Are Justin Trudeau & Bill Morneau right?

200px-Lagarde,_Christine_(official_portrait_2011)In a report in Fortune magazine, Christine Lagarde, Managing Director of the International Monetary Fund (IMF)* has renewed her calls for “stronger action by the world’s economies to boost growth.” Does that mean that the spending spree that Prime Minister Justin Trudeau and Finance Minister Morneau have launched is, in fact, good public and fiscal policy?

What is “growth?”

Put fairly simply: Economic growth is an increase in the capacity of an economy to produce goods and services, compared from one period of time to another. How one measures that “capacity” influences the results _ when comparing one country to another GDP (or GNP) per capita is usually used to take account of inflation. Sometimes inflation itself can appear to create economic growth ~ as it did in Canada in the 1970s, but that is a false indicator and Canada’s economy was, in fact, in relatively poor shape; as you can see below the economy appeared to grow at a brisk rate in and around the 1970s, but inflation was a record highs ~ higher, even, than during the Korean war ~ which meant that for individuals any “growth” they might have seen in their paycheques was more than eaten up by sky-high mortgage and car loan interest rates and constantly increasing prices for good and services:

Now, the inflation crisis (that’s the appropriate word) was not entirely the fault of …

image

… in fact there was a global monetary (interest rates) crisis, but their wild spending spree certainly didn’t help. In fact, it was these guys, and their colleagues, who sorted out the mess the politicians had made by targeting inflation as the real enemy of the people …

… but, despite the best efforts of central bankers, wild, irresponsible spending can still be made to look like growth even as it is just piling on long term debt. You too can appear to be growing richer if you max our your credit cards and lines of credit to buy a new car, take a vacation and renovate your home but you and I both know that nothing real has changed, except that you may have burdened your children with your bad debts.

Most real economic growth occurs as a result of some fundamental (often technological) changes like the invention (and exploitation) of the steam engine and, later, the internal combustion and jet engines, and the invention of e.g. radio and the transistor and the personal computer. The Green Revolution (1930 to 1960) is a good example of technological and practical (procedural) changes that stimulated real growth; so did Deng Xiaoping’s restructuring of China’s economic system in the 1980s. Some people hope that green (alternative) energy and e.g. electric cars will do that in the 2000s but, thus far, each appears to be a “tweak” of existing technologies, not a new, “game changer,” like the internal combustion engine or the discovery of penicillin were.

Maintenance.

Some of us hoped that Prime Minister Trudeau would keep what seemed to be an implicit campaign promise to run smallish deficits to refurbish essential infrastructure, the veins and arteries of the economy ~ borrowing while interest rates are low to maintain essential infrastructure.  Many respected economists advocate this … but Team Trudeau seems intent on spending on far, far less “economically desirable” or “productive” projects.

How to stimulate growth …

There are several ways to help stimulate growth; they include (but are not limited to):

  • Getting government out of the way ~ this includes not “picking winners” (i.e. not subsidizing “regional (or sectoral or both) champion” companies like Bombardier);
  • Make the country business friendly ~ this includes lowering corporate taxes and providing real incentives for locating or keeping head offices (and banking) in Canada and doing real R&D in Canada;
  • Negotiating more and free(er) trade deals with other countries and regions;
  • Subsidizing post secondary education and training based on merit and performance, not need or race or gender; and
  • Helping to make and keep the world more peaceful so that we (and others0 may trade our good, services and labour freely.

How many of those are Liberal policies?

All of them should be in the Conservative Party’s platform for 2019.

So, to answer my own question: No, Justin Trudeau and Bill Morneau are not right. Their Budget 2016 does not stimulate real (and needed) economic growth, it just creates expensive illusions and adds debt to a bill we will all present to our children and grandchildren.

_____

* The primary purpose of the IMF is to ensure the stability of the international monetary system ~ the regime governing exchange rates and international payments that enables countries (and their citizens) to do business with each other. The Fund’s mandate was updated in 2012 to include all macroeconomic and financial sector issues that bear on global stability)

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