Does the Economy Need Viagra?

There is a lot of talk of a Canadian stimulus package – a kind of Viagra for the economy. The rationale goes like this:

1. The economy is in recession and jobs are being lost, especially in manufacturing, forestry and the service sector.

2. So as to mitigate the implications of this, let’s stimulate the economy with infrastructure spending and other supports for industry so as retain jobs.

3. Other countries are all stimulating their economies, so we should too.

4. Obama sees green jobs as the key to the future, so let’s do the same.

This thinking is known as Keynsian – following Lord Keyne’s response to the economic conditions of the 30’s and the so called Bretton Woods strategy.
The problem with this is clear:

1. The people displaced in the auto sector do not have many of the skills required for the public works infrastructure spending envisaged. While all parties are committed to doubling public infrastructure spending, this is about transport systems, roads, bridges, public works of other kinds and support for public invested activities.

2. The Dancing Coalition (today’s Prime Minister…watch again on Dec 17th for the next one and again in May for the one after that) suggest we should also spend money on culture, bail out forestry and the auto sector so as to “save” jobs. The problem with this thinking, as the US has found, is that the industry sectors needing bail outs is endless. What really needs to happen is the Chapter 11 bankruptcy route for these companies, so that they can restructure, bail out of overly expensive labour contracts and refocus their market activity so that we are not entirely reliant on the US market for our own economy. Bailing out failing industry is a recipe for debt.
What we really need to do is:

1. Cut government spending on as many front as possible, lower the tax and regulatory burden and leave more money in the hands of individuals and firms and make entrepreneurship easier. Rather than bailing our failing firms, we can invest in the recovery strategy by investing in education, innovation and training – re-skill and refocus the economy.

2. Invest in education, especially training and College level education to strengthen the skills base of the economy. This investment should be in paying auto workers to go back to school or paying forestry workers to have new skills.

3. Invest in innovation – strengthen the SR&ED tax credit to make it the most supportive of R&D in the world, increase funding to IRAP and strengthen the commercialization activities of regional commercialization networks.

4. Invest in export development activities to countries other than the US. We spill more beer than we export. Lets become a leading exporter to countries in South America, Russia, China and India – countries which show the potential for growth quickly. Expand NAFTA, do bilateral trade deals with as many countries as possible and creative incentive for firms to get past the US as the “natural market”.

A stimulus that looks just at mirroring what others are doing is likely to be both money down the drain and carry a structural debt implication that we don’t want to have.

So that’s what should happen. Want to bet it wont?