COVER

Exercising the politics of restraint

Anthony Whittingham July 18 1983
COVER

Exercising the politics of restraint

Anthony Whittingham July 18 1983

Exercising the politics of restraint

COVER

Anthony Whittingham

Restraint. In political and economic circles throughout the Western world, it has become the new buzzword of the 1980s. Margaret Thatcher’s resounding victory at the polls in Britain last month flowed out of a resolute program of restraint. In Canada the federal government’s celebration of the first anniversary of the Sixand-Five program two weeks ago was further proof of the political appeal of the economic hard line. Last month the reappointment of Paul Volcker as head of the United States Federal Reserve Board reaffirmed the commitment of U.S. authorities to a continuing program of “Reaganomics” and monetarism, the strict control of the money supply. And in British Columbia, Premier William Bennett’s provincial budget last week not only made good his electoral promise to restrain public spending but charted his province on a radical program of economic austerity for several years to come.

It is a time when most Western economies have been shaken by the effects of a profound 18-month economic depression; when thousands of business enterprises are still precariously close to bankruptcy; and when millions of

workers throughout Europe and North America are without jobs. It may seem extraordinary that policies aimed at keeping economic growth in careful check have gained such widespread public support. Still, restraint has entered the political lexicon as a shining virtue. Barely three years ago, Canadians scoffed when John Crosbie, finance minister in Joe Clark’s ill-fated Tory government, called on the nation to endure “short-term pain for long-term gain.” Now, many Canadians wish they had heeded the advice when it was offered. Ironically, the Liberal government, whose profligate spending in the previous decade contributed greatly to Canada’s present enfeebled economic condition, is now attempting to score political points for tough economic management.

But what is restraint, and why is it so widely accepted by economists and politicians as the necessary tool for restoring health to the economies of the Western world? “In economics there are no simple answers,” says Michael Walker, head of Vancouver’s conservative public policy think tank, the Fraser Institute. “But if there is one truism of today,” he adds, “it is that the spiral of global inflation set in motion during the 1960s and 1970s had to be brought under

control. Restraint means many things—both in the public and private sectors, both in monetary and fiscal policies. The aim of all of these should be to break that inflationary cycle.”

While economic theories come in and out of vogue, an almost universal consensus has emerged in most Western countries since the late 1970s. That consensus holds that spending in the previous decade by governments, consumers and businesses outstripped the capacity of the overall economic system to produce the real wealth necessary to back it up. This fundamental cause of inflation—excess money supply—ultimately triggered the crisis that produced the first, and in many ways the harshest, of all the restraint measures: the restrictive monetary policies introduced first in Britain in the late 1970s and tentatively in Canada during the same period. The policies reached full force worldwide when the U.S. Federal Reserve Board clamped down on the money supply, beginning in 1980.

The effects of this new approach, labelled monetarism and first espoused by U.S. economist Milton Friedman, were swift and devastating. Scarce money translated directly into skyrocketing interest rates between 1980 and 1982, when U.S. and Canadian rates

reached unprecedented peaks of more than 20 per cent. Those rates, in turn, precipitated a severe decline in worldwide economic activity, setting off a prolonged two-year worldwide “recession.” In 1982 alone, Canada lost 400,000 jobs in the manufacturing sector, corporate profits dropped by one-third and 10,765 businesses declared bankruptcy.

In strict monetary terms—not accounting for the immense social costs— there is little argument that restraint succeeded in cooling down an overheated worldwide economy. “Make no mistake,” says Laurent Thibault, economist with the Toronto-based Canadian Manufacturers’ Association. “Volcker’s policies, harsh as they seemed at the time, succeeded in breaking the inflationary spiral. I don’t think it is quite over yet. We’re expecting another rough spell before the year is out.”

Because of its direct impact on spending and investment within the free market, monetary restraint brought with it an automatic adjustment in wages and prices as private sector producers struggled to pare costs in order to survive at a time of plummeting sales and revenues. By last summer in Canada’s private sector, wage increases were already showing a sharp decline, even before the federal government moved to control public sector salaries. Canadian industry abounded with examples of self-restraint, such as that of Stelco, the Ontario-based steel producer, where white-collar workers agreed to forgo salary increases. For the private sector, restraint was neither imposed by legislation nor adopted voluntarily by public-spirited managers: it was an inevi-

table response to economic realities.

The public sector, however, was another matter. Impervious to market forces and immune to conventional laws of supply and demand, government-controlled wages and prices in Canada are estimated to account for almost onethird of the nation’s economic activity. This includes not merely civil service employees at the federal and provincial levels and the vast array of costly socialservice programs, but the myriad goods and services operating under government regulation, including energy, transportation, telecommunications and marketing boards.

Between 1968 and 1976 the number of federal public servants jumped by more than 30 per cent. From 1970 to 1974embracing the period when John Turner, now portrayed as a prudent businessman, was finance ministerfederal spending shot up by more than 100 per cent. “What happened during the 1970s,” says Wendy Dobson, director of the C.D. Howe Institute, a Toronto-based economic think tank,“was that Canadian policymakers believed they could shelter Canadians from adjustments being faced in the rest of the world. This assumption fostered the belief that Canadians could ‘afford’ to adopt economic policies that concentrated more on redistributing income than on ensuring the economic efficiency necessary for continued economic growth.” In 1975 the first of the bitter fruits of the policy hit the public: federal deficits that had grown in suc-

cessive years until, in 1983, the total is projected to reach an extraordinary $31 billion.

In 1975 the federal government did make an attempt to put a limit on inflation with the imposition of wage and price controls enforced by the AntiInflation Board (AIB). But inflation climbed back toward a double-digit level even before the three-year program had run its course. The government managed to slow the growth of the civil service between 1976 and 1981. But by 1982, with a recession ravaging the country, it was clear that the measures were not enough. “Neither monetarism nor the recession was having any effect whatsoever on the inflationary spiral within that vast sector of our economy controlled by government,” says Walker of the Fraser Institute. “We were faced with the ridiculous paradox—as was the States, too, for that matter—of a restrictive monetary policy strangling the private sector, offset by an expansionary fiscal policy which saw governments continuing to spend.” The Liberal government finally responded with the Six-and-Five program, which set salary goals for federal workers and limits on price increases for federally regulated goods and services. And, says economist George Vasic of Data Resources of Canada: “The Sixand-Five program came in not a moment too soon.”

According to the prevailing view of economists and statisticians, the impact of Six-and-Five—and corresponding programs in at least five provinces—has been to curb the worst excesses of government-induced inflation. In spite of the boasting by federal and provincial politicians that those restraint programs have curbed inflation, economists like Thomas Maxwell of the Conference Board of Canada say that they likely account for no more than three per cent of the drop from last year’s inflation rate of 11.8 per cent to last May’s greatly improved level of 5.4 per cent. A policy of high interest rates is responsible for the rest, he adds. And Thomas Kierans, president of the brokerage house of McLeod Young Weir and former chairman of the Ontario Economic Council, says that the federal government’s “record on restraint has been very, very poor.”

For all that, restraint has become the economic message of the 1980s and the political message as well. Canadian voters seem to have accepted the necessity of working to achieve greater efficiency, lower costs and higher output in order to save their economy. The private sector has already learned that it will ignore the danger signals at its peril. For most economists, the fact that the public sector is beginning to follow is a sure sign of hope.