Montreal, February 15, 2010 • No 275

 

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

 

 THE EMPEROR'S DERRIΘRE

Ending an Economic Stimulus Package
 

by Harry Valentine
 

          A little more than a year ago, the federal government, under occasionally libertarian-leaning leadership, announced a series of economic stimulus packages intended to "get the economy moving." The package included a bailout for a bankrupt automaker. One of the minor aspects of the stimulus package was a limited-time subsidy for home renovations, a program that has now ended. Over the past century, numerous free-market economic thinkers have warned that once governments initiate stimulus packages and subsidies, they can be difficult to terminate, as federal officials have come to realize.
 

          The end of the home renovation package was accompanied by protests that the government could have done more or that the government could have continued the program. Government subsidies, rebates and stimulus packages all share the characteristic that attention is focused on the alleged benefits of such programs, while disregarding their harmful effects. If the money that government is handing out comes from tax revenue, that money was taken from other more functional areas of the economy and re-allocated to areas favoured by government. As a result, one area of the economy has to make do with less while another area of the economy reaps the benefit, even if temporarily.

International Competition

          The sectors of the economy that were temporarily deprived of resources could become less competitive with offshore producers. While government may act to restrict competitive imported products, the sectors that were even temporarily deprived of investment resources could face a potential loss of export opportunities. A long-term diversion of capital resources into politically favoured areas undertaken at the expense of reducing capital resources in other sectors of the economy can have an even more detrimental impact on the lower-profile sectors of the economy. Continued political support for favoured, high profile sectors of the economy can also be detrimental.

          Beginning in the late 1980s and continuing into the 1990s, North American political decision makers chose to stimulate the high-tech and information sectors of the economy with grants and ultra-low interest loans. The result was the high-tech malinvestment boom that involved the development thousands of products and services that the market could not support. The high-tech malinvestment boom culminated in the high-tech meltdown and dot-com bust. Many companies that survived that upheaval sought refuge in the Asian economies where lower wages and less government involvement in the high-tech sector was the norm.

          Political decision makers in both China and India appear to have provided a hands-off, almost laissez-faire approach to the high-tech and information sectors of their respective economies. During its post-communist business era, China seems to have followed the teachings of one of their renowned philosophers, Lao Tzu, who in his treatise known simply as the "Tao" expounded on the merit of the freedom of peaceful and productive enterprise. The concept of humility, including among public officials, is highly emphasized in the teachings of many Asian philosophies, religions and ways of life.
 

"It was a government-driven economic stimulus package in the housing sector from the early 2000s that ultimately collapsed and caused the mortgage meltdown of late 2008. The economic fallout that followed included General Motors having to declare bankruptcy."


          The high-tech sector across most of Asia operates free from the hype, media attention and political-level egotistical behaviour that occurred in the North American high-tech sector during the 1990s. North American officials wanted to be seen by the electorate as being the cause of the tremendous economic opportunities that the high-tech sector had to offer. But ongoing, politically inspired stimulus packages aimed at creating a perpetual economic boom in the high-tech sector ultimately destroyed most of that sector across North America. It is perhaps to their credit that the humble Asian officials learned a lesson from their American counterparts.

Ignoring the Asian Example

          As a result, the high-tech sector across much of Asia has undergone steady growth for over a decade. It is essentially free from the massive, politically driven malinvestment that occurred in North America during the 1990s. As a result, the Asian high-tech sector will likely continue growing and expanding on a steady, if unspectacular, path for several more years. This is the result of Asian "laissez-faire" under the administration of what are nominally communist and socialist governments. While Asian officials may have learned a lesson from western officials following the high-tech bust, western officials have ignored the example of humility from their Asian counterparts as to how to maintain a thriving high-tech sector in the economy.

          It was a government-driven economic stimulus package in the housing sector from the early 2000s that ultimately collapsed and caused the mortgage meltdown of late 2008. The economic fallout that followed included General Motors having to declare bankruptcy. The governments in Ottawa and Washington almost immediately announced new economic stimulus packages aimed at reviving the economy. During the 1990s, the government of Japan implemented stimulus packages to revive a stagnant economy, but their economy remained stagnant. It is again stagnant, as is the economy of Greece, where the national government now finds itself in the midst of a fiscal crisis of its own making.

          Political behaviour in matters that pertain to the economy is very different in China and India as compared to Western nations and Japan. It is no coincidence that the economies of India and China have undergone less upheaval that the American economy, or even that of Canada. The kinds of massive economic stimulus packages that have become common in many western economies are virtually nonexistent in the Chinese and Indian economies. Western officials seem determined to continue their implementation of various economic stimulus packages, seemingly unaware that such packages can ultimately harm a nation's economy. As a result, the economies of China and India will likely gain strength during the present economic slow-down and gain new prominence internationally.