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Monetary expansion prevented a catastrophic depression in 2008–09 but also failed to generate growth since 2010. The G20 countries tried fiscal expansion in 2009, but that has offered little help in pushing growth beyond one or two per cent.

Japan and Canada are hot to expand public spending ‎but increased deficits will do little to create conditions for long-term growth. As Robert Mundell taught macroeconomists years ago, expansionary fiscal policy in open economies typically fails. Pumping up aggregate demand will cause currency appreciation, shrink exports and reduce private demand. This has already happened in Canada with the recent build-up of deficits. Federal-provincial new net borrowing will top three per cent of GDP next year with gross public debt already over 116 per cent of GDP, repeating the 1980s’ experience where the public sector was living the life of Riley.

So what is the answer? Constrain inefficient public spending and regulations and cut taxes. It has worked in the past and it will work again.

Several economists who have studied economic growth over the years have found that constraining public spending and cutting taxes can be a good recipe to rev up growth. It is curious that those espousing expansionary fiscal policy seem to focus on ramping up public spending rather than cutting the most harmful taxes, such as income taxes and transfer levies (like land-transfer taxes). Tax cuts and regulatory reform are much faster in generating growth and they enable countries to avoid building up an inefficient public bureaucracy. If the worst taxes and regulations are reduced, they encourage risk-taking and innovation that best come from the private sector.