Sunday, December 14, 2008

Economic Stimulus Madness

There is a madness hitting many countries around the world - the idea that government spending increases are an economic stimulus that will help the economies grow. This is a collective madness with no basis in reality. It is as if all these leaders have decided they need to drink the same poisoned chalice.

The first problem is that government is utterly incapable of choosing winners and losers in an economy. The effect of government intervention is almost always in support of businesses and industries that are fundamentally flawed. At the moment we have the automotive sector in North America is seeking government support to keep it afloat.

Why should the government intervene on the behalf of the losers. The North American car manufacturers have been avoiding taking the internal actions needed to make the companies more efficient. Not a single North American company is willing to make a good quality minivan, they are not willing to offer the most basic things consumers want like a standard transmission. These companies now want a collective $60 000 000 000 in support. The argument is that they are too big to fail. I do not buy that for a minute. If Ford goes bankrupt, someone will buy the assets and make cars - maybe Hyundai will buy them or Chery for China, who does not matter. The huge market for cars in North America will continue to exist and it will remain most efficient for the cars to be built in North America. If GM goes bankrupt, maybe Volkswagen will buy the assets and massively expand their production here. Government intervention in the auto sector will only distort the market and reward the companies that are wasting resources. It is not as if Ford, GM and Chrysler have any special magic that means they need to survive - Tata is just as good as any of them.

All this money governments are proposing to spend has to come from somewhere and that somewhere is the public and business community. Initially most of the money will be borrowed. All these governments going to the capital markets will be a huge drain on money for business investment. There will be scarcity in the capital markets and this will mean higher borrowing costs for business and the public. Do we really want to make it more expensive for people to expand their businesses or to be able to pay for their houses?

Eventually this government borrowing will be paid for from taxes and will cost us a lot more because of the cost to borrow this money. An extra $50 billion in debt for the Canadian government will end up costing us about $300 billion over the next 50 years. This is money that is collected from the taxpayers and not used to do anything over than pay interest on the debt and eventually pay the debt. This cost is the same as cost for us to build two new skytrain lines each and every year for 50 years.

What would we get for this extra $50 000 000 000 in spending over a couple of years? We would see a boost in the economy of about one percent in each of the two years, maybe. One percent cumulative over the two years is more realistic. The reason it may not be very high is because the government is going to give the money to companies that already proved themselves to be losers.

People suggesting economic stimulus are suggesting we take money from the companies that have planned well, worked hard and been successful and give it to the ones that fucked up. We know that the companies that need the help are the ones least able to make use of the money in a positive manner. The worst part is that once you start giving someone like GM money, you will allow more money to flow because you are pot committed. One the biggest economic mistakes was in the early 1980s when Chrysler was in trouble, it should have been allowed to go under.

A smart government of a country would make sure that they did not increase their debt at the time. The government should also sit back and DO NOTHING for industry subsidy. Let the other countries do it and reduce their productivity through syphoning money for the their best companies and giving it to the losers.

Canada could manage to avoid having a deficit. It could also take this moment to get rid of all of the industry subsidy programs and no economic stimulus other than reducing taxes and the size of government. Canada is well poised to be a global economic superstar if it has the guts not to do the economically stupid thing that so many other countries are doing.
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