Montreal, August 15, 2010 No 280


Harry Valentine is a
free-marketeer living in Eastern Ontario.



Canada Seeks to Phase Out
the Economic Stimulus Package


by Harry Valentine


          There have been recent announcements from Ottawa that the federal government plans to phase out the economic stimulus package. This was not the first time that Ottawa had enacted an economic stimulus package and the merit of this package is that the government will phase it out. At least this time, the government was up front that the stimulus package would be short term. There may have been the hope that the short-term package would have created some long-term business opportunity along with several long-term private sector jobs. The history of economic stimulus packages indicates otherwise.


          During the 1970's, Canada's Department of Regional Industrial Development introduced an economic stimulus package aimed at easing regional economic disparities. The federal government provided grant funds to companies that opened up in regions of high unemployment. Initially that program actually appeared to work over the short term. Government consultants at the time had high praise for the program that stimulated local economies and created jobs. The reports all focused on short-term results and on the perceived benefits to various communities as new companies opened up to provide employment.

          Local businesses expanded in response to the perceived opportunities that new manufacturing industries could offer a community. For a while, government figures who handed out the money become local heroes. However, as the federal funds for the new industries began to expire, the federally subsidized companies closed their doors in one location and moved to other locations, and many people lost their jobs.

          Established businesses that had expanded their operations had to scale back and lay-off even more employees. Other long-established businesses that had taken out new business loans to expand their operations literally closed their doors. While the regional economic program lasted, some communities literally became revolving doors for federally subsidized industries. Local citizens soon became disheartened, as they knew that the jobs were only for the short term. The new federally subsidized industry would leave town once the federal funding expired. Having learned hard lessons, other long-established local businesses responded in a cool manner to the subsidized newcomers.

          During the early 1990's, Canada and the USA initiated an extensive economic stimulus package for the then-emerging high-tech sector. The stimulus package included grants and low-interest loans being made available to both established and start-up information sector companies. The easy terms of the government program achieved the short-term objective of stimulating spectacular growth in the high-tech and information sectors. Soon the recipients of government funding engaged in business transactions with numerous other companies.

          These companies tested market demand for their products and services by fluctuating prices and received very positive market feedback. But the high-tech boom became the high-tech mal-investment boom as companies formulated plans based on this grossly misleading market feedback. Only massive government involvement in the Canadian and American high-tech and information sectors could have distorted the market to produce such feedback. The dot-com bust and high-tech meltdown were the result of the cozy partnership between government and industry.

"While Canada's plans to phase out the stimulus package certainly have merit, there is far greater scope for government further to rectify a dysfunctional economy. There are many economic regulations that hinder economic growth and have long since become obsolete and no longer serve any useful purpose, if they ever did."

          Several of the survivors of that market melee moved operations to China and India where technical expertise was available at very favorable costs. The comparatively low cost of doing business in China and India saved numerous high-tech and information sector business ventures. The cozy partnership between government and business that occurred in the high-tech and information sectors of Canada and the USA was literally non-existent in China and India, where high-tech and information sector companies have undergone 10 years of steady and stable growth. While the economies of India and China do have very serious problems, their governments' limited involvement in the high-tech and information sectors of their economies has so far prevented the boom and bust cycle that occurred in North America.

          While Canada's plans to phase out the stimulus package certainly have merit, there is far greater scope for government further to rectify a dysfunctional economy. There are many economic regulations that hinder economic growth and have long since become obsolete and no longer serve any useful purpose, if they ever did.

          It has been shown again and again that such regulation can only achieve short-term political objectives. Most economic regulations today are signed into law by order-in-council and are formulated by non-elected bureaucrats on their Keynesian or neo-Keynesian interpretation of economic events. However, such interpretations are often distorted, since almost everything written by Keynes in his General Theory has been debunked and refuted repeatedly.

          America's economic stagnation will likely continue in the long term and reduce trans-border trade and related employment in Canada. Canadian businesses will have to seek greater business opportunity through trade with other nations. There may be room to increase internal trade within Canada. There is a limit to what government can provide to its citizens as an economy stagnates. The history of state-funded economic stimulus packages is that they invariably cause economic hardship to citizens over the long term. An economic stimulus package that provides greater economic freedom through the mass repeal of long obsolete economic regulations could go far in terms of encouraging greater entrepreneurial activity amongst citizens.

          The economic history of India illustrates how the majority of a nation's citizens have to quite literally fend for themselves by exchanging goods and services on a mass scale in an underground or unofficial economy, the result of excess government control over major sectors of that nation's economy. A large percentage of the North American population may need to acquire such enterprising initiative as their means of economic survival in the future. The Canadian and American economies are also likely to stagnate indefinitely due to the excess printing of currency by the US Federal Reserve, a practice that seems likely to continue into the foreseeable future.