The “Right” Stimulus Debate

We are now into full blown Budget consultation mode, with MPs of all parties going through a bit more than the usual pretence of listening before the actual Budget is finally put to bed by the government a few days hence. For once, even the Conservative inner circle seem a bit unsure of where to go. Below the closed (charmed) circle of the haut corporate elite Economic Advisory Committee (which vindicates the crudest theories of “corporate rule”), Flaherty and other Ministers have been meeting with a fairly broad range of organizations, including labour and anti poverty groups, and the Conservative MPs on the Finance Committee held a full day of meetings in Ottawa today.

I detect no unanimity on the part of those whom the Conservatives usually heed most closely, and unusual signs of creeping Keynsianism and outright interventionism among the normally orthodox.

At one pole, Jack Mintz who sits on the Advisory Committee and Bill Robson of the CD Howe have staked out the fiscal orthodoxy ground, contemplating only a very short term, very modest, highly targeted stimulus to be quickly followed by a return to balanced budgets. The Howe’s priorities for the 2009 Budget envisage $26 Billion of stimulus over 3 years (not per year), hugely short of the $30 Billion or 2% of GDP annual stimulus called for by the International Monetary Fund. Mintz and the Howe (surprise, surprise) want permanent cuts to personal income tax rates at all levels, and accelerated cuts to corproate income tax rates.

With the exception of a small temporary investment tax credit and very small increases in income benefits (EI and the Working Income Tax Benefit), their line is to depart modestly and temporarily from the norm of balanced budgets by adding permanent tax cuts to the expected cyclical decline in revenues. They contemplate almost no increase in public investment, be it in infrastructure or public services, and likely want the cuts called for in the short-lived Conservative Economic Statement. The Bay Street bank economists seem to have endorsed the same general line of a permanent tax cut led stimulus .. though Don Drummond of TD has previously editorialized in favour of at least some spending side stimulus.

Gratifyingly, Glen Hodgson of the Conference Board penned a rather good critique of the orthodox approach in yesterday’s Globe, correctly noting the very limited stimulative effects of personal income tax cuts (especially permanent ones) as compared to public investments which directly enter the spending stream with no leakage to savings and only small leakages to imports. While more modest in his own proposals than the CCPA’s excellent AFB stimulus package, Hodgson and the Conference Board similarly favour significant investment in environmental and basic municipal infrastrcuture, and income support for the unemployed and other low income groups who can be counted on to spend on home grown necessities like food and shelter rather than save or blow their tax cuts on imported consumer goods.

On several occasions over the past few weeks, including today’s meetings with Conservative MPs, I have been struck by the degree to which most employers and employer groups – as opposed to right wing economists – appreciate much more keenly the depth and severity of the crisis. Those I have met – including the leaders of two major national ‘umbrella’ business organizations – do not expect a quick turnaround, and point to the fact that order books are disturbingly bare beyond the completion of current orders and planned investments. This crowd is not particularly worried that some major infrastructure projects may take a while to get off the ground, since they see the need for a medium term public investment program to sustain employment and to crowd in new private sector production and investment. I detect no great alarm about large deficits over at least the next few years, and some voice at least limited support for increases in EI and other income support measures, as opposed to personal tax cuts.

At today’s meeting, the Conservatives were asked by the leader of a major national business organization to consider creating an Innovation Fund to supplement lending to the private sector by the Business Development Bank and the Export Development Corporation. The basic argument was that government can borrow or endow at low cost and thus can provide equity and credit to the private sector much more effectively than a private credit system in crisis. Yelling at the banks to lend more will not provide low cost funding for long term capital investments, and governments should help fill the gap created by the collapse of venture capital and investment banking. This is not all that different from the public investment bank and sector renewal funds supported by labour and the CCPA in recent Alternative Federal Budgets.

Given their political stripes, I suspect Harper and Flaherty will try to keep any stimulus package on the Howe side of the spectrum – small, temporary, and tilted to permanent tax cuts. But that mistakes the nature of the crisis and the challenges ahead, as is well understood, not just by progressives, but also by many employers seeking to survive in the world as it actually exists. The same debate is playing itself out in the US, with some in Obama’s team challenging the feasibility or desirability of stimulating the economy throug temporary increases in consumption via personal income tax cuts, as opposed to public infrastructure investment and subsidized private investment in “new” green industries.

In short, there is an important Budget debate on the right, not just between progressives and the right.