Spending Our Way to Economic Growth Is Fool's Play

05/10/2013 12:10 EDT | Updated 07/10/2013 05:12 EDT

Many Canadians are probably on the verge of insanity as a result of the Conservative government's indefatigable peddling of its economic action plan. Jobs, jobs and more jobs are apparently on the horizon. Oh, and fiscal belt-tightening.

Nonetheless, that the Conservative's have spent more money than any other government throughout the course of Canadian history brings the latter promise into question. Why, the government even spent $21 million on advertising its ostensible dedication to austerity and fiscal responsibility from 2011 to 2012, which increased the total amount it's spent on advertising to just upwards of $100 million.

But that some people lambaste the Harper government's so-called fiscally hawkish agenda while simultaneously lambasting its spending on advertising is rather perplexing and contradictory. After all, there are people who believe a country's government can spend its way out of a recession and into affluence. By that logic, however, the Harper government's expenditures on advertising are stimulating growth -- very similarly to expenditures on preparing for a mythical alien invasion!

It's believed that such expenditures put money into the hands of people who will subsequently buy goods and services from other people who will thereafter buy even more goods and services from even more people. As the American entrepreneur and writer Nick Hanauar wrote a while back, it's an enormous consumption-oriented feedback loop. But some channels of spending initiate and accelerate the feedback loop more effectively than others.

"A major problem with infrastructure spending is the time it takes," said Matt Bufton, executive director of the Institute for Liberal Studies. "If you're a Keynesian, then you value getting money flowing as soon as possible, so ads, which can be produced and aired in a week or two, are a good way to do that."

But logical consistency isn't exactly a defining characteristic of political discourse. Quite the contrary, clearly if not blatantly inconsistent views on economic matters are so vociferously voiced all too regularly. Why the cognitive dissonance? "Perhaps it's because the theory is cover for the projects they want to do anyway, or maybe they just don't really understand Keynes," speculated Bufton.

Still, cognitive dissonance notwithstanding, increasing spending to spur consumption and facilitate economic growth isn't as effective or commonsensical a procedure as some of the advocates let on. Though the idea of stimulating the economy through governmental expenditures seems attractively easy to grasp, markets are much more complex and thus don't work so simply.

Consumption -- stimulated or not -- never has and never will be the driver of economic growth. It's rightly been said before that the true engine of an economy is savings and investment, whereas consumption is merely the steering wheel.

Ultimately, you need to produce before you consume, and you need to save and invest, which is to effectively forgo on present consumption so as to consume at a later date, to produce. Not surprisingly, the historical record accordingly demonstrates that fluctuations in investment have caused changes in economic growth, as evidenced, for example, by the past two decades of booms and busts in the United States.

In any case, the unadulterated story on stimulus spending doesn't provide a very rosy picture.

The empirical data on American stimulus spending, for instance, isn't terribly convincing. Indeed, you'll be hard-pressed to find an actual correlation between governmental spending and economic growth. While there are economists who have argued that the governmental spending following the Great Recession made things better, their credibility is at issue. In fact, their ability to forecast at all what will or won't happen after any stimulus package is administered should be taken with a grain of salt.

The Canadian story on stimulus spending isn't all too persuasive either. Though the Harper government ostentatiously takes credit for Canada's putatively favourable performance on the world stage, Statistics Canada contends that the government played no more than a negligible role in the economic recovery.

More importantly, however, economic progress isn't really about creating jobs, for it's actually about finding better uses for our scarce resources, including labour, which is arguably the scarcest resource of all. Anybody can create jobs, but not everybody -- and most certainly not bureaucrats and politicians -- can create wealth.

The sooner we understand that, as the critics of the Harper government apparently do when it comes to spending on advertisements, the better off we'll be.

This article was initially published in the Prince Arthur Herald.