Did Stimulus Spending Boost the Economy?
Mar 29, 2010
Last week the notoriously pro-business Fraser Institute released a study that looked at the Canada Economic Action Plan and whether it had stimulated the economy and helped move the country out of recession.
To do so, they looked at Statistics Canada data on the contributions of government spending, government investment and private sector activity to the improvement in economic growth.
Although acknowledging that Canada’s economic outlook has improved dramatically in the last year the Institute concludes (not surprisingly) that the government stimulus initiatives had a “negligible” effect on Canada’s economic turnaround. In their view, “private sector investment…was the driving force behind the economic turnaround from the second to the third quarter of 2009.”
The Institute also suggests that government money targeted at stimulating renovations in the housing sector (the Home Renovation Tax Credit) and through business tax relief to stimulate the purchase of new computer equipment, did not contribute in any significant way to the economic turnaround that took place in the third quarter of 2009.
The report concludes with the bold statement that, “despite the government’s rhetoric, the stimulus package didn’t work and was a mistake that will burden Canadians with a legacy of debt for years to come.”
However, Iglika Ivanova of the Canadian Centre for Policy Alternatives (CCPA) quickly stepped forward to challenge the Fraser Institute’s analysis. While she was in agreement with the Institute that the federal government could not claim exclusive credit for the speed of the economic recovery (as it cannot be blamed for the recession in the first place), she argued that the government can and should claim credit for “cushioning the blow of the recession.”
According to Ivanova, both federal and provincial governments “stabilized employment and personal incomes (and thus consumer spending) by maintaining operating expenditure levels despite the reduction in their revenues.” Although the federal stimulus package was arguably too small to have a very significant effect and there were delays in rolling out the actual spending, without the monies “things would have been a lot worse.” As evidence she points to the fact that almost all of the recent gains in employment have come from the public sector, while the private one continued to shed jobs into February.
Ivanova argues that there are three main problems with the Fraser Institute’s analysis. First, they misused a basic equation that calculates growth to arrive at conclusions that are beyond the scope of the equation itself. In a related vein, they made a very basic mistake (and one you would think a think tank would be very careful about) in mistaking correlation for causation. Lastly, it was pointed out that the two sets of quarterly Statistics Canada data are far from sufficient to derive any real meaningful conclusions about the drivers of economic growth.
It’s true – you can’t trust everything you read.
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