Quoderat

When a government spends money, a few things happen:

1. it competes with the private sector for money, driving up inflation (or interest rates)
2. it competes with the private sector for products and services, driving up costs
3. it competes with the private sector for land, driving up property prices
4. it competes with the private sector for workers, driving up salaries

During a boom, these are all bad things — when inflation, costs, and salaries are already too high, government spending just pumps more air into the bubble, leading to an even bigger bust later on (as we’re seeing this time around).

During a bust, it’s a different story. With the spectre of deflation and negative interest rates, more competition for money is a good thing. With companies laying off workers and struggling to stay afloat, more competition for products and services is a good thing. With a collapsing property market, more competition for land is a good thing. And with a huge pool of un- or under-employed workers, more competition for labour is a good thing.

So with so much potential good, why are stimulus packages usually a bad thing?

It’s all in the timing

Spending enough money to actually stimulate the economy out of a recession takes a lot of time. Sure, governments can spend some fixing existing roads and bridges, repairing sewers, etc., but that’s chickenfeed. To spend serious money and put people back to work, they need to do big stuff like new high-speed rail lines or highways, convention centres, etc.

Now, stop and think for a second.

Let’s say that you have access to $20B, right now, to build a high-speed rail line down the U.S. West Coast from Seattle to San Diego. When can you spend it?

First, you need to have public hearings.

Then you need to plan the line.

Then you need to negotiate with all the governments along the way.

Then you need an environmental assessment.

Then you need to put the work out for tender.

Then you need to expropriate some land, and deal with the court challenges from people losing their homes, parks, etc.

Then, 10-20 years later, you can start construction.

Granted, that’s an extreme case, but even something as simple as a new convention centre takes several years from first planning to the start of construction, with design, approval, tender, environmental assessment, etc.

Inflating the next bubble

And there’s the problem. Maybe we’ll still be in a bust in several years, but maybe .. just maybe .. we’ll be in the middle of a world-wide boom.

Then all the money that governments are committing now will go not to pull countries out of the current recession, but to inflate another bubble that could make the next recession even worse.

Are there any options? We could try to plan stimulus packages during the boom, not during the bust, so that they’re ready to go when we actually need them. The problem is, how do you predict a bust 5-10 years in advance? Are contractors and workers willing to wait an uncertain number of years to start work until the next recession is declared?

That is why stimulus attempts mostly fail.

The U.S. Senate made the right choice rejecting the auto industry bailout.

This isn’t about class warfare: it doesn’t bother me that the CEOs took their bizjets from Detroit to Washington (CEOs take private jets so that they have more time to work on running their companies, not to show off), and many of the shareholders who stand to lose are private citizens’ 401Ks and pension funds, not rich industrialists.

This isn’t about environmental concerns: companies will make electric cars as soon as they think they can profit from them (would you buy an electric car as your principal car now, when you have to stop every 2-3 hours and plug it in overnight, the batteries are an environment catastrophe waiting to happen, and a lot of the electricity in the U.S. is generated from dirty coal?).

This isn’t about free-market purism: sometimes even healthy private organisations do need a little bridge financing to get through hard times, and in rare cases the government has to be the financier of last resort.

This is about not prolonging the agony: the existing three major North American car companies are obviously doomed, and all a little more money will do is delay the bankruptcies, mergers, and restructuring that might actually create a vibrant, healthy North American auto industry (maybe just one company instead of three).

No money pit

A bailout would also be a commitment to a money pit — after spending $25B$14B now, would the U.S. government be able to say ‘no’ to more in three months, when the industry burned through the first handout? What about another three months after that?

These aren’t healthy companies going through a rough spot — they were dying slowly even during the boom, when the world auto industry was way over capacity for demand, and Detroit was losing hundreds or thousands of dollars on every car they sold. GM burned through USD 4.2B cash in 2008Q3 alone, and that was mostly before the market meltdown.

Palliative care

The U.S. auto industry won’t disappear, but it has to change, and that change is going to be painful for the workers, their families, and their communities. It’s good that the U.S. government has decided not to make a pointless intervention leading to false hope and prolonged agony; now, though, it’s time to think about palliative care for the industry, while the workers grieve and then move on with their lives. Can the government help? How? $25B$14B to help communities would be a lot more useful than $25B into GM’s, Ford’s, and Chrysler’s petty cash boxes. But how to spend it?

Canada just had an election six weeks ago, but we might have a new Prime Minister and cabinet from a different party in a week or so, without holding another election. What gives?

Background

If you don’t live in a country like Britain, or Australia, that uses the Westminster System, what’s happening in Canada right now — to the extent that you’re paying attention at all — must seem very strange. For our American cousins, here’s how our system lines up with yours:

A question of confidence

Since only our House of Commons — equivalent to the U.S. House of Representatives — is actually elected, it holds all the real power, and the leader of the ruling faction in the House — the Prime Minister — is the effective (but not constitutional) head of state and can appoint the other cabinet ministers (just like the party with a majority in the U.S. House can appoint the committee chairs).

The Prime Minister holds power, however, only to the extent that he or she can keep the confidence of the House of Commons. Any party leader can go to the Governor General and offer to form a government, but by tradition, the G-G will always give the first chance to the leader of the party that won the most seats. If that party has a majority of seats in the House, then forming a government will be a no-brainer (assuming that the leader can maintain party discipline); if the party has only a plurality of seats, then it has to prove that it can control the house and pass its major legislation; if not, then the G-G can offer a different party leader a chance to form a government.

Only MPs are elected

Although this might sound bizarre to people used to the American system, there’s nothing inherently undemocratic about it. Canadians elected 308 Members of Parliament (MPs) earlier this fall; we did not vote directly for a specific Prime Minister or a specific party. The Conservative Party won a plurality of the seats, but not a majority: that doesn’t guarantee them the government, only the first turn to try to form one. The Conservatives are about to bring their first major piece of financial legislation before the House, and if it is defeated, the G-G is required to conclude that the Conservative government does not have the confidence of a majority of the 308 MPs we elected, and (since the last election was so recent) to give another party leader a try if one can make a credible case.

Hubris

Last time around, the Conservatives had no problem governing with a minority government — they just made sure that at least one of the other parties would support each piece of legislation they brought forward, and the opposition parties — especially the Liberals — were too timid to force an election by defeating them. This time, though, the Conservatives foolishly pushed the opposition parties just a little too far, by trying to cut government funding for political parties. This would hurt the opposition much more than the Conservatives (who are better at fund-raising), and whether the move was morally right or wrong, it was politically ignorant.

Suddenly, two of the opposition parties — the Liberals and the New Democratic Party (NDP) — woke up out of their daze and realized that they could vote with the Bloc Québécois to defeat the Conservatives, then join together to form their own government. The Conservatives immediately panicked and withdrew the anti-funding proposal, but the genie was out of the bottle — the Conservatives’ only remaining hope is to try to appease the Bloc enough to keep their support.

Food for Junkies

So if you’re a political junkie who’s still in a slump after the end of the U.S. election, stay tuned — even Canadian politics can be exciting sometimes.