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10/18/2010: "Fiscal Policy - Hands on? Hands off?"
There have been a number of interesting articles written this summer that deal with fiscal policy due, in part, to the precarious state of the global economy. The collapse of the credit markets led to a recession in both Canada and the United States and governments in both countries reacted by increasing government spending to prop up aggregate demand. The textbook looks at the 'yes' and 'no' camps when it comes to fiscal policy and these articles provide good examples of the arguments.
One interesting story comes from the Globe and Mail's Sep 13th 2010 edition. (Click here for article 1) Quebec City has asked the federal and provincial government to commit some $360 million toward the costs of building a $400 million NHL rink. Quebec City doesn't have an NHL franchise, but would like one. Not surprisingly, the federal government wasn't accommodating.
The Financial Post published an article on Sep 15th 2010 outlining some of the reasons why the arena is a bad idea. (Click here for article 2)
There is another stadium being built with taxpayer money, though the situation here is somewhat different. This one is in the Fort Myers area of south Florida where the county government has borrowed funds to build a practice facility for the Boston Red Sox and the Minnesota Twins. An article from the St. Petersburg Times dated Dec 30th 2009 looks at the benefits of the spring league to the state of Florida. (Click here for article 3) The article quotes a study undertaken by The Bonn Marketing Research Group that suggests the economic benefit to the State is $752.3 million annually. (Click here for study) This has prompted government spending to maintain, or increase the number of MLB teams that hold spring training in Florida. The alternate destination is Arizona. In the article, Professor Philip Porter from the University of South Florida is quoted as saying that the study is flawed "having used inappropriate methodology". The study does, however, provide an estimate of the multiplier effect as it applies to sports.
There is a second article, published by Bloomberg on Sep 23. 2010. (Click here for article 4) that deals with the decision by Lee County officials to borrow $81.2 million to build the training center. In this case, an economic analysis could be undertaken. Not all the relevant numbers are presented in the article so some research would be required. To decide whether the County has an economic case for building the stadium, we would look at the capital cost and the annual operating costs of the stadium and compare that to the benefits derived from the stadium, including lease revenues, concession and parking revenues as well as the benefits to the community. All values would have to be discounted to take account for the time value of money. This is known as net present value analysis and is similar to what a profit maximizing firm would do. The difference between public and private analysis is the inclusion of external benefits. If the article is accurate and the stadium would account for $41 million in tourist revenue, a legitimate business case might be made.
Another article dealing with fiscal stimulus, from the Washington Post, argues that the U.S. government should borrow $2 trillion (that's $2,000,000,000,000) and spend it on infrastructure including roads, railroads, runways, water systems, schools and levees. The argument is that there is so much labour and so much material available due the recession and the fact that interest rates are so low, that the costs will never be lower. The article also says that current government spending needs no cost-benefit analysis and is completely political. (Click here for article 5)
A lot of the economic rationale for stimulus spending has to do with both direct and indirect job creation. Unfortunately, politicians don't always succeed in creating jobs with public money. A Sep 26, 2019 article from McClatchy News illustrates how much money can be spent to produce so few jobs. (Click here for article 6)
As the textbook explains, there are always two sides to economic arguments due to differences in our acceptance of the economic models that we use, and also due to differences in normative positions. Politicians, on the other hand pay more attention to polls than they do to economists. Here are two polls on how the public feels about the stimulus spending. The first is from Reuters, dated Sep 14, 2009 (Click here for article 7) and the second is from the Toronto Star dated Sep 28, 2009. (Click here for article 8)
Relevant Learning Objectives
Chapter 8
LO#1 Use the concepts of injections and linkages to explain the multiplied impact of aggregate demand fiscal policies.
LO#5 Distinguish between normative, positive, economic, and political arguments about fiscal policy.
Sources
2009 Major League Baseball Florida Spring Training Economic Impact Study, Florida Sports Foundation & The Bonn Marketing Research Group, Inc. June 2009
1 Harper dashes Quebec City's arena funding hopes, Rhéal Séguin, Globe and Mail Sep 13, 2010 accessed Oct 15, 2010
2 No sports welfare: Subsidizing arenas means putting taxpayers in hock for decades, with zero benefit to the economy, Mark Milke and Niels Veldhuis, National Post, Sep 15, 2010 accessed Oct 15, 2010
3 Florida wants Grapefruit League to again rule spring training, John Frank, St. Petersburg Times Dec 29, 2009 accessed Oct 15, 2010
4 Red Sox Threat to Flee Winter Home Prompts Lee County Bond Sale, Simone Baribeau, Bloomberg.com Sep 23, 2010 accessed Oct 15, 2010
5 Now's the time to invest in infrastructure, but U.S. plan is too modest, Ezra Klein, Washington Post, Oct 2, 2010 accessed Oct 15, 2010
6 Stimulus spending on highways isn't delivering on job promises, Chris Adams, McClatchy Newspapers Oct 06 2010 accessed Oct 15, 2010
7 Global poll sees support for spending stimulus, Adrian Croft, Reuters Sep 14 2009 accessed Oct 15, 2010
8 World split on stimulus spending, Toronto Star, Sep 28, 2010 accessed Oct 15, 2010
Questions
1. After reading the articles on the Québec hockey arena and the Lee County baseball facility, and examining who will actually use the facilities, explain which one is likely to have the greater multiplier effect and why.
2. Examine the article from the Washington Post recommending $2 trillion in government spending and compare that with the results of government spending in the McClatchy article. Why do you think the infrastructure spending doesn't create jobs the way economic theory suggests?
3. Notice that the last two articles were written over a year apart. Given the other articles that you have read why do you think public opinion is moving against stimulus spending.
