Here is some of what Terry Corcoran wrote in todayâ€™s Financial Post about Bank of Canada Governor Mark â€œCarneyâ€™s suggestion that Canadian business has so far â€˜disappointedâ€™ because it has failed to revive Canadaâ€™s lagging productivityâ€:
Central bankers appear to know many things, and have big fancy computer systems and economic models to tell them whatâ€™s happening in an economy [but] it wouldâ€™t (sic) be enough to tell a widget maker that nowâ€™s the time to invest in more wiget (sic) making capacity. Corporate managers make investment and other decisions on the basis of market conditions and a hundred and one other factors exclusive to their business and their markets and their companies.
. . .
BMO Capital Markets economist Douglas Porter put it well in a note to clients. â€œThe reality of course is that capital spending decisions are made by individual businesses based on the conditions and incentives they face, and their perceived prospects. Against the backdrop of the deepest global downturn in 50 years, the forecast of a prolonged period of deleveraging by U.S. consumers (and next governments almost everywhere), and the crushing weight of the resurgent Canadian dollar on exporters, is it really shocking that business is somewhat cautious in its capital spending plans?â€
I think that this interpretation of what drives investment and productivity is basically correct. Also, as I asked a month ago, why would we expect corporate Canada to invest in building substantial new plant and equipment when some 30% of existing capacity is idle?
Corcoranâ€™s view that investment and productivity are subject to many industry-specific factors and cannot be predicted by economic models leads to an interesting question. Why should we have any confidence that yet another â€œfree tradeâ€ deal, or yet more corporate tax cuts, will boost productivity?
Of course, tax policy could affect some investment decisions at the margin. However, if it is impossible for policymakers to predict if or when corporations will invest, surely the appropriate approach would be to provide tax incentives that apply only when they actually do so: an investment tax credit, accelerated depreciation, etc.
Across-the-board corporate tax cuts wastefully give companies money even during extended periods when other market factors will dissuade them from investing anyway.