The Economic Death Spiral–More Government–Less Industry

    Do not think about, write about or deal with  human behavior without determining the effects of incentives.

    Wherein we see the death spiral of a once prosperous entity. Government drag on the economy increases and real enterprise decreases.

National Post                   
Philip Cross Philip Cross is the former Chief Economic Analyst at Statistics Canada

Forecast: Few future jobs
Ontario public sector investment has tripled while business investment stagnates

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     Government employees and politicians have perverted the concept of “investment.” I may say I have “invested” in a new car, but I’ve only spent money to please myself.

Public sector investment never “kick-starts” more business investment

Business investment is the most important dynamic in a growing economy. It commits a firm to a plan for its growth and creates jobs. Investments made today determine what our industrial structure will look like years from now, and how productive those industries will be. For Canada, watching business investment pour into our energy sector 10 times faster than the rest of the economy so far this century locks in that our future lies in producing oil and gas and transporting this to new markets inside and outside of Canada.

So what does investment say about Ontario’s future? A look at the nearby graph tells an alarming story, with public sector investment tripling since 1998 while private sector investment has stagnated. Over the past 16 years, private sector investment in Ontario rose a total of only 17% from $39.8-billion to $46.4-billion, or 1% a year. Meanwhile, investment by the public sector soared 293% from $9.9-billion to $29.0-billion, or 18% a year (the public sector includes public administration, health, education and utilities, since Ontario’s electricity utilities clearly make decisions at the behest of their political masters, not on the basis of market principles). After a spike related to infrastructure spending during the 2009 recession, public sector investment has settled back into its long-term growth path. As a result, public sector investment has risen from one-quarter the size of private sector investment in 1998 to nearly two-thirds this year. Private and public sector investment are actually converging more than the graph shows, since the billions government is spending on urban transit cannot be separated out from the rest of transportation, which is allocated to the private sector.

One insight jumps out from comparing private versus public sector investment in Ontario. Public sector investment never “kick-starts” more business investment, creating the virtuous circle governments always hope for when launching the latest wave of government capital spending. Instead, more public sector spending creates a vicious circle, where a “failure” of business investment to respond to higher public sector spending justifies the perceived need to further boost public sector investment “to fill the gap.” Repeated enough times over more than a decade of parochial provincial budgets, and the result is a tripling of public service spending while business investment stagnates.

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    Government investment theory never fails, people fail the theory. It’s like Global Warming, all data support it so whatever happens means support for the theory.

What businesses have been the most reluctant to invest in Ontario’s future, despite the much-vaunted benefits of an engorged public sector, including a highly-educated labour force? Pretty much all of them. Since the peak in 2008, business investment has fallen by $3-billion. The drop is widespread across all industries. Overall, 11 major industry groups have cut back, while only five have invested more. Manufacturing posted the largest drop, with 15 of its 22 member industries paring investment outlays. Before 2008, manufacturing consistently was the largest industry investing in Ontario. Now it has slipped to fourth place. But this is far more than a story of weak manufacturing investment, with important declines also occurring in finance, retail and wholesale trade, recreation, and information and culture among others.

It is not just that public sector investment crowds out business investment, although that clearly is a factor. The aggressive expansion of public sector investment is symptomatic of a wide range of public sector policies that discourage business spending in Ontario— uncompetitive electricity rates, higher minimum wages, more regulation, a new pension plan tax, and high budget deficits that promise future tax hikes.

Freud said anatomy was destiny for humans. In economics, investment determines our future. The implication for Ontario is clear; based on a decade-long pattern of investment, Ontario increasingly will have the capacity to produce public sector goods and services in the future, not the business products needed to create jobs and pay the public sector’s bills.

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    According to government employees and politicians, real enterprise only exists to support the sacred work of government. Death spiral.

Government Job or Respect–Which’ll It Be?
Cheerio and ttfn,
Grant Coulson, Ph.D.
Author, “Days of Songs and Mirrors: A Jacobite in the ‘45.”
Cui Bono–Cherchez les Contingencies

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