Stand Up for Harper

When conflict erupts between Conservative politicians and the Fraser Institute, I am inclined to react as Henry Kissinger did to the Iran-Iraq War: “It’s too bad they can’t both lose.”

But in the recent spat over stimulus, it was easy to choose sides. However grudging the Harper government’s decision and however inadequate its execution, it did the right thing by enacting a significant stimulus package.

The left correctly advocated this policy for months before it was implemented. We should now be prepared to defend it.

Also, I hear that Harper is looking to appoint a new Governor General. So, I intervened on his side in today’s issue of The Hill Times (page 12):

In Defence of Stimulus

It is not every day that a union economist comes to the defence of Stephen Harper and Jim Flaherty. But they were right in calling the Fraser Institute’s recent stimulus study “wrong.”

Under pressure from opposition parties, Canada’s Conservative government belatedly recognized in 2009 that fiscal stimulus was needed to pull our economy out of the recession that started in 2008. However, the conservative think tank claims that government stimulus contributed almost nothing to Canada’s partial economic recovery between the second and fourth quarters of 2009.

The Fraser Institute is correct to focus on Statistics Canada figures, but its interpretation of those figures is absurd. Gross Domestic Product (GDP) consists of several components.

The public sector provides two components: government investments and government purchases of goods and services. The private sector comprises personal consumption, business investment, inventories and net exports.

The Fraser Institute’s study shows that, as a percentage of GDP, the public sector expanded by 0.4% in the second quarter of 2009, 0.5% in the third quarter, and 0.5% in the fourth quarter. The private sector contracted by 1.3% in the second quarter and by 0.4% in the third quarter, but expanded by 0.9% in the fourth quarter.

Over the three quarters, the public sector added a total of 1.4% to economic growth. Meanwhile, by shrinking for two out of three quarters, the private sector subtracted a total of 0.8% from economic growth.

In the second quarter, public-sector expansion partly offset private-sector contraction, mitigating the recession. In the third quarter, further public-sector expansion outweighed further private-sector contraction, tipping the overall balance from recession to recovery. In the fourth quarter, the private sector returned to growth and yet more public-sector expansion added to it.

So, how did the Fraser Institute conclude that stimulus contributed almost nothing to growth? Rather than examining these quarters in total or separately, it subtracted each component’s expansion in a given quarter from its expansion in the following quarter. Because the public sector contributed about the same amount to growth in each quarter, the Fraser Institute asserts that it barely contributed anything “between quarters.”

This strange methodology does not actually measure the contribution of stimulus to economic growth. Instead, it measures the rate of increase in stimulus from one quarter to the next. That rate might be worth examining, but it in no way supports the Fraser Institute’s conclusion.

Of course, it is true that the public sector increased by similar amounts each quarter. The private sector swung more dramatically from a large decrease to a small decrease, to an increase. But that is exactly how stimulus is supposed to work: steady growth in government investments and purchases stimulates a return to private-sector growth.

Stimulus also contributed more directly to the private sector’s turnaround. In addition to increased government investments and purchases, federal and provincial stimulus packages increased government transfers to households and businesses.

These public funds supported private-sector demand. For example, modestly extended Employment Insurance benefits clearly allowed some households to sustain a higher level of private consumption than they otherwise could have. Simply dividing GDP into its components misleadingly counts such government transfers as part of the private sector.

A Conservative government fighting with a conservative think tank makes for good political theatre. The important policy question is whether stimulus worked. It did.

However, simply shifting GDP from decline to growth is not enough. Federal and provincial governments must deliver enough stimulus to propel our economy back to the levels of output and employment that prevailed before the financial crisis.

Erin Weir is an economist with the United Steelworkers union.