Welcome to Need to Know, The Hub’s roundup of experts and insiders providing insights into the developments Canadians need to be keeping an eye on.
Today’s weekend edition dives into thought-provoking research from think tanks, academics, and leading policy thinkers in Canada and around the world. Here’s what’s got us thinking this week.
In just four short weeks President Donald Trump has upended public policy not just in the United States but throughout much of the world. Policymakers of all stripes are reeling over his more than 100 policy actions and counting, ranging from tariffs to paper straws. However, now we’re beginning to make out the contours of the responses to Trump’s patented brand of chaos and uncertainty.
Let’s unpack some of the opportunities and challenges with how the world is responding to Trump.
Short-term stimulus spending doesn’t stimulate economies
Trump’s tariffs will undoubtedly have negative economic consequences for all parties involved. One of the standard responses of governments to economic downturns is to follow the Keynesian playbook and use spending to stimulate the economy. And even when there isn’t an economic crisis, governments like Ontario’s under Doug Ford think debt financing payments to residents of $200 can have economic benefits. The thinking is that by putting money in people’s pockets, they’ll then spend it and create a temporary economic boost. But does short-term government stimulus really produce any macroeconomic benefits?
A new paper by economist and Hoover Institution Senior Fellow Valerie Ramey critically examines the macroeconomic impact of temporary cash transfers. Ramey’s analysis spans four distinct periods: the 2001 and 2008 U.S. tax rebates, and similar initiatives both in Singapore and Australia.
Ramey employs a method she terms “historical plausibility analysis” to assess whether these cash infusions effectively stimulated economic activity. Her findings challenge prevailing assumptions, indicating that in all four instances, temporary cash transfers provided little to no macroeconomic stimulus. This conclusion is particularly significant given the resurgence of Keynesian stabilization policies, which often advocate for these transfers as tools to invigorate economies during downturns.
The study underscores the need for policymakers to reassess the efficacy of temporary cash transfers, especially considering their potential to contribute to higher national debt, without delivering the anticipated economic benefits.
As the U.S. exits its global commitments, China steps in
One of the first moves by Elon Musk and his Department of Government Efficiency (DOGE) has been to gut and effectively shut down the U.S. Agency for International Development (USAID), the agency responsible for delivering American aid abroad. Conservative critics of USAID often accuse it of being “wasteful and corrupt, with Kentucky’s GOP Senator Rand Paul stating on X recently that the U.S. should “Abolish USAID and all foreign aid.”
While legitimate criticism can be levied towards how foreign aid is deployed, the reality is that foreign aid accounts for less than 1 percent of the U.S. federal budget, and while there was certainly some dubious support being funneled through USAID, many would argue the Trumpian view of foreign aid is juvenile and naïve.
Aside from the morality of American aid that has benefited millions of struggling populations around the world, they would assert that foreign aid is a key tool of American foreign policy, acting as an enhancement of American soft power.
China is actively taking advantage of the American abandonment of this historical tool of American statecraft. As Politico reports, the Middle Kingdom is rapidly stepping in to fill the void left by USAID’s withdrawal. Reports indicate that Chinese officials have approached nations such as Cambodia, Nepal, and the Cook Islands offering to replace the development funding previously provided by USAID. In Colombia, non-governmental organizations that once relied on USAID support have noted China’s interest in bridging their funding gap. For instance, in 2023, Colombia received almost $740 million in American aid, about 50 percent of which came from USAID.
Analysts across the political spectrum are expressing concern that USAID’s dismantlement could undermine U.S. influence and bolster China’s global standing. Michael Sobolik of the Hudson Institute emphasizes that USAID offered developing countries alternatives to Chinese investment, particularly in infrastructure and telecommunications.
As the U.S. retreats from its longstanding role in international development, China’s proactive engagement with developing states signals a significant shift in global power dynamics, with potential long-term implications for U.S. foreign policy and influence.
If the Democrats want to beat Trump, they need to reassess the Biden economic track record
Perceptions of the economy were a key factor in Trump winning a second term. Put simply, many Americans were concerned about the economy’s direction and wanted change. They believed Biden’s policies had failed them.
Against this backdrop, Jason Furman, an economist and President Obama’s one-time chair of the Council of Economic Advisers, critiques the economic strategies underpinning the previous administration’s “Bidenomics,” which was manifested in policies like Build Back Better. Furman argues that the administration’s departure from neoliberal principles—marked by increased government intervention and spending—has not yielded the anticipated economic benefits.
Furman contends that the administration’s expansive fiscal policies, including substantial investments in infrastructure and social programs, have contributed to rising inflation and government debt without delivering proportional gains in productivity or employment. He suggests that these interventions have led to market distortions, inefficiencies, and an unsustainable fiscal trajectory.
However, Furman is not pollyannish about neo-liberalism either. He argues that addressing challenges like delivering high employment rates for working-age populations, dealing with legitimate security concerns from China, and the green transition, will require new economic policy thinking.
However, he specifies that ideas to overcome these challenges will not be successful if, “they dismiss budget constraints, cost-benefit analysis, and tradeoffs. It’s fine to question economic orthodoxy. But policymakers should never again ignore the basics in pursuit of fanciful heterodox solutions.”
These are lessons for Canadian policymakers too. In a time of immense economic and social challenges, what worked in the past may not work in the future. However, as Canadians grapple with the response to Trump and our homegrown issues like our affordability crisis and low productivity growth, we cannot ignore fundamental limits to what governments can do. More importantly, we should be attuned to the fact that government action may crowd out private sector activity that would produce long-term sustainable economic benefits.
ChatGPT assisted in the creation of this article.
Taylor is The Hub's Research and Prize Manager. He is a Ph.D. candidate in Political Science at the University of Toronto. He…
