Governments must make more prudent investments

Hey there, time traveller!
This article was published 6/10/2016 (314 days ago), so information in it may no longer be current.

WHEN politicians debate whether deficits are needed for economic stimulus, the entire discussion is pointless. It’s not the deficit that matters, it’s how it is spent.

Imagine your household were a break-even operation — your income covers food, utilities, entertainment, home and transportation costs. Now you decide to go to the bank and take out a loan for additional education. You have a debt, which puts your household budget into a deficit.

This is a good plan, unless you decide not to go to school and spend the money on a holiday. Clearly, this is foolish because the debt and deficit remain, but you have nothing to show long-term for the spending. You have incurred a debt without a higher future income to manage the resulting deficit.

Even the decision to return to school is tricky. In general, those with post-secondary education earn more than high school grads and much more than those who do not complete Grade 12. But just completing a degree is no guarantee the investment will pay off. Graduates with a degree in art history have much lower lifetime earnings than those who graduate with a degree in science, technology, engineering or math, the so-called STEM educational stream.

Before anyone assumes I am "dissing" art history or liberal arts education, I am not. One could get job in a museum or even Sotheby’s, rising in the organization to eventually receive a high salary in management. But a STEM degree increases the odds of high lifetime incomes.

The same lessons translate to deficits and debt incurred by government. Manitobans have a provincial government seeking to trim every possible expenditure in an effort to reduce the deficit. At the same time, we have a federal government that campaigned on the promise that increased deficits would create fiscal stimulus. It has passed out $8 billion in cheques over the summer to a wide range of organizations and causes.

How has this worked? Not so well. The Canadian economy continues to amble at a very low level despite an uptick in June. What is going wrong?

Well, politicians make two mistakes. First, there is no question investing in infrastructure has become the mantra for curing our economic malaise. But as the example of education shows, what we choose to support matters.

Take an example close to home. Imagine the provincial government used debt to finance the construction of a gravel road between two northern lakes. The construction involves airlifting in the equipment, with labour and gravel locally sourced. At the end, we are left with a road between two lakes, but no way to get there except by air. Certainly, some benefits may occur from the purchase of services and training local labour, but in the long term, we have little to show. It may have been better to send a cheque to every Manitoban or reduce taxes by an amount equivalent to the cost of construction.

Now, if that road ran from Winnipeg to some remote communities — say, those on the east side of Lake Winnipeg — the investment might have enduring benefit. This is especially so if the formerly remote communities became entrepreneurial and created recreational and other business opportunities that attracted visitors, especially from other countries. The ongoing payments to service the debt result in higher future incomes to the communities and Manitoba.

The second mistake is to expect infrastructure investment pays off quickly. Like investment in education, most of the return lies in the future. A Manitoba example illustrates this.

In the 1970s, Gordon Downey and Baldur Stefansson discovered how to breed out undesirable qualities of rapeseed to create what has become one of Canada’s most important crops: canola. The government of Canada financed this basic research over several decades, with results that have been an extraordinary boon for farmers and Canadians. Success was far from overnight and never assured. However, spending on science is probably one of the best long-term investments government can make.

Those who advocate running deficits and those who promote cutting spending as unique avenues to economic prosperity offer simplistic solutions for our economic malaise. Policies such as regulatory change, creating incentives to entrepreneurship and efficient management of public and private enterprise are also vital.

But wise investments on infrastructure are an essential foundation to return our economy to prosperity. We must be patient and understand that like spending on education, it does matter greatly how we invest.

Gregory Mason is an associate professor of economics at the University of Manitoba and a senior consultant at PRA Inc. His views are his own.