Iglika reported to me that Kevin Milligan made the argument in favour of the HST that its presence was economically beneficial because it induces additional investment on the margin, as projects that previously did not meet a certain profit threshold would become real investments. This is a net gain (forget about who benefits from those investments) even if the vast majority that would have made investments anyway also benefit from the tax cut.
But when it comes to energy efficiency programs, economists (Mark Jaccard, for example) argue against subsidies for efficiency retrofits because most of the cost of these programs goes to “free riders” who would have made the investment anyway, and only some to the marginal consumer induced to make the upgrade.
I’m not sure what the answer is but seems like one cannot have it both ways. If you want gains on the margin, you must accept that there will be free riders. If you do not like free riders, then you will not pursue marginal efficiency gains.
There is a bigger issue in here, too. So much of “competitiveness” (whatever that means) policy is focused on the supply side (tax cuts, deregulation) to induce additional gains on the margin (forget that investments made under a high degree of uncertainty, and other factors like environmental problems). But are not these microeconomic gains on the margin almost always swamped by macro forces, and in fact, investment is more determined by demand conditions, anyway. That is the one robust conclusion of a review of econometric analyses from the IMF I read a few years ago.
That is, if the economy is booming and demand is strong, business will invest even in the face of tax and regulatory hurdles. But eliminate those taxes and regulations in the midst of a recession, and they will have no meaningful effect because business won’t invest anyway due to weak demand. This is basic stuff, for anyone who’s thought about Keynes I know. But it is a big reason why most economists, business commentators and politicians that focus on supply side gains and neglect demand conditions get it wrong.
- Polozogistics: Nine Thoughts About the Choice of the New Bank of Canada Governor (May 3rd, 2013)
- A Weak Week for Canada’s Economy (April 19th, 2013)
- Austerity through infrastructure Cuts: Budget 2013 (March 22nd, 2013)
- Boost the Minimum Wage, Boost the Economy (February 27th, 2013)
- Albert Hirschman 1915-2012 (January 27th, 2013)