« Commodity prices and the Canadian economy | Main | Life in the time of six sigma »


Feed You can follow this conversation by subscribing to the comment feed for this post.

"They're hard to cancel when the need for them goes away."

Geez, you mean people might actually get to keep their own money even after they don't "need" it? Well that's the end of civilization right there.

Interesting that the results of "Keynesian" expansions bring such different results on a country by country basis.

Also, I must say I am a huge fan of your data representation skills.


Looking at the most recent data for Canada (1980-2001), we see that every 1% decrease in taxes results, 3 years later, in an economy that is about 2% bigger than if nothing is done, and more than 4% bigger than if spending is increased by 1%. So tell me again why this doesn’t prove that decreasing taxes is the best possible antidote to recession...

Add to that the fact the old saw that correlation isn't causation. The devil is in the details. What other factors are at play? I would think there could be any number of reasons to see that trend.

Also, at some point tax relief is counter productive. Haven't we seen the general political abuse of the Laffer Curve to wrongly "prove" that decreased taxes always result in increased growth, which will always result in increased tax revenues? This is true at high rates of taxation, but the returns diminish as tax rates decrease, then become negative. Taken to an extreme, I doubt not funding government at all would be helpful to the economy.

There is a selection effect here. You lower taxes in "good" economic times (when the fed masses don't protest). You raise programme spending for a variety of reasons. Another minor adjustment is debt isn't costed by GDP. Mulroney gets brownie points for doubling federal debt while Chretein gets penalized (economic growth under GWB is negative if costing debt).
I look at it as two competing ROIs. Giving money to corporations vs programme spending. You can't really compare different years as programmes and corporations change. We have big oil and banks making much of the profits now, and the opposition parties had efficient programmes (daycare, GHG costing, affordable housing, Kelowna Accord), so I'm left wing now. In the past when telecoms were a bigger slice and gun registry was a prospective programme, maybe right wing was better.

Conservative/Liberal corporate tax cuts are scheduled to peak right around 2012, when boomers will start to need last year of life palliative care. Crank up those corporate rates, drop some income taxes, or get bed sores. The future is left wing.

The comparison between Australia and Canada (superficially very similar places - urban medium sized economies which export mostly agricultural products and raw materials) is wierd! Any comments on why the response profiles seem so erratic?

I'm trying to think of theoretical reasons why fiscal policy multipliers might be (or might seem to be) negative:

1. because the Bank of Canada raises interest rates in response to the loosened fiscal policy, in order to keep inflation on target, and mistakenly raises interest rates too much.

2. because households fear that the increased deficits and debt will cause future taxes to increase, overestimate those future tax increases, and mistakenly increase savings by even more than they need to pay those future tax increases.

3. because investment falls since those future tax increases reduce the after tax return on investment.

Explanations 1 and 2 assume consistent mistakes by the bank of canada or households. Explanation 3 relies on a high elasticity of investment. Or maybe fiscal policy just appears not to work.

Like Phillip Huggan, I doubt the ability of VAR techniques (as used in the paper) to 'hold other things constant'. Generalising his point, if monetary/fiscal authorities set monetary/fiscal policy to target constant inflation/output growth at an H-month horizon, and have rational expectations, then (it can be proven) inflation/output growth will be uncorrelated/unforecastable with any measure of monetary/fiscal policy (or any public information) with a lag of H months or longer. All econometric estimates of monetary/fiscal multipliers will fail. This point was (sort of) understood 30/40 years ago, but has been (largely) forgotten. At horizons of less than H months, we are more likely to be estimating the response of monetary/fiscal policy to inflation/output growth than vice versa, so the negative estimated multipliers are not a surprise. Anticipating falling inflation/output, they loosen monetary/fiscal policy.

I am old enough to remember the days of "Pink" Floyd Laughren and the Ontario NDP attempt to use fiscal policy to fight a recession. What we forget however is that this was just the last gasp of how fiscal policy was done for many decades; it used to be conventional wisdom that fiscal policy (at least at the national level) should always be presented and formulated to attempt to stabilise real output. And only economically illiterate people thought that the national debt was a problem, because the economically literate knew that "we owed it to ourselves". (Read Abba Lerner on "Functional Finance" to recapture the flavour of those days.)

Back to the present, Nick....

The comments to this entry are closed.

Search this site

  • Google

Blog powered by Typepad