These Liberals get economics

Posted on October 27, 2015 in History – Full Comment
October 26, 2015.   Stephen Gordon

As the Liberals prepare to form a government on Nov. 4, it’s worth looking back to the train wreck that was narrowly averted the last time the Liberals returned to power. The 1993-2006 Chrétien-Martin Liberal government is generally viewed as a success as far as economic policy goes, and justifiably so: it negotiated the expansion of the Free Trade Agreement to include Mexico, it returned the federal budget balance to surplus and it initiated a series of reductions to the corporate income tax that was continued under the Conservatives. And after decades of high and volatile inflation, the Bank of Canada finally managed to get inflation under control. But none of this looked likely to happen as the Liberals took over in 1993.

While the Liberals had not gone so far as to promise to abrogate the FTA that it had strenuously opposed in 1988, its promise to “renegotiate” the FTA was designed to appeal those who still thought the agreement was a mistake. The same for the Goods and Services Tax: while not going so far as to make an explicit promise to repeal the GST, the Liberals had promised to “replace” it with “something better.” Even the newly-adopted regime of inflation targeting was at risk: Liberal MPs were still upset at Bank of Canada governor John Crow’s insufficient deference to them while they were opposition.

Happily for Canada’s economic prospects, the Chrétien government quickly backpedalled from the Liberals’ 1993 election rhetoric, although taking care to respect the letter of its commitments, if not the spirit. The FTA was indeed renegotiated — it was expanded to include Mexico and became the NAFTA: probably not what FTA skeptics had in mind.

The same for the GST. The Liberals made a great show of trying to find a better alternative to the GST, but the Chrétien government ended up admitting there was no such thing. My favourite anecdote of the period comes from an economist who specializes in tax policy, and who had participated in the development of the GST. He was asked to speak to the committee examining alternatives, and began his remarks by explaining the advantages of the GST. He was quickly cut off by a Liberal MP who wanted his best thinking: what would he suggest if political considerations were set aside? The economist stared briefly at his questioner and replied “The GST.” The GST stayed.

So did inflation targeting. The Liberals contented themselves with a refusal to renew John Crow’s term as governor; his policy remained in place.

It’s not too much of a stretch to say that the economic achievements of the Chrétien-Martin years were largely due to its eventual rejection of its electoral mandate and the wholesale adoption of the agenda set in place by the previous government of Brian Mulroney. Even the signature achievement of the 1993-2006 Liberal government — balancing the budget — was a continuation of a Mulroney government initiative. Repairing the damages of the fiscal legacy left by Pierre Trudeau’s government required an increase in the primary budget balance (not including debt payments) of eight percentage points of GDP. Mulroney’s government increased it by four points; Chrétien’s government supplied the other four.

Gone is the contemptuous “beer and popcorn” dismissal of cash payments

This all happened 20 years ago, and I only bring it up to illustrate how much has changed since the last time the Liberals returned to government. While it is possible to disagree with the Liberal platform on many points — for example, the narrative of a middle class in decline contradicts my reading of the evidence — its level of economic literacy is remarkably high for a political manifesto. If the Liberals still fear the political consequences of reversing the two-percentage-point cut in the GST, they have at least abandoned Michael Ignatieff’s proposal to increase corporate income taxes. And what is probably the most important policy plank — the Canada Child Benefit — is firmly based on what economists have learned about the benefits of direct transfers to low-income households. Gone is the contemptuous “beer and popcorn” dismissal of cash payments.

Trudeau likes to make references to Sir Wilfrid Laurier, and he could make a worse choice of a predecessor from whom he could draw inspiration. Not necessarily for the “Sunny Ways” theme, but for what the Liberal Party stood for while Laurier led them: free trade and open markets. When Laurier led the Liberals, it was the Conservatives who were the party of the ‘National (sic) Policy’ of high tariffs and special treatment for the favoured interest groups concentrated in central Canada. For reasons too long to get into here, the two main parties traded places on this issue at some point during the 20th century. But the Liberals’ attitude to freer international trade has moved from grudging acceptance in 1993 to increasingly enthusiastic support, from NAFTA to the Comprehensive Economic Trade Agreement with the European Union to the Trans-Pacific Partnership. While they (sensibly) refuse to offer unconditional support for a TPP agreement that they have not yet read, neither have they specified any deal-breakers that would lead them to abandon the TPP.

Chrétien came to power campaigning against the consensus of opinion among economists. Even though he did eventually incorporate that consensus into his policy agenda, he was obliged to spend valuable time and energy engineering several 180-degree turns before his government could get traction. Justin Trudeau has not made that mistake.

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