Harper Government Economic Stimulus – Doomed to Failure by Richard Komorowski – February 5, 2011 – Cornwall Ontario

Cornwall ON – Despite everything the Harper Government says to the contrary, Canada, the US, and most of the Western World are still mired in the 2008 depression, and will remain so for the foreseeable future. The reason is simple and has nothing to do with the “subprime” mortgage crisis. $147 per barrel oil, and gasoline selling in excess of $4.00 per gallon (roughly $1.06 per litre) caused the depression. The mortgage crisis was merely one of the results.

The major result of any depression is high unemployment. When people lose their jobs, they spend less. Production goes down, demand for services goes down, and more people lose their jobs. Discretionary spending is the first to go down – people spend less in restaurants, take fewer vacations, cut back on luxuries, wear clothes a little longer, and so on. With no demand for these goods and services, more people lose their jobs.

Classical economic and government theory demands stimulus spending in order to break this cycle and encourage economic growth. The Harper economic stimulus package, announced in the spring of 2009 and now winding down to a close, was designed to do just this. By creating jobs, particularly in building and repairing our physical infrastructure, money is  pumped into the economy, spending increases, and more jobs are created to carry on the momentum. It is this stimulus package, along with reduced revenues from personal and business taxes, which is responsible for this country’s (and the provinces’) record deficit.  Ideally, these deficits are paid off as the economy starts to grow again, as income (and therefore taxes) from individuals and businesses increase.

The classical theory, however, takes no account of the cost of the energy needed to run all our homes and businesses. If the cost of energy remains stable, stimulus packages such as Harper’s (or Obama’s) have a reasonable chance of working. However, when the cost of energy is rising fast (as it did in 2008 and is doing now), no stimulus package can even hope to get things running again.

Sub-prime mortgages did very little to cause the 2008 depression – the bursting of the housing bubble was a symptom, not the cause of the depression. The mortgage crisis would not have happened if the financial institutions had to follow intelligent regulations and interest rates had remained stable. However, the Bush regime had deregulated just about everyone, which just made everything worse.

The real cause was the steadily accelerating price of oil from 2004, peaking, as it did in the summer of 2008, at $147 a barrel. Gasoline prices in Florida were around $4.50 or more per gallon, and diesel, which is perhaps more important to the economy than gasoline, cost even more. Energy costs are an important part of any business or household budget. When energy costs rise, the business or household must give something up in order to compensate.

With excessively high energy costs, business has to cut back somewhere. Production goes down, and jobs are lost. As other companies also lay off workers, demand for their product goes down again, so there are more layoffs, perhaps even bankruptcy.

At the household level, once it costs too much to fuel the SUV, something has to give. Keeping the gas tank full might be essential to keeping one’s job, so all discretionary spending goes down. And when one’s job disappears, because there is no demand for one’s service…?

Rising energy costs cause inflation, and the classic way to reduce inflation is to raise interest rates, which supposedly reduces demand, thus lowering prices. However, with rising interest rates, costs go up, and it becomes harder to find the capital to increase energy efficiency. Thus, even if a homeowner or business does find a way to save, they can’t because the banks aren’t lending at an affordable rate.

Oil prices have been pushing the $100/barrel mark for a while. In 2008, this was enough to slow the economy so that the final peak to $147 proved fatal. Given that we are still in that 2008 depression, the current and anticipated oil costs will be enough to push us right back into the worst of it again, with rising unemployment and reduced demand.

This is why the Harper Government’s economic policies are so obviously wrong to anyone who takes a serious look at them. Their sudden cancellation of the ecoEnergy grants last year, which were designed to upgrade the energy efficiency of Canadian homes, will make Canadian families more vulnerable as energy costs increase. The higher demand for gas, electricity and fuel oil will only serve to raise the prices of these essentials. Additionally, the government’s reneging on this program has resulted in an actual loss of jobs in the construction and insulation industries.

Even more ridiculous is cutting corporate taxes by another 11%, as is scheduled to happen in the next budget. All this will accomplish is to increase company profits, and therefore the dividends paid to (mostly) overseas investors, and further reduce government income. Absolutely ludicrous is cutting the taxes paid by the Alberta Tar Sands Industries, as the following will show.

As the chart shows, gross revenues (in blue) and pre-tax profits (red) have steadily increased, spiking with the 2008 oil price spike. Actual royalties and related payments (green), however, have remained almost static. Worth keeping in mind, also, is that royalty payments are 100% tax deductible, yet the Alberta Government basically forgives all royalties until all the capital and interest charges for the plants have been covered.

It is these profits that the Harper government proposes to reduce by a further 11%, from 18% to 16%. Will they result in increased employment? Canadian corporate tax rates are about average for G20 countries. A cut such as this is not going to make much difference in employment, especially with so many companies actually cutting Canadian jobs, and outsourcing them to places like India, China and the Philippines, where labour costs are so much lower.

The trickle down economics that the Harper government uses to justify these tax cuts have proven not to work. What they will do is lead to the bankruptcy of government, which justify the privatization or elimination of government services — services Canadians will need when these tax giveaways blow up in the government’s face. Where will the money come from to pay health care, pensions, unemployment insurance, etc?

Choose Cornwall

1 Comment

  1. I think I understand finance a bit better now, thank you. Can you send this to Mr. McGuinty ( either one, MP or MPP) because he needs the lesson.

    About 2004, we were hit with a health tax of up to 900 dollars, which kind of looks like it comes from after tax income. Later increases food prices happened because people asked for more money at the same time oil went up. Oil is needed for trucks to bring food to shops is another reason food costs went up. Plus things mentioned above adding to the upwards curve.

    Last week the OPP raises were in the 5% range and Mr Dalton McGuinty says that taxpayers will not have to pay for it. He must be getting ready for other employment after October, I am thinking magician if we do not have to pay……or tickets will greatly increase etc.

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