Budget '09: Mind the lag

Like a bunch of little birds clamoring for barfed-up worms from the big momma bird, every organization, business sector and government in the country was begging for some sugar in today's budget.

Let me go on record again as saying that this whole concept of "fiscal stimulus" is way overblown. However, measures to boost investment in things that have potential to build value or increase productivity down the road could be helpful. For example, the extra funds for Business Development Bank of Canada and Export Development Canada could be money well spent, or the credit for home reno's (also because that one benefits me -- that's an important factor that we should all consider).

One of the dangers with all this is that we could we could be stepping on the gas pedal when we need to ease off, two or so years down the road. In economics, nothing is immediate. Monetary and fiscal policy all works with a lag. So two years down the road when the economy is recovering we might have put some things in motion with this budget and the next that could result in inflationary pressures when we least need them, especially if oil prices rebound, which is very likely.

Let me paint this scenario: it's 2011 and WRHA has just torn down the Nutty Club warehouse to build it's 5th office building in three years. GDP is growing again, but the economy is still relatively weak so tax revenues have not fully recovered. Inflation is at 3%, which means the the Bank of Canada needs to raise interest rates, effectively putting the brakes on the economic recovery while the government is still running deficits. The Federal government, in an attempt to rein in spending and get back to black, makes massive chops to transfer payments to the provinces. The provinces are in debt too because they went in for halfers on all of these infrastructure programs, and now their revenue stream is drying up. But that doesn't matter because a giant asteroid from the Edgeworth-Kuiper Belt is about to destroy the planet. I mix myself a whiskey sour and put on some Pink Floyd.

In the end, we may have been better of riding this out instead of trying to spend our way out. Don't forget that this is a global problem, and the US will be injecting plenty of stimulus into the economy as well.

some Floyd for ya:



edit: actually, I like this version better with Roger Waters and the amazing Dave Kilminster (sp?) on guitar: