Business

What price controls?

Peter Brimelow October 18 1976
Business

What price controls?

Peter Brimelow October 18 1976

What price controls?

Business

Peter Brimelow

The bleak headquarters of the Anti-Inflation Board in Ottawa is like the inside of an ant heap. As soon as you emerge from the elevator into the crowded reception area, you are intercepted by a soldier ant who dodges through the swarming worker ants, antennae waving menacingly. He’s spotted that you’re not carrying the plastic identification tag the younger female ants sport insouciantly on their belts and the senior male ants tuck surreptitiously behind their ties. The AIB justified its formidable security on the grounds of preserving the confidentiality of intimate information it exacts from corporations under its sway. But having to surrender their social insurance cards or driving licenses to the guards has ruffled a number of Ottawa dignitaries attracted into the offices by the scent of raw power and the hope of advantage for their constituencies. Last week, the AIB was still reverberating from former cabinet minister Herb Gray’s outrage when he was challenged in this way.

The secrecy inside the AIB’S headquarters is in contrast to the agency’s public stance. One year after the imposition of controls, official Ottawa is forming up in an almost unbreakable phalanx of selfcongratulation. The government is even spending $1.1 million on advertising to spread the happy news of the achievements of the AIB, much of it thoughtfully distributed to those smaller and ethnic newspapers which have the manners to be grateful. The Consumer Price Index (CPI), the rough aggregate of prices which is assumed to be representative of most shoppers’ experiences, was only 6.5% higher this September than last. A year ago, this measure of inflation was running at 10.6%. The government’s stated aim is to see inflation over the whole year average out at 8%, which looks quite likely. At the same time, although average weekly earnings are ahead by less than the year before—12.9% as opposed to pre-controls rates of more than 14%, according to the government’s ads—real earnings are actually increasing faster, by 3.6% as against 3%. This is because inflation is subsiding faster than earnings increase, leaving more buying power in the hands of the consumer. Or so the government says. “We’re doing well,” emphasizes the AIB’S bouncing chairman, Jean-Luc Pépin, while warning at the same time against any move to abandon controls before their three-year lifespan expires. Certainly NDP leader Ed Broadbent’s recent campaign against the AIB has done nothing to shake government ranks, being distinguished mainly by an apparent

inability to differentiate between net income and profit margins.

But are controls really working? Economics, like love, is a many-splendored thing. While ministers and their acolytes proclaim the success of the program, a Greek chorus of academic economists keeps up a muttering of dissent. They dispute the official version of what is happening, arguing that just because the AIB preceded the current decline in inflation does not prove it caused it. Businessmen are worried about falling investment and the possibility of resurgent unemployment, while the government is preoccupied with its battle on the inflation front. Dr. Michael Walker, chief economist of the Vancouver-based Fraser Institute and editor of a recently published collection of essays with the uncompromising title of The Illusion Of Wage And Price Control describes the politicians and some of his erstwhile colleagues in Ottawa as being members of “the TGIF club—thank God it’s falling.” Walker is totally unimpressed by recent economic figures. He points out that in

1975 many economic forecasters, including outside authorities such as the Japanese Economic Research Centre and the Organization for Economic Cooperation and Development predicted this year’s decline in Canadian inflation with remarkable accuracy—before the government imposed controls. And they also said why: food costs would decline and oil prices would stabilize, which is exactly what has happened. (The Anti-Inflation Board has no jurisdiction over food prices, without which the CPI shows embarrassingly little decline, although it is attempting to claim part of the credit for them since it does control processing and distribution.) Even those experts—like the Conference Board or the Canadian Imperial Bank of Commerce’s economists—who believed that the inflation rate would increase in 1976 were only talking about marginal rises, while one of them, the University of Toronto’s Institute for Policy Analysis, was sufficiently adventurous to project a decline in 1977.

“People don’t realize that the 1975 inflation rate was actually less than 1974’s 10.9%,” says Walker. It’s against this background that Pépin’s talk of controls as a “war” requiring “almost passionate public support,” or Pierre Trudeau’s musings about a “new society” and the need for greater “authority” in our lives, must be placed.

The question thus raised about the efficacy of the controls program is sufficient to give even Finance Minister Donald Macdonald pause. There’s a moment’s silence, occupied only by the echoes and howls of the telephone line from Manila, where he is attending the International Monetary Fund conference. “I don’t think that forecasters generally would have said that,” he offers eventually. This somewhat uneasy denial turns out to be the general Ottawa response. “They just weren’t looking at the 20% and 30% wage claims we were looking at,” shudders one authority, revealing perhaps unconsciously the obscure but pervasive fear that things were just all going wrong, which lay behind the consensus for controls that formed in Canada’s capital last fall. But Walker remains unimpressed.

