points out why “spend, spend, spend” is not the best message for these economic times.
By Harry Koza
Savings and caution are bad things while debt and spending sprees are good.
While governments and their minions are busily panicking about the threat of a global credit collapse, they insist that you don’t even think about it. It’s not allowed. No, you are expected to do your part by continuing to borrow and spend. Don’t worry, be happy, and why don’t you go down to the mall, where they’re having a big half-price sale on Soylent Green?
Jeez Louise, politicians are starting to sound like they come from Orwell City. Debt is wealth. Saving is bad.
Consumers have no savings and debt up to their ears, but their political masters want them to go out and dig themselves even deeper. The solution to the debt bubble is more debt. Yeah, borrowing and spending our way to prosperity – that’ll work.
Suddenly, in a move so bizarre it’s as if mullets and painter pants and platform shoes were suddenly in vogue again, Keynesianism is back. Stimulus, goes the cry, that’s the ticket. We need fiscal stimulus, and plenty of it. All the politicians in the country have added the phrase “shovel ready” to their vocabulary, and over-used it to the point where whenever I hear it, I want to take a shovel up the side of a few heads.
One of the reasons we are in this financial mess in the first place is because we’ve been pumping stimulus into our economies for years now, to the point where they are more stimulated than a Grade 3 class on pep pills. Oddly enough, few are actually questioning whether we in fact need fiscal stimulus, or whether it is an appropriate response to the current malaise.
Here in Canada we also have the odd case of the opposition parties simultaneously castigating the Harper government both for allowing the nation’s books to fall into deficit and insisting that they commit to reporting on a quarterly basis how effective they have been in digging the hole! Talk about having your political cake and eating it too.
There are two main kinds of stimulus: tax cuts and spending on such things as infrastructure. The budget covers both. Of course, past infrastructure plans, such as that memorable $6 billion Chrétien-era program, included such essential infrastructure “investments” as putting a roof over every bocce court in the Toronto area, so don’t expect this multi-billion dollar scheme to be much better. Most infrastructure, things like sewer and water, are boring and don’t provide many ribbon-cutting photo ops for politicians, so if past performance is any guide, expect to see lots of social spending and outright pork-barrelling labelled as infrastructure.
The empirical evidence, meanwhile, strongly suggests that permanent tax cuts are the most efficacious form of stimulus. A dollar of tax cuts, according to recent studies, can generate three dollars of GDP, while a dollar of government spending at best generates one dollar of GDP, and often less. So for those naysayers who still argue tax cuts just make people save, consider this:
If I have more money left after paying my taxes, and I put it into a savings account in my bank, it is not dead money. Far from it. It is then available for the bank to lend to my neighbour in a mortgage, or to a local business to expand its operations, thereby creating jobs, or to a student to help her pursue higher education. And for every dollar I save, my bank can lend $10 or more. Or I can invest that money in the market, to provide for myself in my old age.
But that’s bad, apparently. How stupid is that? Ohmigosh, consumers are starting to spend less and save their money and pay off their debts, and generally just waking up and smelling the coffee and starting to do prudent things, things like saving for a rainy day and deferring the purchase of that Cineplex-sized plasma screen until they can afford it and cutting up their 10 credit cards and paying down their debts. That’s only rational economic behaviour when you’re up to your ears in debt, have no savings and, with the economy in a deepening recession, might even lose your job.
But no, citizens of the world, your governments don’t want you to be rational. They want you to spend more, consume more and borrow more. They want you to be irrational. Encouraging irrational behaviour might seem like a very odd thing to do, but it makes perfect sense in the Orwellian world of politics. Of course they want you to be irrational. How else would they ever get your vote?
The Research Fellow in Financial Markets for the Atlantic Institute for Market Studies, Harry Koza is senior analyst for Canadian markets at Thomsonreuters’ IFR Markets.