Tuesday, December 2, 2008

Simpson mistaken re economist consensus

In a G&M option piece Jeffrey Simpson suggests that economists are unwilling to acknowledge that the Canadian government spending and tax cuts of the last 3 years did anything to reduce the need for a stimulus now. I don't believe that's the case. If he read his own newspaper he would have noted the headline that Jack Mintz "defends Harper's approach" to a stimulus.

Many if not most economists believe it takes several months if not years for fiscal measures to work their way through the economy. If Simpson could produce economists who say IN HINDSIGHT (i.e., now) that the GST cuts were a mistake, he might have a point. But I'm one economist who believes that subsequent developments on the ground have gone to some length to suggest the GST cuts constituted timely demand management, insofar as it is possible to really manage demand at all, whatever the textbook failings of the move.

The enthusiasm amongst economists for the Canadian stimulus being discussed is also less than overwhelming. There are serious concerns about creating a structural deficit; that is, a deficit that will be difficult to reverse in the future. Again, what the Keynesian textbook says and what political reality says are two different things. How is a massive deficit supposed to be reversed in the future? Which benefiting constituency will agree to see its increases cut in the future?

This isn't to say I disagree with need for fiscal stimuli elsewhere in the world. But the situation in Canada is not nearly so dire. Monetary policy is far more effective and appropriate, and should be largely sufficient in Canada. There's a reason why monetary policy is independent of political game playing, and the same reason would apply to fiscal policy to a large extent.

From the IMF:

In practice, discretionary fiscal measures are typically slower to arrive than monetary policy responses... Moreover, fiscal measures often become permanent, implying that public debt creeps upward.
... there have been calls in many countries for governments to actively use fiscal policy to stimulate the economy. Indeed, the United States has already responded.... But there are many commentators and economists who argue that these sorts of actions stand to do more harm than good.

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