Closeup/The Economy

Big Mac’s big mess

Amazingly, he left things worse than he found them

Ian Urquhart September 19 1977
Closeup/The Economy

Big Mac’s big mess

Amazingly, he left things worse than he found them

Ian Urquhart September 19 1977

Big Mac’s big mess

Closeup/The Economy

Amazingly, he left things worse than he found them

Ian Urquhart

Economic conditions have been and are going to be difficult for Canadians and for. . . other Western economies for months to come, and I guess I would have to say that I wish (my successor) courage and patience in what is going to be a difficult period.

With those unhappy words, Finance Minister Donald Macdonald stepped out of the political spotlight he had held for 15 years. He joined four Liberal predecessors—Walter Gordon, Mitchell Sharp, Edgar Benson and John Turner— who had found their political careers damaged or curtailed by the crushing finance portfolio. Macdonald’s reasons for resigning were intensely personal (see box), but he left behind an economic mess.

Unemployment, which had been running at a rate of 7.2% when Macdonald entered the finance portfolio 24 months ago, was up to 8.1%. Inflation, while lower than the appalling rate of 10.6% two years ago, was at 8.4%, on an upward swing after a brief respite. The dollar, which was worth about 97 cents U.S., had dropped to barely 93 cents after rising artificially to more than $1.03 last year. Canada’s balance of international payments, the measure of all the goods and money coming into and going out of the country, showed post-war high deficits of more than four billion dollars a year, an indication we are living beyond our means. And the real gross national product (GNP), the measure of all the things Canada produces, had just registered a decline of six tenths of 1%. While Macdonald continued to see “positive signs” of an economic upswing in the making, others raised new fears of a recession. Some Cassandras were even predicting another depression. But the government, beset by conflicting advice, seemed unable to move toward corrective action.

For Macdonald, a Gordon protégé who became Prime Minister Pierre Trudeau’s most trustworthy minister, it was a disappointing finale to a long and distinguished political career. Before entering finance, Macdonald was considered a nationalist and a progressive, one of the few in Trudeau’s cabinet. In earlier cabinet jobs, he had often taken outspoken stands. As government House Leader in 1968-69, he was responsible for pushing through tough new rules to make parliament more responsive to change. At the same time, he argued strenuously against Canadian participation in NATO, which he considered an American-dominated outfit. Later, as energy minister, he ruffled feathers but won admiration in his fights with the oil companies and the government of Alberta

to hold down prices and maintain a federal presence in the field.

But in finance he displayed little of his old zeal. He seemed to be overwhelmed by the bureaucrats in the department and their economic jargon. He did introduce wage and price controls, a radical measure in peacetime, shortly after joining finance. But that policy was pushed on him by the bureaucrats; he came to the portfolio with his mind set against controls, but they changed it. Thereafter, he regularly followed the advice of his department and of Gerald Bouey, the conservative governor of the Bank of Canada. Bouey preached monetary restraint to fight inflation in spite of the high unemployment levels and always got his way. In cabinet, Macdonald found himself arguing for fiscal restraint and against measures he had previously

supported, such as indexed family allowances and income supplements for the working poor. He even changed his public image on the advice of Bud Drury, an old cabinet crony, and adopted a more subtle approach, dropping the off-the-cuff, partisan remarks that had been his trademark.

Macdonald introduced two budgets during his term, both unimaginative documents that maintained the status quo. “What was lacking,” concludes Tory finance critic Sinclair Stevens, “was a flair for the job. He was never able to capture people’s imagination.”

After introducing controls, his major goal became to replace them with voluntary restraint. He would have liked to have nailed down agreement on restraint from business and labor before leaving politics, but he failed, as had his predecessor, John Turner. The experience left Macdonald bitter, for he had believed that union leaders would ultimately agree to voluntary curbs. But that was always a chimerical goal, given the inability of labor or business to carry out commitments to cut back, even if they wanted to.

Macdonald and the finance department cannot, of course, be blamed for all the country’s economic woes. Canada is, above all, a trading country, with exports amounting to 24% of GNP, compared to just

9.5% in the United States. It cannot expect to isolate itself from adverse conditions elsewhere and the rest of the world has been undergoing the same economic problems as Canada. Indeed, Canada remains one of the world’s wealthiest countries despite problems. Its economic performance is only marginally worse than that of the United States, its major trading partner. And it has not yet experienced the kind of deep recession the United States underwent in 1974-75.

Then, too, Macdonald inherited a sick economy from John Turner. Again, Turner cannot be blamed entirely for the situation, although his stimulative budget in February, 1973, at a time when inflation was really beginning to rip, has been singled out as a major mistake. Like Macdonald’s, most of Turner’s problems were brought on by international factors beyond his control, such as the quadrupling of world oil prices and crop failures.

Given the vulnerability of the Canadian economy, one theory goes that the government should do nothing in the short term because any action could only have marginal effects and would run the risk of doing more harm than good. But, aside from the adverse political impact, such an approach is morally unconscionable with 878,000 people out of work in Canada, more than half of them under 25. There is growing concern among Liberal MPS that something must be done about unemployment before it is too late and they lose power.

