Canada

Controlling interest

IAN URQUHART January 10 1977
Canada

Controlling interest

IAN URQUHART January 10 1977

Controlling interest

Canada

Last fall, Finance Minister Donald Macdonald and the government were solidly battered over the wage-price control program. Labor had its day of protest, business took out full-page newspaper advertisements to denounce the program, and economists of all stripes called for a quick end to controls. A weary Macdonald allowed that he would be the “most delighted” person in Ottawa if controls, originally intended to last until the end of 1978, could be lifted early. Some cabinet colleagues, viewing the program as a political albatross, hinted that an early end was planned. Anti-Inflation Board Chairman

Jean-Luc Pépin began shopping for another job.

But all that has changed. Controls appear likely to continue, at least for the duration of 1977. Pépin, at the government’s urging, may even stay. Worried staffers at the AIB, where he is highly respected, were reassured in a Christmas “pep talk” by AIB executive director Robert Johnstone, that Pépin was not about to leave. Said Prime Minister Pierre Trudeau at a year-end press conference: “The point is, controls are working. They have succeeded in bringing the rate of inflation down. People seem to be realizing that they are a success and, therefore, should be kept on.” While many would quarrel with Trudeau’s boast that controls are responsible for the turnaround, none could dispute the figures: the inflation rate has been nearly halved from 10.6% when controls were introduced in October, 1975, to 5.6% by last November.

There were two main reasons for the government’s decision not to abandon controls early. First, government planners are not convinced that inflation has been licked despite the encouraging figures. There are signs the inflation rate could move higher again in 1977 as basic food and energy prices, which are not controlled, begin to rise and the full impact of the recent devaluation of the Canadian dollar is felt. In addition, Canadians still have dn inflationary “psychology” that must be countered. Macdonald told last month’s federal-provincial finance ministers’ meeting that controls must continue until “inflationary expectations have been effectively wound down.” The fact that many labor contracts call for immediate increases once controls are lifted leaves room for doubt that this condition has been met, Macdonald said.

It is doubtful whether the government could have maintained controls in the face of continued strong criticism. But opposi-

tion has diminished considerably in recent weeks. Labor’s campaign ran out of steam after the October 14 day of protest, which was somewhat of a flop, and has been hampered by bitter internal schisms. Business has also toned down its attacks, perhaps out of a realization that a slumping economy, not the wage-price control program, is primarily responsible for lagging profits. As for the general public, a secret government survey showed 69% felt the AIB was “a good thing.” The program even received some support in December from the Economic Council of Canada, which said in its annual report that “continuing restraint on all fronts will be necessary.”

The clinching factor for continuing controls, however, is the continued support shown for them by the provincial governments. Their agreements with Ottawa to enable the AIB to control the wages of provincial. municipal, hospital and school board employees are due to expire in April, and if the provinces had decided to withdraw support it would have been difficult to continue the program. Some premiers, under pressure from business and labor leaders at home, were wavering in their support, but, after the federal-provincial meeting in Ottawa in mid-December, Trudeau was able to report a general consensus behind continuation of controls. While the provincial finance ministers must still meet with Macdonald to work out the details, all but one or two provinces are expected to renew their AIB agreements.

While controls will not be lifted this year, decisions will have to be made on j ust how to end the program. (The government is not considering maintaining permanent controls, the solution advocated by John Kenneth Galbraith, the economist who Trudeau said had “permeated” his thoughts just a year ago.) Says Macdonald of Galbraith: “It’s useful to have a couple

of gadflies around like that to entertain people on the very shallow surface level of economics while other people think more seriously about it.”

The “decontrols” phase, as it is known in Ottawa, presents its own difficulties. Without proper timing and handling, it can lead to a sharp jump in the inflation rate as business and labor scramble to regain lost ground. Says Macdonald: “The political task now, in the months to come in 1977, is to try and get some agreement that [scramble] will not occur, that everybody who has been denied anything won’t try and recover it all at once.” To pursue such an agreement, the government plans a series of meetings with the provinces and with business and labor leaders. But chances of reaching a consensus on the decontrols process are slim; the provinces and business and labor leaders are unlikely to want to share responsibility with Ottawa for what could be unpopular economic decisions.

Thus, Ottawa will likely have to move unilaterally. The first move, expected early this year, will be the introduction of a new competition bill (see page 15) designed to prevent monopolies and oligopolies from controlling the marketplace. Other moves being considered include replacing direct controls with indirect curbs on excessive increases in income through the income tax system and replacing the AIB with some form of monitoring agency without rollback powers but with the power to publicize excessive wage or price increases. The United States set up such an agency after it got out of controls in 1974. Also being considered is a “sectoral” approach to decontrols, with sectors of the economy being dropped from the AIB’S jurisdiction one by one after entering agreements with the government to restrain their incomes voluntarily. Macdonald has speculated that one sector, public employees, might be restrained by some form of compulsory guidelines on a permanent basis. But, he says, “the objective is not to fight inflation on the backs of public servants by attempting to hold their rates of salary increase below average. Rather, the concern is to ensure that public servants, whose wages are not generally subject to very effective market constraints, do not become pacesetters for their counterparts in private employment who, in turn, would press hard to catch up and overtake.” IAN URQUHART