None very insightful, but for what they are worth:
1. As I have said before, it doesn't make sense to continue fiscal stimulus if at the same time the Bank of Canada is removing monetary stimulus, which will probably begin to happen later this year. It would be better for the Bank of Canada to raise interest rates more slowly, and for fiscal stimulus to be removed more quickly. That way, we could get the same amount of Aggregate Demand (and inflation and unemployment), but with a lower Federal debt.
2. However. Expectations matter. Things looked bad a year ago. It is quite possible that a commitment for a 2-year fiscal stimulus would have had a bigger effect on AD one year ago than a 1-year fiscal stimulus of the same annual size. To then break that commitment in the second year, when the expectations created by that commitment have already done their job, is tempting, but not time-consistent (or honest).
3. What matters for long run fiscal sustainability is not debt, but the debt/GDP ratio. Take the derivative of that statement with respect to time, and what matters is not the deficit but the deficit minus (the debt times the growth rate of nominal GDP). That latter term in brackets is about $20 – $25 billion, assuming long term growth rates around 4% – 5% in nominal GDP and a debt of around $500 billion. In other words, if the deficit is less than $20 – $25 billion, the debt/GDP ratio will be falling over time.
Worthwhile Canadian Initiative 
I don’t think I’m going to add much more than what you’ve already said in your first 2 points, but the fiscal stimulus was put in place when the economic outlook was much worse. Given the inherent time lags of fiscal policy, it’s not unsurprising that monetary policy will probably start to tighten before the stimulus spending stops.
But, knowing what we know now, what should have been the optimal policy last Winter? Given that Canada fared fairly well (or less bad than others) in this global economic downturn, maybe Flaherty’s original stance in the Fall of 2008 was correct and the the Federal gov’t should have just hunkered down and weathered the downturn?
Knowing what we know now, was it a mistake to plan for 2 years of stimulus spending from the start of 2009? Or was it better that the Federal gov’t erred on the side of caution, given the time lags of fiscal policy?
Lest we forget, we were staring down the barrel of GD 2.0. Let’s not declare victory prematurely. Our unemployment rate is still way too high. The rest of the world is far from healthy, and the US employment situation is a disaster. They could double dip very easily. Think of our fiscal measures as insurance. If it shaves a percentage point off what unemployment would have been otherwise, it will have been worth it in my view.
I’m not really convinced that the fiscal stimulus really had much of an impact. It truly was dwarfed in impact by monetary policy. So, I guess I’d have rather seen some intelligent investing in infrastructure while costs were lower than trend (and interest rates were low). I guess we have new kitchens and roofs instead.
Kosta: I still can’t make up my mind on the answers to your questions. I don’t think anyone can really know, even with hindsight. I’m glad they didn’t raise taxes or cut spending a year ago, to try to prevent a deficit. On balance, I think maybe the fiscal policy was worthwhile as a precaution. But I can’t really justify that belief.
Patrick. I definitely think we can’t tighten AD too much yet. But should it be fiscal, or monetary policy, that tries to expand AD?
Andrew: Agreed. But it’s much quicker to get some guy with a pickup truck and a few tools to fix our kitchens and roofs than build a massive new bridge.
My point is that we didn’t need anything quick. I suspect that expectations were more important in the stimulus than the actual pace of spending. And we’re probably better off with the bridge (or replacing 100 year old sewer lines) than subsidizing roofs that would be replaced on their own, anyway.
A couple of thoughts based on the comments above.
First, let’s assume that GDP growth is 2% for the foreseeable future (as Patrick states) and let’s assume that for whatever reason the Bank of Canada tightens monetary policy (say short-term rates rise to 1.5%, still very low but not rock bottom). Is there a case for fiscal stimulus in this circumstance? It would be ideal if monetary policy expands AD, but if the BoC decides that somewhat tighter monetary policy is appropriate, should additional fiscal stimulus be implemented?
Second, going back to the fiscal decisions at the start of last year, is it better to err on spending too much or too little on stimulus? I think the answer is that it is better to spend too much. While it may increase the deficit, the macro effects of spending too much can be countered by tightening monetary policy. On the other hand, if too little is spent and additional stimulus is needed, monetary policy can’t be loosened (well I suppose quantitative easing could have been attempted, but the traditional channels were already tapped out).
