Philip Shaw » Blog Archive » The Economic Stimulus: Don’t Bet the Farm On It

The Economic Stimulus: Don’t Bet the Farm On It

In a few weeks, I’ll be speaking at the Western Fair Farm Show in London Ontario. I’m speaking about a specific subject that day; something called the “Ontario corn basis”. For the readers of this column, don’t worry about it. Under the Agridome, its big news, but for you folks, far from the farm gates, you don’t have to worry about. Needless to say it has to do with money and agricultural economics and my own opinion. If you’ve found me within cyberspace, you get lots of that.

I bring it up because I heard a radio interview of somebody who will be appearing with me that day in London. He was actually commenting on the Obama stimulus package and how that would spur grain demand into the latter half of 2009 and into 2010. I was a bit surprised by that, because in our current economic world, who really knows up from down?

A few weeks ago I mused in these pages about the grand old days of “economic stimulus”. What I was referring to was times past when I treated interest rate changes like they were some seminal event. For instance when the Bank of Canada and the US Federal Reserve changed interests rates I treated it like the economics Stanley Cup. Now with our American friends debating an $800 billion dollar stimulus bill, interest rate changes seem so trivial.

To refresh everybody’s memory let’s do a little economics 101 refresher course. In short in our traditional economy government and free market forces act out together. In fact, you could say they act out in “spite of each other”. Governments and central banks have control of the money supply and interest rates are always the fuel gauge to boost or slowdown economic activity such as inflation, deflation, unemployment, foreign exchange and a whole host of other things. However, when you get into a mess like we’ve seen starting last 2008, it takes some special measures. In this case it’s going to take an $800 billion “stimulus” bill from the US government to get the American economy going again. With interest rates close to zero, “somebody has to do something to get money moving again!”

Right now that’s on President Barack Obama. Today as I write this he’s in a place called Elkhart, Indiana holding a “town hall” meeting, essentially using campaign tactics to get his stimulus bill through the US Senate. Clearly, Obama wasn’t gifted the best hand, and now he’s zeroed in on a stimulus package which will move the economy.

What’s that mean? Simply put this stimulus measure has to do with both mandated and voluntary spending to spur demand. The hope for the voluntary spending comes from incentives via tax credit to get consumers to spend. Governments are doing that because most segments of the economy are not spending and in the United States credit has almost completely dried up. That’s what a stimulus does.

So how many people are interested in reading about economic stimulus now versus when I was talking about a quarter of a percentage point rate cut? Let me tell you, it’s pretty crowded now. I listen to talking heads on TV who don’t have a clue what an economic stimulus is, but they thing it’s a good idea.

So let me offer this suggestion. How about if it doesn’t work? Remember, there isn’t anything to measure this against. I think it should work and it’s better than nothing, but shoveling money at a problem to induce spending will not necessarily work the way we’d like it. Something tells me I won’t be writing next year in this space about HP, City Group, Ford, GM and Chrysler hiring thousands of new workers.

That’s one reason why President Obama is having a hard time getting his stimulus plan to the finish line. Simply put, it doesn’t add up to everybody and that shouldn’t necessarily be a surprise. In Canada on the other hand, it took an opposition stunt to push the Stephen Harper government against the wall. If it wasn’t for our Canadian GG, we may have found out about our own Canadian stimulus “coalition style.”

Today in Elkhart Indiana, a man stood up and asked President Obama to remember the little guys who elected him and not those rich fat cats! I thought that particularly timely because he was right. It was the rich fat cats who invented sub prime mortgages and effectively mortgaged all our futures by packaging all of that bad debt as if it was diamonds. Now President Obama is almost forced to save those same fat cats with the money on the backs of the little people who one by one financed his campaign.

So will it spur grain demand comes late 2009 and 2010? I wouldn’t bet the farm on it. In this current economic environment, I won’t be making any other bets either.

This entry was posted on Monday, February 9th, 2009 at 7:59 pm and is filed under At Issue. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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