What is government’s proper role in the economy?
To take a spin through Economics 101, government is there to define the ground rules of commerce through laws and regulations. It regulates economic activity by using fiscal policy (taxing and spending) and monetary policy (interest rates and other credit controls). It also monitors and regulates Canadian international business interests by making and enforcing trade agreements.
Government rightly provides a social safety net in the form of employment insurance, public pensions and other supplements based on age and/or circumstances. In a recession, government is obliged to use its resources — our tax dollars — to help out.
It’s best prepared to do this by running budget surpluses in good times, building up a reserve that can be used in hard times when it may be necessary to run a deficit. Mostly, this doesn’t happen because governments tend to make economic decisions for political reasons.
One way the Harper Conservatives managed to turn a surplus into a record $50-billion deficit in a blink of Jim Flaherty’s eye was by cutting the GST before the recession to appeal to voters, forfeiting revenues that would be helpful now.
It’s perfectly reasonable to spend tax dollars to provide assistance to individuals (in the form of extended benefits) and companies in general (tax measures) in a recession. Public works spending on infrastructure or research and development that benefits the economy in general is also useful.
It’s also fitting that governments provide support to key industries so they can compete internationally on an equal footing with foreign companies that have equivalent support from their governments. The critical distinction here is that government should not be in the business of shielding uncompetitive and/or dying companies like GM or Chrysler from market realities.
Otherwise, government is there to be the honest broker or economic referee — providing clear, fair and consistently applied business regulation and enforcement, tax policies and broad-based incentives.
In short, its job is to level the playing field so everyone — companies as well as individuals — gets a fair shake.