Another factor in Canada’s decreasing inflation rate that the AIB doesn’t mention is the appreciation of the value of the Canadian dollar against other world currencies. In October, 1975, it stood at $.975 U.S.; last week it was $ 1.03 U.S. Although this has distressed Canadian manufacturers because it means that Canadian exports cost more in foreign markets, it does mean that Canada’s imports cost less to domestic consumers. And 28% of the goods purchased in Canada is imported. Ottawa policy-makers are acutely aware that a foundering of the value of the dollar could swamp the anti-inflation program. The dollar’s current strength is largely due to massive Canadian borrowing abroad, chiefly by government agencies, made possible by high interest rates here. Hidden in the process is a steadily mounting outflow of capital, as Canadian businessmen vote with their money and invest in the United States rather than here, ATCO Industries Ltd., Dominion Bridge Co., Ltd., Imasco Ltd., Northern Telecom Ltd., Harlequin Enterprises Ltd., have all joined the procession of companies pouring money across the border in recent months. Short of reversing its attitude to profits, there is little the government can do to staunch the flow. Exchange control is still anathema in a country with Canada’s need to attract capital.

Donald Tansley doesn’t talk so much as give birth to carefully formed words, interspersed by thoughtful silences. His lined face and crinkly, kindly smile radiates moderation and reason. But he’s had a hectic bureaucratic career, which has seen him deeply committed on such progressive battlefronts as the Saskatchewan doctors’ strike over medicare, which he broke by airlifting in British physicians, and. after the NDP defeat in 1964, in New Brunswick

during Louis Robichaud’s “equal opportunity” pro-francophone regime.

Tansley came from the Canadian International Development Agency to be the administrator of the Anti-Inflation Act. The idea of an administrator for the act, physically and institutionally distinct from the Anti-Inflation Board and to whom the board’s recommendations can be appealed, is said to have come from Trudeau himself, partly out of an admirable distaste for the authoritarian administrative law that an AIB with undivided powers would have been able to make. Tansley can investigate and reinterpret situations, but basically he sees his job as applying the detailed regulations set down by the government. It is an irony that this has meant reducing with the force of law the contracts of several labor groups that had already been approved by the AIB but which they had misguidedly appealed to Tansley’s higher authority. “I can’t let them out . . . they get no advice from their national headquarters. It disturbs me no end, but there doesn’t seem to be a lot 1 can do about it.” Philosophically, Tansley is attuned to the idea of government participation in the collective bargaining process long after the controls period ends. “There has to be a whistle-blower.” What causes inflation? He laughs and rolls his eyes. “I’m not an economist. I’ve a simple view

of these things ... I suppose, basically, greed.”

But greed is not the cause of inflation. The appetite for material possessions was no less strong in the past at times of stable or even declining prices, and there’s no reason to suppose Canadian greed suddenly started to increase at more than 10% a year, but has now been reduced to 6.5%. In fact, the free-market system is based on a somewhat unidealistic but apparently accurate view of the self-interested nature of human beings, as well as cultural assumptions about such things as the role of individuals, which is why it has never appealed to those who prefer their societies vibrantly united on some question of faith. Since inflation has only afflicted the system on rare occasions in its history, the idea has gained ground among North American economists that this disturbance is not endemic, but related to the habit of democratic politicians of trying to pay for votewinning projects while tactfully not upsetting electorates with higher taxes by instead—in effect—“printing money.” Bob Johnstone, executive director of the AIB, concedes that “fiscal and monetary policies are crucial,” referring to government spending and the way it is financed. “We’re just a supplement.”

To understand the impact of economic controls, it must be realized that no planning system, no matter how sophisticated, can be designed to anticipate the indescribably complex interplay of human decision and circumstances in an economy. The resultant forces cannot be eliminated: they can only be partially suppressed. “My four hours with Gosplan [the Soviet central planning agency] was one of the funniest meetings I’ve ever had,” says JeanLuc Pépin, who has a fine contempt for economic theory of all kinds. The Russians admitted that they were constantly scrambling to revise their quarterly estimates in the wake of unforeseen developments. “I said, ‘You’re just like us!’ ... it ended in great laughter.” Where prices are free, however, they are determined automatically by supply and demand and not by cost. Capital is attracted by unusually high profits much as sharks sense the motions of a victim resonating through the water. Investment is automatically allocated efficiently, judged by its ability to pay off. But if you hold down prices and profits, the signals are no longer sent. There becomes no way to assess the value of one group of workers as compared to another, except by the arbitrary assumption that they are worth now what they were worth yesterday—which is what the AIB’S tendency to look at historical relationships entails. Each settlement becomes a test of political strength. There’s no incentive to reduce costs, and therefore increase productivity, since you have to pass on to the customer all the fruit of your efforts. The economy becomes distorted, and as investment falls off it begins to atrophy.

