More government spending (on infrastructure or anything else) will make Canadians poorer

As pretty much everyone knows, the price of oil has fallen dramatically. When the price of an item falls, consumers are better off and producers are worse off. But Canada is a net exporter of oil—it exports more oil than it imports. That means that the drop in the price of oil has hurt Canadians on net.

Why?

Because the losses to producers are on every barrel of oil sold, including exports. The gains to Canadian consumers, on the other hand, are only on the oil they consume.

In short, because the price of oil has fallen, Canadians as a whole are somewhat poorer than if the price had not fallen.

What should government do about this? Not make them poorer. Wasteful government spending is bad enough when the taxpayers who pay for it are doing well. It’s even worse when the taxpayers are worse off than they were.

Unfortunately, government officials are often very much like the politician in the British comedy “Yes, Prime Minister.” They say, “Something must be done. This is something. Therefore it must be done.”

The “something” in this case is government spending on infrastructure. According to the Financial Post, the federal government is considering speeding up spending on infrastructure projects in Alberta and Saskatchewan.

When government spends on infrastructure, it doesn’t use market signals that tell where money is best spent. So the government is flying blind. This means that the odds that even the most well-intentioned government officials will spend it better than people would spend their own money are vanishingly small.

It gets worse. Government officials have perverse incentives because they are spending other people’s money. People spend other people’s money more carelessly than they spend their own. The result—the odds that the money will be spent well are even closer to zero. More government spending will make Canadians poorer. When you’re poorer, it’s even more important not to waste resources.

More government spending will also add white noise to clean market signals.  The unemployment in Alberta’s oil fields is a signal to people to move to industries where they are wanted more. Yes, unemployment is painful. But that’s why it works as a market signal. The market is saying that former oil workers’ skills are best used elsewhere, possibly in manufacturing. Canadian manufacturing is now more competitive, with the oil-induced drop in the value of the loonie, than it was a few months ago. Or maybe unemployed oil workers should work somewhere else. But let them find those best uses of their skills so that a somewhat poorer economy will be slightly richer.

There is one good action the federal government could take: get out of the way. Government officials should examine the regulations that hamper oil development for no compelling reason, and eliminate or modify them. This will help the oil industry, not just now but also in the future when oil prices increase, as they are likely to do eventually.

But when you’re in a hole, quit digging.