The Extraordinary Madness of the Stimulus Crowd

-- (historic), Commentary, Crown Corporations, Role of Government, Taxation, Uncategorized

In 1841, in his book, Extraordinary Popular Delusions & the Madness of Crowds, Charles Mackay wrote of how every age has its own peculiar folly—“some scheme, project of fantasy into which it plunges, spurred on by the love of gain, the necessity of excitement, or the mere force of imitation.”

Mackay detailed the 17th-century tulip-buying bubble where, for example, a Dutch speculator offered twelve acres of land, buildings included, for one rare bulb. Other forms of madness over the centuries included the burning of witches, the South Sea stock scandal, and the popularity of poisoning one’s enemy (or spouse!) in France and Italy in the late 1600s.

But one doesn’t need to dig that far into history find examples of popular delusions. The recent worldwide craze for “stimulus” spending, including in the federal government’s 2009 budget, is the most recent case study.

The Conservative budget offered up by Finance Minister Jim Flaherty tags the cost of the federal stimulus at $22.7 billion this year and $17.2 billion in 2010/11. The problem is that most of the stimulus measures proposed will do little to help cushion the downturn or to get us out of it.

For example, the budget includes an extra $407 million for VIA Rail—a Crown that competes with bus and airplane companies for travellers and which would be better privatized than subsidized.

The stimulus includes $1 billion for a new southern Ontario development agency. Ontarians should hope it doesn’t “succeed” in a manner similar to other regional development agencies—Atlantic Canadians have had those for years and to their detriment.

The budget provides $1 billion to help hard-hit communities re-adjust—something Employment Insurance already does except for individuals, who sensibly move out of one-horse towns unless governments encourage them to “re-adjust” and stay.

If the Tories, along with the Liberals, New Democrats and Bloc Quebecois—all of whom are affected by the stimulus mania, cared to actually stimulate the economy, here’s the missed opportunity: chop federal corporate taxes in half.

The cost of a 50 per cent cut in corporate taxes would be roughly $13 billion-plus in 2009 and about $15 billion next year. The cost of that real stimulus over two years would be $12 billion less than the budget’s own advertised $40-billion stimulus.

Had the Tories and the now-dead coalition chopped the business tax take in half, the federal government would have still faced a deficit. But a corporate tax chop combined with pared-back spending would have brought the federal books closer to a balanced state.

In addition to my above-noted examples, to be prudent and also provide a stimulus, Ottawa’s stimulus parties could have capped transfers to the provinces at last year’s rate (a saving of $3 billion). They could have yet delivered infrastructure spending in the new budget year but frozen at the 2008/09 allocation (another $1 billion saved).

The parties could have dropped the $500-million expense created by a new home renovation tax credit; they could have saved another $225 million in broadband funding. More boldly, they could have foregone the recently promised amounts to the automotive sector ($2.7 billion), or the budget’s new lolly to forestry ($170 million) and the agricultural sector ($500 million).

Instead of the fake or weak stimulus offered up by Budget 2009, Ottawa should have slashed corporate tax rates in half—permanently.

Canada would have been marked at home and abroad as a desirable place to invest, a rather key advantage vis-à-vis other countries. A dramatic rate reduction would have allowed marginally profitable businesses at home to more easily survive 2009; temporarily unprofitable ones not in danger of failing would know their future cash flows would be less impaired by government imposts.

Critically, such a stimulus would have saved and created more jobs, now and in an economic recovery, much more quickly, efficiently and in abundance compared to any half-baked stimulus plan.

Instead, Canadians received a gimmicky budget birthed in political panic and fuelled by wrongheaded popular and pundit mania about the efficacy of a stimulus. There’s a word for such a delusion: madness.