Grabonomics

The storyline is clear. This is a serious economic crisis. What we need to cushion the impact of the crisis on key industries and families is significant government spending intended to create jobs and stimulate the economy. We also need to use government funds to support banks, financial institutions and industries since otherwise these may fail, disrupt regional economies and create new welfare burdens for the State or lead to the collapse of essential institutions. Its called “depression economics” and it rarely works as intended.

There are four critical problems with this approach. First, it is expensive. Government has to go into debt to pay for this so-called stimulus and these debt burdens will later lead to higher taxes and lower levels of public service. No one is talking about how we will pay for all of this “stimulus”. Canada is talking about a relatively small debt level – around $65 billion. But the US is talking trillions – total US debt is likely to reach $12-$13 trillion, with 23% of this debt being held by China. Is this really a way to help an economy in the long term?

Second, stimulus leads to capital spending on roads, technologies, hospitals and schools. It does not provide funds for maintaining these new structures or for the operating costs of facilities created. In the case of Canada, the Government requires matching funds from Provinces and Municipalities (where appropriate). The Provinces and Municipalities don’t have such funds, so they borrow too. Stimulus quickly becomes “spread around debt with unfunded future liabilities”.

Third, funds flowing to industries, such as car manufacture, props up companies that would otherwise fail. It also requires Government to cynically chose which companies and which sectors it wishes to support. In the US Larry Flint asked for $5 billion to support a pornography industry which is hit by recession – a lower cost deal that the GM and Chrysler ask which will end up around $120 billion. Larry didn’t get his cash (wonder why? But the car companies got a down payment. What happened to markets and investors here?

Finally, this is a hey-day for liberals. Every goofy scheme you can imagine has found its way into the US stimulus package passed by the House and Senate yesterday. The most obvious is the “green” jobs – claiming that millions of jobs will be created and the planet saved by adopting green technology and curbing CO2 emissions. Its all “holier than thou” stuff. If you go through the various stimulus packages in the US, Canada and the UK you will find lots of “pork” – pet projects that will need constant feeding so that Government can get fat and stick its fingers into people’s business.

Will any of this work? Paul Krugman, the Nobel prize winning economists and journalist and a strong liberal democrat, thinks that what we are seeing so far is the first installment of the stimulus package – expect four of five more about the same size (between $1.5 and $2 trillion of debt). He also thinks that the impact of all this will be slow – 18-24 months, one reason Obama is making clear that there are “no quick fixes” and that the economy will take years, not weeks and months to recover.

What should Government do? It should reduce taxes, cut Government spending, ensure its regulation of financial institutions are strong, provide repayable loans to banks to ensure that the financial system has capital to flow, increase the period of support for unemployment insurance and provide additional funds for education and training. Let the market do the rest.

Some will suggest that letting GM. Chrysler and a few banks fail would be the death knell of key parts of the economy. So too is propping up companies which failed some time ago and increasing debt and reliance on foreign debt-buying aid. Some will suggest that it is cheaper to bail out firms than pay for unemployment benefits. No it isn’t. GM will take 5-10 years to turn around and will likely suck up $500 billion or more in the process. We could give every worker $2 million and be done.

We used the phrase “voodoo economics” to describe trickle down Reaganomics. We need a phrase for the current economic strategy – how about “grabanomics” ? Governments are grabbing at anything and everything and throwing cash at it in the hope it will stick.