Before deciding what to do, however, Trudeau’s first step was to choose a new finance minister. The acknowledged frontrunner when Macdonald stepped aside was Trade Minister Jean Chrétien, a 10year cabinet veteran who would become the first ever French-speaking finance minister. Outgoing and down-to-earth, Chrétien came to Ottawa as an MP without knowing a word of English but taught him-

expenditures during his term in the health department as he has to increase them. Lang is just plain accident-prone.

The new minister faces a series of tough choices in the near future. There is little consensus on what should be done and many proposals are contradictory. An exasperated Macdonald noted in an interview with The Toronto Star: “Your newspaper has been continuously critical of the government of Canada for spending too much money. On the same page, you get an editorial saying, on the other hand, the government should be spending more money to do this or that. You can’t have it both ways. The two guys on the editorial page don’t have to talk to each other, but I have to be concerned with the two elements and their balance in the economy.”

Among pressing matters high up on the finance ministry agenda are:

• The future of controls.

Fixing the economy isn’t so hard. Ask anybody

For

Big business Big labor Most economists Conservatives New Democrats Big labor The public Conservatives New Democrats New job-creation Big labor programs The unemployed

Against

Small business The public (opinion polls are strongly anti-controls) Liberal MPS

Big business Small business Liberal MPS Most economists Big business Small business

Likely gov’t action

Retain controls until the end of 1978

Tobe decided by new minister

self to be more eloquent in the language, in his own way, than most English-speaking ministers. He has also made himself popular with the business community, a key requirement for the finance portfolio, by talking tough on government spending during a previous stint as treasury board president and by castrating the Foreign Investment Review Agency in his present job. But Sinclair Stevens may have given Chrétien the kiss of death by calling him the “best qualified” man for the job.

Other contenders included Allan MacEachen, the government House Leader and the only minister with more years of service than Chrétien, and Treasury Board President Robert Andras, a man with a reputation for being able to muddle through. Two others, Health Minister Marc Lalonde and Transport Minister Otto Lang, could probably be ruled out for image reasons, although both have excellent intellects. Lalonde, so the myth goes, is a “big spender,” although he is actually one of the most conservative men in cabinet and has done as much to cut back

• Demands for a new budget with tax cuts.

• Proposals for new job-creation programs this winter.

There are strong arguments and pressures on both sides of each question (see chart). The controls program will probably be dealt with first. Big business and labor both want controls lifted now. Labor never liked the program, and big business now believes controls are dampening the economy. As for inflation, many business leaders and economists feel it will be kept in check by the continuation of restrictive fiscal and monetary policies, which in turn would mean continued high unemployment. Business is readier to accept high unemployment than high inflation. Putting the case for business in a speech this month in Bermuda, John Turner said unemployment cannot be beaten until inflation is. “We are going to have to sweat it out for a while,” added Turner, who sweats it out at an estimated $150,000 a year as a corporate lawyer.

But the government, which would like to be reelected, is not so sure. It will probably

decide to keep controls until the end of 1978 and do something about unemployment at the same time. The polls show controls are still popular despite the massive lobby against them by business and labor. There is also some doubt that lifting controls would stimulate the economy. It might, by raising prices, discourage consumer spending.

As for a new budget this fall with tax cuts, labor and the opposition parties want one, but most business leaders and economists do not. Some economists argue that what is really needed is a cut in provincial sales taxes. But such a step could backfire by encouraging more spending on imports than on Canadian goods. One finance department insider says a new budget is “95% certain.” Less certain is what would go in a budget. The government has already budgeted for a deficit of $7.2 billion this year and may exceed that figure by another one billion dollars because revenùes are not meeting expectations. Another tax cut on top of that deficit could have serious inflationary consequences. An across-theboard tax cut would also fail to meet the special problems of high unemployment among young people and in specific regions.

More likely to be considered is a shortterm job program. The finance department is now studying proposals for a resumption of the old “winter works” program. Also being considered is a proposal to supplement wages of workers who are hired from the unemployment rolls. But such a program would be open to abuse by employers, who could lay off all their workers one day and rehire them the next with a subsidy from Ottawa.

In any event, all these steps are stopgap measures. What is really needed, say most economists, is a long-term restructuring of the economy. For too long, such problems as deteriorating industrial relations, inefficient industries, and falling productivity have been ignored while the government concentrated on short-term measures for the economy or noneconomic problems. “What we’ve had is the virtual abandonment of systematic policy for many years,” argues Jack Weldon, professor of economics at McGill University. “At both the federal and provincial level, governments have been preoccupied with things like constitution-writing. They’ve been busy with non-problems.”

Not surprisingly, though, the Trudeau government believes much of the fault lies not with its own policies but with Canadian attitudes. At a press conference in Ottawa this month, the Prime Minister had this familiar advice for the nation: “If we continue to work harder and be more productive and ask for a little less satisfaction, we’ll become more competitive, have higher employment, less inflation and we’d all be better off. But this is not something that government alone can do. It has to have the cooperation of all sectors of the economy.”