« Two perspectives on commercial and central bank solvency | Main | Do private sector forecasters have an incentive to produce good forecasts? »


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

It is an important point that you are Nick have been making. But it is a cute technical point that in proper context is wrong.

It does take some time to get infrastructure projects up and running. It requires cooperation with provincial governments and municipalities, and time for planning processes to get underway. That is the knock against infrastructure projects in normal recessions. But our times are not normal. There is every reason to believe that 2009 is going to get ugly, and so we need a signal to other levels of government to get going. Every other country in the world has recognized this, and is acting accordingly. Canada needs to play its part not free ride off the effort of other countries.

The rest is a matter of reinforcing the automatic stabilizers, primarily EI, so that as the downturn happens they kick in. The feds should immediately make changes that open up accessibility, increase benefits and lengthen the time for which they can be claimed.

These things should not wait until late-January 2009 or later.

I think it's better to say that every other country in the world is reacting to its own reality - as should Canada. Our responsibility is to maintain aggregate demand, and so we should - when it starts falling off.

If the only thing we were talking about were strengthening EI and the transfer payments, I would certainly support implementing that right away.

But tying infrastructure projects to that package is a bad idea, for at least two reasons in addition to the question of lead times:

1) There is no slack in the construction industry for the govt to take up. Who is going to build it?
2) Available estimates for the multiplier from this sort of spending appears to be very, very small.

Canada took on an international commitment to stimulate the economy to the tune of two per cent of GDP, say, $30 billion. It is part of an effort to do a reverse beggar-thy-neighbour. If we are part of a global effort doesn't that make sense in a global economy?

You're confusing the statement "We don't need to rush into a program of public works" with "No fiscal stimulus will be necessary". The first one is my view; the second is not.

And my view is that we need a monetary stimulus right now (Bank of Canada can and should cut the overnight rate), and maybe will need a fiscal stimulus later (if the monetary stimulus is not enough).

But the beggar-thy-neighbour question is interesting. Is the Nash equilibrium between countries' macro policies Pareto Optimal? If not, and the world as a whole needs more stimulus right now, then you could perhaps legitimately argue that Canada morally ought to use monetary and/or fiscal policy to stimulate the Canadian economy more than what is optimal for Canada alone. There's a literature on this question, but I don't think it has ever looked at the Zero Interest Rate Bound equilibrium. My gut tells me that with monetary policy, and flexible exchange rates, the Nash Equilibrium is PO in "normal" times, (so the "policy coordination" question is just an excuse for politicians to have something to say at fancy destinations), but at a ZIRB, when fiscal policy is needed, perhaps the NE is not PO.

I feel another theory post beginning to well up inside me.

Traditionally, Canada deals with a recession by devaluing the currency. Witness the 75 basis point cut by Carney which will make our currency less attractive to hot money people. Fiscal stimulus leaks, or is offset by provinces following balanced budget approaches to recession, so the Dept, of Finance drags its feet. Witness the economic update.
What is needed is a structural shift to serious public investment, including a federal public investment bank, and probably provincial ones as well. These could do equity deals with coops and commercial enterprises, but also promote not-for-profit enterprises.
I do not think game theory is as a good a guide to what to do as history. The 1930s should have taught us that attempts at balanced budgets make things worse, new tariffs make this worse, and trying to profit from the misery of others makes things worse. Thus the injunction, first do no harm.
Canada typically looks for this: how can we improve out situation? We do not have to fear the consequences for others of what we do because the only meaningful other is the U.S. and we cannot hurt them. The Nash equilibrium does not account for this type of self-seeking since it is willingly blind to others. Once upon a time it was thought that international citizenship required certain commitments and actions. Now this seems limited to the military sphere where dissent from NATO makes sense, whereas dissent from the G7 view make little sense.

Duncan: have a look at my later post, on "International Coordination with ZIRP, and Functional Finance", where what was welling up inside me burst out into the open!

The comments to this entry are closed.

Search this site

  • Google

Blog powered by Typepad