Well, I believe that discrete fiscal stimulation is ineffective and often wasteful. But problems related to time consistency are more important.
The Harper government could announce a return to 6% and 7% GST rates that don’t start to take effect until 2012, for example. In a Ricardian world, the bump to Canadian savings rates should reduce demand. Seems virtuous to me.
Compulsory frivolous prediction follows: Federal budget surpluses are not restored until a majority government takes power.
“What matters for long run fiscal sustainability is not debt, but the debt/GDP ratio.”
Could you explain that a bit more? Even assuming a government-household analogy, if I take out a mortgage I don’t worry as much about the ratio of debt to income as the ratio of payments to income. (Neither is precisely what I would worry about, myself, but as a rule of thumb isn’t the payments to income ratio closer to the mark?) By that analogy, isn’t the deficit/GDP ratio more telling?
Thanks. 🙂
Sorry, I didn’t say what I meant, I wrote deficit/GDP ratio when I meant interest_payments/GDP ratio.
Nick, I strongly agree with your first point. Regarding your second point; if expectations matter then fiscal stimulus never should have been used in the first. Monetary stimulus would have been better. You might reply with a “belts and suspenders” argument. But I use belts only, and that has never failed me. Similarly, I have never seen an expansionary monetary policy fail to boost AD.
Fiscal policy should generally try to reduce the Debt/GDP ratio. If it tries to keep it stable, it will actually tend to rise over time in a “staircase” fashion, as the ratio shoots up during emergencies, then levels off during non-emergencies.
I’m trying to prevent our world from warming to a point where economics is irrelevant and where a pension is defined as shotgun shells. Our government isn’t. The Afghanistan mission is irrelevant: Pakistan and Afghanistan have 15 years of replenishable Aquifer left even assuming perpetual pre-AGW annual Himalayan meltwater. Our to be northern naval ports are irrelevant if/when permafrost melts away in infrastructure costs all the projected Arctic Ocean free economic growth. Lowering foreign aid growth is much less a forcing than is wiping out Bangladesh.
If Albertans get to maintain their Atlantic culture of dependancy (mocking their unemployment), Quebec should be allowed to lower India’s life expectancy to 40 with asbestos and the Virology Lab should be allowed to sell trade secrets to Hamas, whether or not our Fox News and everyone else controlling our enviro-policies, agree. I don’t want to go to Hell for being a Canadian (a bit of me is agnostic).
…and forget “own the podium” subsidy, give the Games to a broadcaster who will show them next time around (in Inuvik?). The three best hockey games were probably all Slovakia games and even our Environment Cabinet Minister, Fox News, would’ve showed the Bronze medal game instead of bobsled reruns and some sort of E-Talk daily commentary of Vancouver/Whistler nightlife pg-13 censored. Nice torch but did Bombardier have to squish the medals?
Kosta: You could make a case that if the BoC tightens too much, then fiscal policy should be looser than you would ideally want it. But in my view the BoC would just make monetary policy even tighter to compensate in that case, so that AD is determined by whatever the BoC thinks it should be. This all depends on how you see the game between the BoC and the fiscal authorities. Who is Stackleberg leader and follower? I did a post on this a while back: http://worthwhile.typepad.com/worthwhile_canadian_initi/2009/01/the-changing-game-between-monetary-and-fiscal-authorities.html
“Second, going back to the fiscal decisions at the start of last year, is it better to err on spending too much or too little on stimulus? I think the answer is that it is better to spend too much. While it may increase the deficit, the macro effects of spending too much can be countered by tightening monetary policy. On the other hand, if too little is spent and additional stimulus is needed, monetary policy can’t be loosened (well I suppose quantitative easing could have been attempted, but the traditional channels were already tapped out).”
I tend to agree with you there, except I am more optimistic on the power of monetary policy even at ZILB.
Min: maybe you are right, and we should be looking at the debt service ratio. But even here, I would want to subtract the inflation component from debt service costs. If the real interest rate is constant over time, however, the debt/GDP ratio and the real debt service ratio should give the same answers, I think.
Scott: I tend to agree. But given the hold that “Monetary policy is interest rates” has on the imagination, and hence on expectations, I am not sure we could have had an expansionary monetary policy.
NicK: “Min: maybe you are right”
Thanks very much for the answer. But I seldom ask a rhetorical question here, so it’s not a question of being right or not. Usually I just don’t know. 🙂