Jumpstarting the economy: Less government spending, more tax relief?

[yllus]

The article quoted below deals with the Canadian economy, but as both Canada and the U.S. have economies that are heavily intertwined the same questions apply.

The basic question is whether accelerating an economic recovery is best done by government deficit spending, or by offering tax relief to private citizens. While I suppose that there's no reason we can't just do both (to lesser amounts obviously), it's an interesting question.

Infrastructure spending in particular is something I think could greatly benefit both Canada and the U.S. - working in tech and being privy to some of the details of negotiations on data centre costs leads to a quick education on how much of your profits get eaten away in energy bills, for instance. But I'm wary of how many employees-for-life we'll be creating as a result of this sort of stimulus spending.

Less spending, more tax relief

With the economy in a downturn, the cause celebre has become government spending to grow the economy. It is argued that Tuesday's budget must drive federal expenditures to new heights to "prime the pump" and stimulate growth since individuals are consuming less, investors remain skittish and industries are squeezed.

A government spending spree, we are told, will stimulate economic activity by injecting money into the economy, thereby increasing total economic output. It sounds good. But unfortunately there is a glaring hole in this theory: The fact is, no new money is actually added to the economy when governments spend.

To understand why government spending is not "stimulative" it is necessary to consider where the cash Parliament is proposing to spend will come from. For Ottawa to increase expenditures by as much as $40-billion above tax receipts it will need to borrow that amount. As a result, as the government injects money into the economy, it simultaneously takes money out of the economy.

Keynesians argue that government borrowing will boost the amount of cash circulating in the economy, but taking money from one pocket and putting it in another does not increase the nation's total income.

These deficit-spending advocates claim that government can spur consumption by borrowing the savings sitting idle in the banking system -- and that government-funded consumption will lead to additional private consumption and investment. Yet, this presumes savings are inactive and not already seeking growth opportunities. Such an assumption might be true if people were hoarding cash under mattresses.

But that is not the case.

Savings are constantly used to finance private investments in capital markets or to purchase real estate, for example. Even if savings are "only" deposited in a bank account, that bank still lends the individual deposits to other people or businesses. All government borrowing does is redirect national income from one area of the economy to another, since the people or institutions that lend money to government have less to invest elsewhere. There is no increase in economic output.

If Mr. Flaherty is going to give the opposition a "prime the pump" budget, he should do so on his terms. Rather than succumb to the belief that government spending is the only way forward, why not simply leave money in the pockets of Canadians? Indeed, there is no reason why Keynesian "stimulus" must be provided by way of deficit spending. Cutting taxes will achieve the same ends without triggering a lasting increase in the size of government.

Economic growth is the result of increasing the economy's total output. Over the long run this is accomplished, in good part, with a competitive tax base. Spending on infrastructure, for example, can be helpful, but at a certain point government spending no longer raises productivity because any boost is offset by the economic harm caused by excessive taxes.

In other words, government expansion beyond a reasonable limit does not induce growth, it stifles it.

 

[sandorski]

Tax Relief alone is kinda pointless when people are losing their Jobs and Consumer/Corporate Spending is falling. Less Money is flowing through the Economy and that's the problem. Sure, decreased Taxes may ease the pain for many, but it doesn't help stimulate Recovery/Growth.

Government Spending, especially on necessary Infrastructure, Creates Jobs employing more People who will have $$ to Spend. There's another added benefit to areas that were recently Booming, such as Alberta/BC. That is: Important Infrastructure can now be built at a $Savings and without inflating the Market like it would have just a few months ago. The Construction Industry has slowed substantially and that gives a great opportunity to both Stimulate economic conditions and save $$ because of economic conditions.

As far as: "All government borrowing does is redirect national income from one area of the economy to another," I think that's more of a concern when times are Good. The Need to Borrow amongst the Private Sector will decrease during an Economic downturn, so there is less competition for Credit.

I think Flaherty is kinda clueless and have not been impressed with him at all.

 

[JS80]

Nothing, economy is cyclical, all we can really do is keep the system itself from collapsing.

All these newly unemployed people innovating and inventing is the only way to "jumpstart" the economy.

edit: short term, lower corp income tax is useless because earnings are going to be down anyway (no tax to pay) and companies would just hoard cash. lowering individual income tax is useless too because people will just save.

 

[Craig234]

Originally posted by: JS80
Nothing, economy is cyclical, all we can really do is keep the system itself from collapsing.

All these newly unemployed people innovating and inventing is the only way to "jumpstart" the economy.

edit: short term, lower corp income tax is useless because earnings are going to be down anyway (no tax to pay) and companies would just hoard cash. lowering individual income tax is useless too because people will just save.

Your first point is absurd. Millions unemployed don't run around inventing.

Your edit point is remarkably correct.

But instead of my saying a lot more about the effects of the government spending on jobs, that FDR's weakness was not spending *enough* on it until WWII, a huge public works program, I'll let the most recent Nobel Laureate for economics explain it to you - watch the video:

Link

 

[sandorski]

Originally posted by: Craig234

Originally posted by: JS80
Nothing, economy is cyclical, all we can really do is keep the system itself from collapsing.

All these newly unemployed people innovating and inventing is the only way to "jumpstart" the economy.

edit: short term, lower corp income tax is useless because earnings are going to be down anyway (no tax to pay) and companies would just hoard cash. lowering individual income tax is useless too because people will just save.

Your first point is absurd. Millions unemployed don't run around inventing.

Your edit point is remarkably correct.

But instead of my saying a lot more about the effects of the government spending on jobs, that FDR's weakness was not spending *enough* on it until WWII, a huge public works program, I'll let the most recent Nobel Laureate for economics explain it to you - watch the video:

Link

Innovation and Invention happens more when times are good rather than bad.

 

[miketheidiot]

cut taxes normally has a much smaller multiplier effect than increased spending

also, national economies aren't closed systems, so his entire thesis is broken from the start, and you can increase the amount of money in the system because eserve manks bank up much of the debt, increasing circulating currency.