Friday, March 05, 2010

"Not all stimulus spending is created equal" 

I had the pleasure last week to speak on the phone with Kevin Libin, who writes for the National Post in Canada. He added some comments from me to an article (a little old, but very instructive -- sorry, Mr. Libin, I simply missed it till now) on how not all government spending comes with a multiplier. It's a very basic point: You must be spending money on something that will not have money spent on it otherwise, it must come from funds that were going to otherwise lie idle, etc. This part is well done:
The thinking behind stimulus spending comes from economist John Maynard Keynes, who argued that amid rising unemployment, the government might as well bury money underground and let private companies dig it up, if that�s what it takes to create jobs and soften a recessionary shock. But even if you accept the theory, and what Keynes considered the �multiplier effect� of government spending (spending a dollar of government money creates more than one dollar in positive economic effects), not all stimulus spending is created equal, notes University of Alberta economist Bev Dahlby. Given that it costs Ottawa money to borrow the money it�s been spending (the Tories have forgiven themselves for running a predicted $56-billion deficit in the fiscal year just ending, claiming it was imperative to rescuing the economy), some stimulus projects may actually take more out of the economy than they put in. The difficulty, he says, is picking the right projects.

�It�s not a free lunch; you just can�t push money out the door,� Mr. Dahlby says. In a recent paper for the C.D. Howe Institute, Mr. Dahlby calculated benchmarks for how Ottawa should select stimulus projects; anything not delivering sufficient and rapid direct consumptive and productivity results is better left on the shelf.

But with such a wad to spend, in a short time, the government often lacks enough options to park funds properly, which is why we might end up with plainly non-stimulating spending like the IndyCar grant. While a �more measured and slower response� is required in planning spending, Mr. Dahlby says. �The problem with that is that it might mean that, effectively, the timing of the stimulus will be screwed up, because then most of the projects and the money will be coming out in fact when the economy is recovering.