Sunday, January 25, 2009

Saving our country by getting a bang for our deficit dollar


The media and their corresponding web sites are full of articles this weekend about the forthcoming budget. Most responding to massive conservative public relations campaign detailing the extraordinary efforts that Harper, and Flaherty have gone through to prepare this budget.

Unprecedented details have been purposely leaked about the budget that is expected to contain $25 billion in stimulus spending as well as highly controversial tax cuts.

But I thought, this weekend that I would put my partisan beliefs aside and try to actually understand what the best options are for the trying to stimulate the Canadian economy.

Our economy is measured by the amount of goods and services we as nation both produce and consume and collectively we, both as individuals and corporations are producing and consuming less. Being a resource rich, exporting nation sitting next to the largest consuming population in the world, our production, at least on the corporate level is more affected by the downturn in the US than whether Willy buys a new TV.

But the recession is now here. Manufacturing, retail and distribution are trying to lower their inventories and reduce costs in an effort to maintain cash flow. Some are closing stores or plants, others are just trying to streamline operations. Energy, and construction projects are being postposed because of the decreasing price of commodities and real estate. Some have already filed bankruptcy.

The consumers also known as the workers are loosing their jobs, either through cost cutting layoffs or out right employer closings and those who still have a job are worried about their future employment and are therefore cutting back on expenses to better position themselves for the worst case scenarios.

In other words everybody (individuals and corporations) are hoarding their cash and spending less, resulting the overwhelming consensus of the world’s economists that governments must inject cash into the economy to jump start production and increase consumer spending.

The big battle seems to be about tax cuts. The right being the fiscal conservatives who favor less government intervention in the social web, prefer large reductions in corporate and personal taxes to stimulate the economy. The left being the more social progressive, favor government sponsorship of universal services and direct assistance to the poor and newly unemployed and are willing to fund that support through taxation.

I found the chart that was prepared by Moody’s for the congressional meetings when Paulson first came forth and asked for his $750 billion (his infamous three page financial recovery plan, a idiotic point I can’t seem to forget).

The chart illustrates how much revenue results by the investment of $1.00 of government funding. Strikingly and logically if you give the poorest segment of the population a dollar they will spend it, thus resulting in markup and immediate consumption. Give the richest segment a dollar and they will save it or invest it and therefore result in the lowest return on the investment.

According to this chart the top four stimulus options produce the best return for the investment of our tax dollars. Feed the poor, extend the unemployment benefits (beyond 33 weeks in our case), invest in infrastructure projects, and provide funds to the provinces for their own more localized and specialized disbursements and stimulus.

As for tax cuts, only short term tax breaks produce the required return (one time Tax Holidays or Rebates). Long term cuts do little for immediate stimulus and hurt the governments ability to return to a positive balance sheet due the loss of future revenues and the even cutting of social programs to restore stability.

Although this is the long term wet dream for the fiscal conservatives it is the long term nightmare scenario for social progressives.

The only question in my mind about the forthcoming budget is whether Harper decides to use the stimulus as an excuse to chop the long term tax rates and thus set us up for the eventual transformation from a socially progressive nation to a fiscal conservative free enterprise state or will he actually do was is right for the country, as it exists.


JAWL

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