Think-tanks provide competing views on stimulus and infrastructure spending

With the worst of COVID hopefully subsiding and economies beginning to reopen, governments are turning their attention to policies to promote and aid the economic recovery. As should be the case, think-tanks, academics, business groups and advocacy organizations are putting forth recommendations for what hopefully will be—if we get the policies right—a strong recovery.

Two competing views have emerged recently between the Toronto-based C.D. Howe Institute and ourselves with respect to infrastructure spending as a method by which to stimulate the economy. The C.D. Howe Institute recently released two statements, both supportive and illustrative of a common view of the advocacy of infrastructure spending as a response to recessions.

The first was a “Communique”, which is more of an opinion statement, issued by the Institute’s Working Group on Business Continuity and Trade, which is led by the former Liberal Ontario finance minister Dwight Duncan and Jeanette Patell, vice-president of government affairs for GE Canada. It also includes representatives from C.D. Howe Institute donors including Ford Motor Company, Boston Consulting Group, Royal Bank of Canada and infrastructure giant Ellis Don. It calls for “accelerating productivity-enhancing infrastructure projects” to “provide much-needed stimulus and help Canada’s economy recover from the COVID-19 crisis.” It includes suggestions such as “repairing bridges, roads, and linear water infrastructure… and broadband connectivity” as well as investments to decarbonize, promote small modular nuclear reactors, improve carbon capture and storage, and innovate hydrogen production.

A week later the C.D. Howe Institute’s associate director of research, Grant Bishop, penned a op-ed in the Globe & Mail calling for infrastructure spending as a centerpiece for economic recovery. Bishop noted that “safeguarding a resilient recovery will also require exceptional government stimulus” and that governments must pivot to “public investments that rebuild our economy.”

The trouble with both the statement by the C.D. Howe Institute’s working group and the op-ed by its associate director of research is that no empirical evidence or research is cited to substantiate the opinions offered.

Several pieces published by the Institute over the last six months or so are worth considering as a response. First, earlier this year, Finn Poschmann, Fraser Institute senior fellow and former vice-president of research at the C.D. Howe Institute, authored a study specifically looking at infrastructure spending as a response to recessions. The study, Fiscal Policy and recessions: The Role of Public Infrastructure Spending found a number of conceptual problems with the standard infrastructure arguments in response to recessions:

Decision making and implementation take time, and governments have difficulty responding at the same pace at which the private sector adjusts. When governments do intervene, they may compete for human and financial resources that would otherwise be put to productive use without intervention. In other words, their actions may hinder recovery rather than encourage it. And expenditure commitments by upper levels of governments may displace those that would have been made by lower levels of government anyway, limiting potential gains. Speeding up investments, even if they are economically sensible, may borrow growth from the future, with uncertain impacts on the long run growth path.

Critically, the study also reviewed the empirical and statistical evidence regarding infrastructure and recessions, and concluded that “empirical data provide dubious support for the case for discretionary public investment as a response to downturns.”

Finally, and perhaps most importantly, the study emphasized the practical problems with using infrastructure spending as a method by which to stimulate the economy in response to a recession. Specifically, Poschmann noted the significant time required for government(s) to design and pass legislation authorizing the spending, identify potential projects, select companies to undertake the work, gain needed zoning and related approvals, plan and secure needed resources for the projects, etc. Poschmann concluded that the evidence shows that by the time shovels are actually in the ground, the recession is usually over and the public infrastructure projects end up competing with the private sector, potentially slowing economic growth.

This lines up with a previous empirical evaluation of the 2008-09 stimulus spending (summarized here), which was largely focused on infrastructure. The then-Conservative federal government implemented a $47 billion, two-year stimulus plan, 40 per cent of which consisted of “shovel-ready” infrastructure projects (provincial and local governments contributed another $14 billion). The study, Did Government Stimulus Fuel Economic Growth in Canada?, examined detailed Statistics Canada data and concluded that government investment in infrastructure had a negligible effect on the economic recovery.

More broadly, the Fraser Institute recently published a major review of empirical research looking at the issue of stimulus. The review included critical work by U.S. and Canadian economists looking at the real-world experience with stimulus spending. Overall the authors conclude that “research raises significant doubts about whether fiscal stimulus can achieve” the objective of stimulating economic recovery.

Canada, like most other countries, is grappling with the economic and social effects of COVID and the recession. In generating policy recommendations, both with respect to COVID and the economy, empirical evidence must be front and centre rather than conceptual or theoretical arguments. The empirical evidence is quite strong that stimulus spending in general and infrastructure spending more specifically is ineffective policies in stimulating economic recovery. These empirical realities should be taken into consideration as governments formulate their policy responses.