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Schools, hospitals and public utilities stifle business, empirically dumb report says

A new report from the C.D. Howe Institute makes the case for why government investments in things like “public administration, education, health and utilities” are bad for the economy. There’s a glitch, though: the report never actually proves this core point. The report claims that “private-sector investment is a key driver of economic growth” and “more public-sector investment may discourage […]

A new report from the C.D. Howe Institute makes the case for why government investments in things like “public administration, education, health and utilities” are bad for the economy.

There’s a glitch, though: the report never actually proves this core point.

The report claims that “private-sector investment is a key driver of economic growth” and “more public-sector investment may discourage some business investment.”

No wonder the Globe and Mail summed up the study’s thesis under the headline Government stifles business in Ontario and Quebec, report says. The article explained: “The C.D. Howe report theorizes that governments in parts of the country may be crowding out and dissuading private investment.”

And yet author Philip Cross, a research fellow at C.D. Howe Institute and former Chief Economic Analyst at Statistics Canada, admits in the report that “the relationship between public sector investment to economic growth” is “ambiguous.” And his own “paper does not explore possible causal links.”

Cross, though, goes on to connect the dots anyway.

In his interview with the Globe and Mail, Cross said: “It’s not a case of dead money and companies not willing to invest. You can see that in certain provinces, they are willing to invest like mad men.”

But if you flip through the report, a much different pattern leaps right off the page:

So, to sum up, provinces with more oil have more economic activity and provinces with less oil have less economic activity. 

And public-sector investments – let’s imagine we lived in a world where public schools and universities created skilled labour forces and a public highway connected Fort McMurray oil to the rest of the world – get in the way of business investments by “crowding out the funds available for firms in financial markets.”

But looking at the ratio of private to public investments is a bizarre way of looking at this question.

The ratio does not look low in Alberta, Saskatchewan and Newfoundland because public investment is low, but because of a major expansion of the resource economy in those provinces. And although Cross himself acknowledges the presence of a “resource boom” in Newfoundland, Saskatchewan and Alberta, he doesn’t seem willing to connect those dots.

And they start to become blurry when you realize that Cross has arbitrarily modified Statistics Canada’s data to help reach his conclusion:

“Unlike the standard Statistics Canada definition of the business sector, I include utilities in the public sector since they often act as extensions of the government… The only exception concerns utilities in Alberta, which were privatized starting in 2001. As a result, I allocate Alberta utilities to the private and not the public sector starting in that year.”

Photo: kcolwell. Used under a Creative Commons BY-NC-SA licence.

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