Bob Johnstone, lips curling, brushing back his long hair, picks his way elaborately across the office and back. Without pausing in his exposition, he pounces on a cigarette. It becomes, briefly, a baton and then a pointer. His shirt-tail begins to work its way loose. The universities of Toronto, Laval and London, plus the Bank of Canada and the International Monetary Lund, have made him an eloquent symbol of the cunning and sophistication of the Cana-

dian controls program. He disarms opposition by conceding immediately that controls lessen initiative, hurt productivity, create distortions and don’t lessen the need for monetary and fiscal restraint. Controls are purely temporary, he insists, to cushion the transition to a tighter monetary and fiscal regime, which would take time to have effect anyway. It sounds eerily reminiscent of the way Stanfield Tories justified their controls programs whenever confronted with the unreconstructed free-enterprise rank and file of their party. But by monitoring margins rather than prices, Johnstone claims the MB has eliminated the problem of product degradation—companies effectively raising their prices by substituting inferior goods. It would show up in their profits, which are carefully monitored. And the AIB is making efforts to reward productivity and stimulate investment in its latest system of credits.

Lrom its inception, a year ago, the AIB has come just about as far as an impressively able staff, many of them accountants from business on an executive interchange scheme, can take it. There are many business grumbles about its inefficiency, but the volume of paperwork it must handle is simply impossible. Steel Co. of Canada Ltd. has “three to five” men working full time on AIB forms; Union Carbide Canada Ltd. said in July the program had cost it $125,000 in man-hours on price compliance alone. There are errors, such as the recent announcing of a wage¡ward rollback at Stelco before the company was informed. Other announcements, such as the leaking of the news that General Loods, Ltd. had to reduce prices to work off an incipient “excess profit,” are clearly politically motivated. It may well be that its system is more difficult to outflank than the U.S. one, if only because the paperwork is more demanding, although experience indicates someone will find a way. AIB officials freely admit that market conditions are such, for example in the steel industry, that some companies come nowhere near making allowable profits, unless they were unfortunate enough to have been unusu-

ally depressed during the base period. And appearances can be deceptive. Recently, two of the more politically oriented AiBers, Pépin and Reed Scowen, director general of the prices and profits branch, both denounced General Motors of Canada Ltd. for criticizing controls at the same time as announcing that it was being prevented from raising price This, they said, proved the program was working. But Ottawa sources tell a revealing story. General Motors has not been forced to hold its prices because its underlying costs have stopped rising. What happened was that the Canadian dollar went above the U.S. dollar, and consumers proved unexpectedly partial to some larger GM models. Both were random flukes, which sent GM’S earnings above what the company had anticipated—and above what the AIB regarded as its historical due. Hence the price freeze on this year’s lines. But if GM is not allowed to benefit from good luck, while remaining unprotected from bad luck, the net effect of controls has been to force it to take more financial risk. This won’t encourage it to invest. And car prices will still go up next year.

Although the AIB is attracting publicity, the government is actually relying on fiscal and monetary policies to combat inflation. The Bank of Canada has been following a more restrictive line on monetary growth, in part due to the personal commitment of bank governor Gerald Bouey and officials such as George Lreeman, who served a disillusioning term on the old Prices & Incomes Commission in the early 1970s. Donald Macdonald says the government aims to hold its share of the Gross National Product equal to growth rates this year, and below them next year, for the first decline in relative share for some time.

But the Liberals are not naturally humble. Their basic instinct, as lawyers and politicians, is to believe all problems can be debated away. One such effort by Macdonald early this summer, which appeared to deny once again the relationship between government deficit spending and inflation, touched off a fresh outbreak of distress among the business community. With some exceptions, such as Paul Paré, president of Imasco Ltd., businessmen have acquiesced in controls, partly because they are cravenly afraid of government displeasure and partly because of their mortal terror of inflation. But in reality they are deeply demoralized, because of long-term trends they believe they see in Canada toward state control. The AIB, despite its officers’ contention that it is temporary, is regarded as symptomatic of a deeper disease. Given that the AIB itself followed inexorably from the government’s November, 1974, blunder of stimulating the economy to avoid a U.S. style recession, thus inflating Canadian costs right off the international map and necessitating a painful readjustment, it’s not surprising that business views Ottawa’s birthday celebrations for controls with a baleful eye.