Thursday, November 27, 2008

Stimulus Package Part 1

The IMF is advising countries to implement stimulus packages that are 2% of GDP. Canada's GDP is now $1.3 trillion, so by IMF standards the stimulus package should be $26B. Some estimate 2% at $32B. Others favor a smaller package, with a floor of about $10B.

There are many forms the stimulus could take, and it should probably be multifaceted.

"New Deal" Projects
Ideas like infrastructure projects and renewable energy development are good, but they will be slow. It could be two years till the money enters the economy that way, while we need stimulus now. It's not even clear we will need stimulus then. These can be part of the plan, but not the whole plan.

Into people's pockets
Sending cheques to citizens is a quick, effective way to boost the economy. Critics counter that consumers might use the money to pay off debt or put in savings, thus negating the stimulus effect. I challenge the conclusion that saving the money reduces the stimulus effect. Consumer confidence will be bolstered by putting more money in the hands of citizens, no matter what they do with it directly. If they save it or use it to pay off debt today, they will feel less financially vulnerable next week. The stimulus effect is still faster than most other options, even if it takes months instead of days to see a boost in consumer confidence. This option is a red flag issue for ideological non-productive responses to the crisis: some on the right will oppose all direct help to people and want to make all support go to corporations. Some form of direct consumer stimulus should be included in the package, whether it's a cheque, tax break, or whatever.

Corporate Handouts
Giving tax breaks, subsidies or other forms of wealth transfer to companies may help retain jobs, but it's risky in that the agenda of the decision-makers may not match the agenda of the government: they could spend the money on management bonuses, foreign travel, saving, send it to the US head office, whatever. A broad-based payroll-tax break might be good, but there's no way to regulate or even oversee how the money is spent. This may be a good area to pursue, but if so, I favor a plan that regulates how the money is spent.

Social Safety Net
Automatic stabilizers, as I've said before, are the most effective form of stimulus, particularly unemployment insurance, so it may make sense to increase UI. (The Globe recently quoted Mark Zandi, chief economist of Moody's, as saying that each dollar spent on UI in the US has been shown to generate $1.63 in the economy.) The current top UI payment is $2,000/month per person, and it's not clear that that needs to be raised. But making UI available to more people is an option, or increasing the lower levels of payment. Increasing money for UI training programs is also a good idea, as is providing more government money to help people relocate for work, and giving grants to groups like food banks and shelters.

Retooling Society for Sustainability
This crisis is an opportunity to make some changes that otherwise would not find political will. We are a car-based country. Increasingly we waste huge proportions of our school budgets busing kids all over the place. We build far-flung subdivisions that can't support public transit and then we run empty buses to them. We build big box stores on the outskirts of town. We let developers plan our cities. When the economy hits bottom and people can't afford to drive their cars, we should have policies in place to work in a more efficient, less polluting, more sustainable way.
That's a start. I imagine (and hope) that in the next few weeks we will all learn a lot more about fiscal stimulus packages. We need to learn more. If the stimulus is 2% of GDP, each Canadian will pay an average of about $1,000 on this stimulus package. For a family of four, that's $4,000. If the stimulus doesn't work, millions of us will lose our jobs. We definitely all have skin in this game.


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