Why is the Fraser solution the only one that makes good
economic sense? The answer is to be found in the distinction between money and
real resources, which the C.D. Howe analysts are ignoring.
money is not a big problem for governments. They can borrow or print gigantic
amounts of it and throw it on the economy to boost this or that sector. That's
what they did during the latest boom that we went through beginning in 2001.
It gave the illusion that we had unparalleled prosperity when in fact we mostly
got speculation and unsustainable bubbles in some areas, record levels of
indebtedness and a depletion of capital that should have been used in sectors
where there was a real and solvent demand.
Now that a crash has predictably happened, these malinvestments have to be
purged and the economy has to readjust to a sounder production process before it
can start growing again. Real resources―we're talking here about manpower,
machines, commodities, etc.―have to move from sectors that were artificially
inflated during the boom to sectors where profitable opportunities existed but
that had difficulty obtaining them.
This takes time. During that phase, until they find a better use, resources can
temporarily remain idle. This inevitably means higher levels of unemployment,
closed plants and low-priced commodities that don't find buyers.
As Austrian School economists have taught however, the wrong was created during
the boom when inflationary policies created all the malinvestments. The
recession is the difficult but inevitable adjustment process that will put the
economy on a surer footing.
Governments should do nothing to prevent it, despite how politically unpopular
that may be. When governments launch massive spending programs, they simply grab
more of the factors of production that businesses need, which keeps the economy
down. The best governments can do is to get out of the way and give the private
sector the means to navigate these troubled waters.
Now, the C.D. Howe proposal seems to offer the best of both worlds. The tax cuts
and incentives to invest will help companies restructure and adjust to the new
At the same time, by keeping public spending at current levels, the government
will presumably continue employing resources that would otherwise remain idle,
thus sustaining demand and the overall economy. This temporary support will be
paid for by borrowed money that can be reimbursed in a few years when growth has