Economy: stalled in midair

Anthony Whittingham June 9 1980

Economy: stalled in midair

Anthony Whittingham June 9 1980

Economy: stalled in midair


Like an accordian, the Canadian economy expands and contracts from one year to the next, the dual hands of the government and private enterprise taking turns in pumping the bellows and playing the keys. Midway through 1980, however, there’s precious little sweet music, a dispirited performance after the rousing gig of the 1970s. Economists peering into the new decade had predicted that 1980 would be a dim year for the North American economy, and now, approaching the halfway point, it appears they were all too right. Indeed, the decade will be well launched before the economy is on a strong forward course. Even then, the mediumterm outlook is only cautiously optimistic at best.

These sobering—if not discouraging-conclusions characterized the deliberations in Toronto last week of Maclean's Panel of Economists (see box), whose views, though varying widely in a number of key areas of theory and policy, converged at least in one common conviction: the Canadian economy is in a slump. From conservative economist and forecaster John Grant, who characterized the current situation

product (the total value of all goods and services produced in the country) will slow to nearly zero—the lowest growth since 1954. Reduced international demand for Canadian exports—both finished goods and raw materials—will whittle away at Canada’s manufacturing trade surplus and enlarge the nation’s balance-of-payments deficit. Continuing high prices for imported goods—amounting to about 35 per cent of Canadian consumption—caused in


Even the recent drop in interest rates—which began to tumble in April as mysteriously and dramatically as their painful meteoric rise during last fall and winter—is a signal less of hope than of retreat: it’s a sign that fewer people, either businesses or individuals, are borrowing money, and that means less expansion. “In short,” noted Dalhousie’s John Graham, “the recession, led by the U.S., has been a long time in

as a “mild recession” to nationalist Abraham Rotstein, who described today’s economy as “marking time—in a state of stasis,” views expressed around the table universally reflected the same assessment of the current state of the nation’s pocketbook.

The likely result is that during 1980 the increase in Canada’s gross national

part by the low level of the Canadian dollar, will add to the consumer price index, giving greater momentum to inflation. Reduced demand for Canadian goods, both at home and abroad, combined with inventory buildups occurring during the past two, more prosperous, years, will curtail business expansion, leading to an increase in

coming, nut now is here with some force. There will be very little, if any, growth before 1981—and, in fact, the picture isn’t too good until the mid1980s.” Despite these slowdowns, the panel showed surprising unanimity in its fear of escalating wage demands, which could, they said, reach such costpushing levels that it may be necessary

to introduce some form of incomes policy.

When it comes to isolating the causes of the current economic doldrums, however, or apportioning blame, the economists were more inclined to disagree. All Canadian economists recognize, as Loewen, Ondaatje, McCutcheon’s Anna Guthrie pointed out, that Canada, far from being isolated from the rest of the world, is “a very small part of the larger global economy.” But just how much outside global influences, rather than internal factors, contribute, say, to Canada’s current inflation rate is hard, if not impossible, to quantify. University of Manitoba’s Clarence Barber argues that the largest single factor in current world—and Canadian—inflation is ris-

ing energy prices, “the huge tax levied by OPEC on the rest of the world,” amounting to an additional $110-to$140 billion during the past year alone. To that, energy expert Gerald Angevine added the chilling note that, as Canada finds itself forced to absorb higher energy prices, which it has yet to do, “we will have a painful period of adjustment ahead of us long after the U.S., which is already taking a more realistic approach” by raising energy prices now.

What divides economists most is the question of what Canada should do within the economy. A mere six months ago many were trumpeting that “Keynesianism is dead”—meaning an end to the days of heavy government intervention through fiscal fine-tuning of the economy. This view was amply supported by the strongly “monetarist”* approach of Bank of Canada Governor Gerald Bouey and former Conservative finance minister John Crosbie, whose policies embraced tight money and deficit reduction on the one hand, as well as a general lessening of government involvement in the marketplace on the other. Now, however, with the Liberals back in power, money economists are wondering whether the reverse is true.

The deputy finance minister under the Conservatives, Grant Reuber, a monetarist, is gone, replaced by Ian Stewart, a Keynesian, and the Liberals

*Monetarists believe inflation is caused by excessive printing of money by government. Keynesians say “tight ” monetary policy causes extreme unemployment, and rely on other forms of government intervention for solutions to inflation.

are showing signs of returning to a more interventionist approach toward managing the economy. “The monetarists,” chortled Toronto-Dominion Bank chief economist Douglas Peters, “are in disarray”—adding that Crosbie’s “short-term-pain for long-term-gain” approach produced nothing more than unemployment and instability. Not so, countered Wood Gundy’s John Grant, who argues that reducing the government deficit, projected this year at $14.2 billion, was, and should still be, a matter of high priority. Guthrie added that a “stimulative deficit” approach wouldn’t work in the current economic circumstances anyway. To make any impact, she said, the government would have to double the deficit—clearly an unacceptable solution. Marie-Josée Drouin of the Hudson Institute says that “we have reached a plateau in terms of the government’s capacity to intervene and fine-tune the economy.” Frustrating the panel was the continuing constitutional uncertainty clouding the distribution of powers and ownership of wealth—particularly resource income—between the federal and provincial governments. In spite of the result of the Quebec referendum, which has “reduced at least one area of uncertainty,” the panel agreed the

larger problem is far from settled and must, as Angevine said, be “quickly resolved.” Maritimer Graham argued strongly that “natural resources must be part of the national patrimonyotherwise we don’t have a country at all.” Quebecker Bernard Bonin, whose studies were crucial to the Parti Québécois in assessing the economic feasibility of sovereignty-association, took the philosophical approach that constitu-

tional reform “will probably lead to increased regionalism within Canada— which, in turn, will lead to an increased awareness of the need for increased centralism.”

With constitutional certainty a high priority on the road to invigorating the Canadian economy both in the short and long term, Maclean's panel suggested a wide range of other potential government policy shifts. Picking up from Bonin, who lamented that in many sectors of the economy, “Canadians are still talking about the same problems as we were 25 years ago,” Rotstein called for a greater emphasis on selective Ca-

nadian industries. “I reject the old claim that 22 million is a small market,” he said. “Look at Quebec, where 56 per cent of the goods consumed are produced in Quebec. The rest of Canada should stop being so import-prone by fostering strong specialist industries.” Both Guthrie and Graham agreed that there has been a distressingly frequent tendency in the past for government either to prop up “losers” or to misapply regional development incentives by

backing the wrong industries in the wrong places.

Almost every member of the panel agreed that greater efficiencies must be achieved throughout the economy in terms of costs and productivity. The incomes policy they predicted, for example, could help achieve this, though it should not be as sweeping as the unpopular—and largely ineffective—regime of the late anti-inflation board. Angevine suggested productivity might be improved by the wider application of employee profit-sharing plans or tax incentives based on productivity. Grant pointed to the need for greater mobility within the labor force—increased flexibility that could be encouraged, for example, by introducing portable pension plans. In short, the Maclean's Panel of Economists clearly favor a government course of action employing a full quiver of fiscal and policy measures going well beyond simply a passive hands-off monetarist approach.

Recession, more often a statistical reckoning calculated after the fact than a bread-and-butter reality when it’s oc-

curring, will be dealt with in Canada far more successfully than in numbers of other Western economies, the panelists agreed. Though economists Rotstein and Drouin sounded a darker note on the lack of policy leadership in the country, the panel generally took the view that if collective good judgment prevails—in the boardrooms, at bargaining sessions and throughout constitutional talks—Canada should be in good tune for the 1980s. Anthony Whittingham