COLUMN

How to avoid economic peril

Dian Cohen November 28 1983
COLUMN

How to avoid economic peril

Dian Cohen November 28 1983

How to avoid economic peril

COLUMN

Dian Cohen

Royal commissions are useless. They cost millions and return next to nothing. They absorb the time of our most talented thinkers for months and years and make it easier for politicians to postpone hard decisions. In fact, the presentations submitted by interested parties have been the most positive things to come out of the royal commissions.

One of the best submissions was the 12-page commentary that the C.D. Howe Institute presented earlier this month to the Macdonald commission. The Howe Institute was one of a number of nonprofit think tanks that sprang up in Canada after the Second World War. During the 1970s Carl Beigie and Judith Maxwell became executive director and senior policy analyst respectively. They made beautiful music together, and the Howe Institute became far superior to the other, similar groups in terms of the relevance and perception of its analysis. Beigie and Maxwell are now gone. But the Howe Institute, now masterminded by Wendy Dobson, still has something to contribute.

The basic premise of the Howe submission is that Canadian policymakers are far more responsible for our economic malaise than they are prepared to admit. It follows that unless—and until—they acknowledge that their actions—or lack of them—do indeed affect the Canadian economy, they are unlikely to make crucial decisions now that will affect the quality of Canadian life for the next decade or more. That point is not made often enough in Canada. One of the few subscribers to the view is Arthur Smith, who got himself into a lot of trouble in the late 1960s when, as chairman of the Economic Council of Canada, he warned Pierre Trudeau that the war on inflation would bring no price relief, but incredible levels of unemployment.

Smith was right. The Economic Council was subsequently banished across the Rideau River to Vanier, and Smith practically vanished from the Canadian economic scene. He is now back as chairman of Northern Professionals Group, a financial management firm. In one of his first public statements, he recently said: “Much Canadian attention in the past two years has been concentrated on bad economic news emanating from the United States . . . and there has been a widespread

tendency to blame Reaganomics and ‘adverse international conditions’ for Canada’s economic difficulties. In this, there has been a failure to realize fully the extent to which the severity and breadth of the recession were attributable to domestic economic dislocations and misjudgments in Canadian economic policy settings.”

The thrust of the submission is that, up to the early 1970s, it was relatively easy for policymakers not to think too much. Economic growth rates were more than adequate to meet most social goals, and there seemed to be little need for the government to intervene drastically to ensure that resources were being efficiently used. But two dramatic events of the 1970s have, according to the Howe submission, forced a “revolution in our evaluation of economic issues and of appropriate policies.” The first was the fact that the economic growth, taken for granted for so long,

‘Canadian policymakers are far more responsible for our present malaise than they are prepared to admit'

suddenly petered out. For most of the 1970s and, so far, for the 1980s, it has taken us two and sometimes three years to achieve the level of economic growth we so easily achieved in one year during the 1960s. The second was the combined impact of a basic change in energy prices and the emergence of the newly industrialized Third World. Said the Howe brief: “Suddenly Canada faced enormous problems of adjustment. It became painfully clear that many economic policies pursued on the grounds of price stability, of full employment, and of equity were seriously inhibiting needed adjustments.”

Tough words. Tougher ideas. The federal government’s 1974 decision to regulate domestic oil prices resulted from a belief that Canadians should not have to adjust to the whims of the OPEC cartel. But subsidized Canadian consumption patterns are “permanently outmoded in the rest of the world.” Our system of subsidies to disadvantaged regions, born out of a desire for geographic equity, has induced uncompetitive production. Our unemployment benefits system discourages workers in

poorer parts of the country from moving to where they would at least have a hope of getting work.

Righting the wrongs of past economic policy decisions does not necessarily mean just letting nature take its course. It does, however, mean that present and future policymakers will have to distinguish much more carefully between shocks to the system that might be offset by government intervention and shocks that must be accepted and adjusted to. For example, if the United States decides to expand its money supply (as it did in the late 1960s), the effect on Canada would be imported inflation (as it was in 1970). That shock could be offset by allowing the Canadian dollar to rise in value. (The Canadian government tried in the late 1960s to offset the imported inflation but it incorrectly used higher taxes instead of a floating dollar. Consequently, as Arthur Smith anticipated, Canadians got no price relief and three per cent more unemployment.)

The decision to protect Canadians from rising energy and basic raw material prices in the mid-1970s and the subsequent National Energy Program of 1980 are as good examples of bad judgment as one can find. In the short term, the costs seemed small in relation to the perceived benefits of lower inflation and unemployment. But by the end of 1981, the costs, in terms of noncompetitiveness and unemployment, had escalated, and adjustment had become more difficult. According to the Howe Institute: “Producers who had acquired equipment designed to take advantage of cheap oil found this equipment obsolete and themselves uncompetitive with producers in other countries, who had adopted energy-efficient equipment some time earlier . . . inflationary pressures encouraged costly wage catch-ups that reduced international competitiveness of Canadian manufacturers ... low prices for producers and the growing tax burdens imposed by governments delayed development of the more costly petroleum supplies on which Canadians will have to rely in the future.”

Canadians have not been good at either recognizing the shocks that must be accepted and adjusted to or encouraging the adjustment. But that recognition and acceptance is going to have to be front and centre if Canadians are going to re-establish steady growth.

Dian Cohen is a Montreal-based economics writer.