Election 2015: The Economy

In an informal survey of voters sitting in my hotel room, all one of the respondents agreed that the economy was the biggest issue of the campaign.

This is good news for Prime Minister Stephen Harper (to be called “Harper” henceforth, just as Justin Trudeau and Thomas Mulcair will be called by their last names). Harper believes that the economy and national security are his two greatest strengths, thus he believes that they are the two most important issues. He is right about one of them.

You won’t get much argument from Trudeau and Mulcair about the economy being a top issue, only they differ on it being something that Harper has managed well. Has he in fact managed the economy well, or should we hand the steering wheel over to Trudeau or Mulcair? In this, hopefully my first in a series of posts on the election, I share my thoughts.

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I am a believer in balanced budgets. That is to say, a government should strive to balance the budget — in a true sense, not just via accounting slight of hand — but it is not critical that a budget is balanced every year. Deficits can be sustainable if they are small and the economy is growing, but that doesn’t mean a government should run a deficit. Every dollar spent on servicing the country’s debt is a dollar that can’t be spent on something more productive. Debt is bad. Period. We would be better off without it.

As well, I don’t buy into the premise that you can kickstart a slow economy by spending more money. As the economy ebbs and flows, as wars are raged and natural disasters come and go, there will be years where it is difficult to balance the budget. I am not going to begrudge the odd deficit if it’s needed to maintain balanced program spending, but massive government deficit spending to “stimulate” the economy is foolish.

Why? Because:
1) Stimulus spending is often inefficient. It comes with deadlines, results in poorly or hastily planned projects or is allocated based on influence or some criteria other than legitimate need.
2) It is often directed at infrastructure spending, and the positive impacts of infrastructure manifest slowly over the long term. A new bridge doesn’t result in a new factory being built within the year. It results in a new bridge and that is all. The only immediate benefit are the construction jobs related to building the bridge, however…
3) There is little evidence that short term jobs from goverment spending do a whole lot to stimulate the economy. In fact some studies have suggested that deficit stimulus spending actually slows economic growth because the money spent by the government and subsequent money spent on paying interest on that spending would have been better used by the private sector. I don’t know about that, but I do know the positive impacts are usually exagerrated.

Keyensian-type stimulus spending has long been popular with leaders, even some who have an understanding of modern economics, because it allows them to plausibly claim they’re doing something productive to help the economy, even though they’re not.

This brings us to Trudeau. As the son of a man who treated the Canadian economy like a massive basement chemistry lab, I’m not inclided to trust him to begin with. Now he’s gone and PROMISED to run deficits to do exactly what I just finished saying the government shouldn’t do.

Inconceivably, he pushed his theory that economic growth lives and dies by government spending even further by suggesting that this year’s quasi-recession was directly related to the recently announced 2014/15 surplus, and when pressed to explain why his deficits are good and Harper’s were bad, he said the following:

“Deficits are a way of measuring the kind of growth and the kind of success that a government is able to create.”

One can only hope that this is all just crazy-like-a-fox election posturing, but more likely it’s a sign that Trudeau’s understanding of the economy is pitiful.

Mulcair has promised to balance the budget. On the surface, this makes him more of a fiscal conservative than Trudeau, except that it is highly unlikely he will do anything of the sort. Mulcair is well meaning (I think), but I don’t trust the NDP. There is good reason for this, living in Manitoba and all. Maybe it’s not fair to paint the Federal NDP with the same brush, but when asked about Manitoba’s difficulty balancing the budget Mulcair brushed off the question saying that Manitoba has “challenges”. So does Canada, in case you haven’t noticed, including $40/bbl oil prices instead of the $75/bbl the NDP uses in their projections.

Mulcair will need billions in new revenue to cover his spending plans, including a very expensive daycare plan. If he can be so cavalier about Manitoba’s poor finances I have no faith that he will take Canada’s finances seriously.

So Harper is the guy, right? Well, maybe, but …

Harper is no stranger to stimulus spending. Even in the weeks before this summer’s election call he ran around the country tossing out stacks of cash like Jesse Pinkman. It was a sad and pathetic display.

He didn’t want to do it at first, but in late 2008 the other guys pressured him to try it and he relented, and it was oh so good. Harper got addicted to the sweet sting of arbitrary program spending and the rush of perceived public support that followed, and now he can’t stop. What was supposed to be temporary has turned into an ongoing program that continues to this day. That’s the thing about temporary spending — it is rarely temporary.

If our current PM is already a stimulus junky, how is he better than the others? Because the others are going to stack their spending — stimulus and otherwise — on top of what the current government is doing.

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Here are a few more quick thoughts:

– All three parties are planning to cut small business taxes. The NDP will do so while increasing big business taxes. Small business taxes do not need to be cut, and increasing the differential with the standard corporate tax rate could deter the growth of larger small businesses. At least Trudeau admitted that not all small businesses are family restaurants with checkered table cloths, although he got skewered for saying it. I thought it was refreshing to see a politician concede that many small businesses are simply individuals (legally) minimizing taxes.

– Tax credits targeted at specific niche groups are bad policy and should be avoided. The conservatives take the cake with a recently announced credit for club memberships or some stupid thing, but all parties are guilty of this kind of pandering.

– Likewise, subsidies for specific industries (oil & gas, auto, etc) are probably over used as well. I often wonder what the return on investment is for these subsidies. I don’t know if there is an answer, but in my view subsidies should be reserved for new/innovative/strategic industries where we want to encourage growth into a self-sustaining critical mass, not old relics of the past or monsters that already represent 10% of the economy.

– Canada needs to be a part of the Trans Pacific Partnership, and if that means ending supply management of the dairy industry, I say GOOD. Ending supply management will benefit far more people than it harms.

I could go on, but I’ll summarize things as follows:

Generally governments overestimate their impact on the economy. Economies are organic creatures that do quite well on their own, with a little guidance from the central bank. The role of the government is to spend only what is necessary on the things that are important, and tax only as much as is necessary to accomplish that. This is what I believe, more or less, and I think that the Conservative Party’s philosophy is closest to that.

Having said that, I have a big nit to pick with Harper that I haven’t touched on yet: The long form census.

Having spent hours in University piecing together sets of time series data for statistical analysis, I have some appreciation of the importance of quality data, and how broken data sets and changes in collection methodology can impact the integrity of a study. Getting rid of the mandatory long form census was completely uncalled for, and has likely done a great deal of harm to the ability of economists and other researchers to produce research to guide government policy and advance our understanding of the changing economy. It was a senseless act of knowledge sabotage. One of many that this government has committed.

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2 thoughts on “Election 2015: The Economy

  1. Where do you stand on income inequality? I know there is some debate as to how much this is a problem in Canada but from what I see, it’s a problem. If Harper would have targeted his tax cuts more towards middle and lower income brackets I would clap approvingly. Instead he seems focused on any boutique tax credit that could conceivably appeal to the 40% of Canadians who would hypothetically vote for him.

    • I don’t know, to be honest. I’ve read different things, and I’m sure it’s getting worse, but as long as the standard of living for most Canadians is increasing over time then I don’t see it being a big problem. I do agree with you about tax cuts.

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