Although unemployment continues to lag in the United States, the economy seems to be rebounding slowly. The Financial Post has two articles on the Keynesian stimulus spending in both the United States and Canada, with both arguing against the necessity for them in the first place. In the first article, George Bragues asks whether it was really necessary to “save the economy” when the recovery began before the money could be spent. Although some believe that the massive flow of money into the economy has had a positive effect on recovery, the facts do not seem to bear out that theory.
The $787 billion stimulus plan was only signed in February, a few months before the bottom levelled off in the U.S., and when almost nothing had yet been spent. And although the rest of the world hasn’t spent anything close to what the Americans have, the U.S. is in the slowest category of those recovering. Mr.Bragues even argues that the recovery on the Nasdaq was largely due to losses taken when it became clear that Barack Obama would be elected and enact a massive stimulus plan in the first place. And the gains that we have seen have been based on good old actions unimpeded places in the market where deflation has led to a natural resurgence in consumer spending.
The New Yorker’s resident economist, James Surowiecki, talks about that consumer spending as it relates to the automobile makers:
In fact, you could argue that consumption has actually fallen less than might have been expected. Spending did drop off the proverbial cliff in the fall of 2008, in the direst phase of the financial crisis, but it stabilized at the beginning of this year, and has now risen for four months in a row. And much of the decrease in consumption since early 2008 can be traced to a drop in spending in just two categories: gasoline (thanks to lower prices) and cars. The decline in new-car purchases has been so steep that the average life of a car on the road today is at a historic high. This is just one example of how better product quality makes it possible for consumers to cut back without experiencing much decline in their standard of living. We can delay buying a new car because the one we have can be driven hundreds of thousands of miles without problems—making the auto industry a victim of its own success. Nonetheless, the response to the Cash for Clunkers program indicates a certain amount of pent-up demand out there.
The funny thing about the “Cash for Clunkers” program, however, is that it merely creates another “bubble” in consumer spending by pushing an artificial demand forward. As Mr.Surowiecki says, most people can delay purchases of cars for a few more months or years, but an artificial pricing fix in the market merely resets the timeline for the demand. Eventually when the “special” expires, people will go back to their frugality, and the bubble will pop again.
Today the Financial Post ran an article arguing against Canada issuing any more stimulus spending in order to create more artificial “bubbles”. Encouraged by low interest rates, businesses are beginning to recover in Canada as well, despite having a similar lag effect in the employment numbers. And just as it is doing in the United States, but on a much lesser scale because of our much more restrained stimulus budget, Canada risks creating problems in the natural growth sectors of the economy by creating competition from artificial sectors created by “stimulus”.
All a stimulus program can really accomplish is to bring an artificial demand for something forward in the market, which could wind up impeding the kind of natural growth of demand that occurs when the economy recovers, and when consumers begin opening their wallets again in earnest. As the Fraser Institute encourages, instead of worrying about stimulus, Stephen Harper should “focus on scaling back his own government’s profligate and harmful spending.”
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