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Canada must spend wisely — not just spend more: Don Pittis

"The definition of insanity is doing the same thing over and over again and expecting a different result."  

That is such a wonderful quote it doesn't really matter whether Albert Einstein actually said it or not, but it sure does seem to apply to global attempts to restart the world economy by making money cheap.



Canada must spend wisely — not just spend more: Don Pittis

Central bank rate cuts in Europe and China haven't worked yet — can Canada do better?

By Don Pittis, CBC News Posted: Oct 26, 2015 5:00 AM ET Last Updated: Oct 26, 2015 10:49 AM ET

The ancient terraced rice paddies of Southeast Asia required the management of an entire watershed and were far beyond the ability of any single farmer. Sometimes government spending is just a waste, says Don Pittis, but wise government investment can make everyone richer.

The ancient terraced rice paddies of Southeast Asia required the management of an entire watershed and were far beyond the ability of any single farmer. Sometimes government spending is just a waste, says Don Pittis, but wise government investment can make everyone richer. (Reuters)

"The definition of insanity is doing the same thing over and over again and expecting a different result."  

That is such a wonderful quote it doesn't really matter whether Albert Einstein actually said it or not, but it sure does seem to apply to global attempts to restart the world economy by making money cheap.

The question is whether Canada can prove there is a better way to help restart an economy, using wise spending instead.

Prime minister-designate Justin Trudeau's election promise to spend on infrastructure is no longer merely a Canadian point of discussion. Champions of Keynesian-style spending like New York Times columnist Paul Krugman have given the tentative plan two thumbs up.

On the other hand, right now there's a conventional free market paradigm that insists government involvement in the economy only makes things worse.

Unwise spending

That market-based view was promoted by the federal government under Prime Minister Stephen Harper. It was hardly alone. 

Simply put, the theory is that governments, for various reason, just cannot spend money wisely. Critics say that whether through corruption, stupidity or a basic misunderstanding of how markets work, government spending distorts the marketplace.

The theory does not necessarily say that businesspeople are smarter than people working in government, although they may be more careful with their pennies than a government will be with yours. It is not brains, but market discipline that keeps business spending on the straight and narrow.

If businesspeople invest in something that consumers don't want or if they try to sell their products or services at too high a price, goes the theory, they will go broke. Their successful competitors will prosper.

There are many flaws and subtleties in that theory. There are governments that claim to stand by the theory when it comes to things like public housing while spending freely on military equipment or subsidies to a favourite industry. But it has a demonstrable element of truth.

Dangerous spendthrifts

Certainly governments have shown themselves to be dangerous spendthrifts. Greece has been the recent example. But many other countries — including Canada before then-Liberal finance minister Paul Martin's brutal spending cuts in the mid-1990s — feel public pressure to keep the fiscal faucet open.

The demand for government spending seems infinite. Last week, I listened to my local CBC Radio morning host Matt Galloway interview doctors, nurses and teachers who want the provincial government to spend more, even though credit agencies say Ontario government borrowing is at dangerous levels. None of the interviewees begged for tax increases.

Since the 2008 economic meltdown, the most popular remedy for the sagging global economy that avoids more government borrowing has been to make private borrowing easier. Once again, in theory, keeping interest rates low and printing money through quantitative easing stimulates the economy without the distorting effect of unwise government fiscal spending.

This week, U.S. central banker Janet Yellen must decide again whether to keep interest rates at record lows to further stimulate the economy.

On Friday, China announced more interest rate cuts. Also last week, Mario Draghi at the European Central Bank said the ECB was open to more quantitative easing if European growth did not pick up.

Unfortunately, long periods of low interest rates have distorting effects of their own, including pushing up asset prices and making it hard for the retired and other fixed-income investors to live off their savings.

CANADA-ELECTION/

Liberal Leader Justin Trudeau holds a baby during an election campaign visit to Thunder Bay. Unwise government spending means future generations foot the bill for a temporary economic boost. Wise spending can pay for itself. (Chris Wattie/Reuters)

And yet, repeated interest rate cuts, while creating temporary surges in stock and real estate markets, have largely failed to bring economies back to health. The confidence that next time the results will be different seems to qualify for the Einsteinian definition of  insanity.

While government fiscal spending often leads to cases like Greece, there are some notable exceptions.

Asian Tigers like South Korea, Taiwan and Singapore were in many ways creations of wise government spending and policy. In Canada, Sasktel and Cameco are examples of businesses created by government fiat.

By some definitions, that kind of wise government spending is not strictly Keynesian because it interferes in the private marketplace. The true purpose of Keynesian fiscal injections are, similar to rate cuts, meant to raise the level of the entire money pool.

Creating wealth

But there is another kind of government spending seen in the the rice fields of Southeast Asia and the dikes of the Netherlands.

Such projects were too big for any single farmer and required a national effort. Wise governments controlled entire watersheds to create wealth for small private farmers while making the entire country richer. In the modern context, the equivalent might be ending traffic jams or helping Canadian industries beat the emerging markets to the punch on robot factories.

Indiscriminately dumping money into the economy, whether through fiscal or monetary means, might perhaps create a bridge over a downturn while we wait for an eventual recovery.

That kind of spending is a loan, borrowing against our children's future, that will have to be repaid. It must end eventually by raising taxes or increasing interest rates. The only alternative is the market-distorting effect of endless low interest rates, or an endless addiction to deficit spending.

But wise spending is not just a bridge to recovery. It builds recovery, creating value that will help the private sector while growing the entire economy.

Can the incoming Liberal government invest wisely instead of spending foolishly? It is an experiment. And while we can hope, not many economists will be surprised if it fails.

Follow Don on Twitter @don_pittis

​More analysis by Don Pittis

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