Saturday, October 01, 2011

David Frum Embarrasses Himself Yet Again: His Attack on Trudeau: Part 1

"Do Canadians understand how many of their difficulties of the 1990s originated in the 1970s? They should. To repay Trudeau’s debt, federal governments reduced transfers to provinces."

The notion that Trudeau era spending in the 1970s was responsible for the debt crisis in the 1990s is so patently absurd it hardly worth discussing. Leaving aside the fact that two thirds of Canada's debt accumulated under Brian Mulroney, when the Liberals were defeated in 1979 the debt to GDP ratio was 16% and the debt in inflation adjusted dollars was the same as what it was 1961!

Moreover, it was only in Trudeau's last term in office that deficits to GDP, for reasons I will explain in a second, consistently reached troubling levels. (a high of 6% of GDP in 1984) Even then, when Trudeau left office Canada's debt to GDP ratio was less than it was under Diefenbaker and lower than it is now.

Oh by the way, Frum makes it seem that subsequent governments cut transfer payments to the provinces to make up for some of his overspending. However, transfer payments to provinces went up under Mulroney. It was Martin that cut them.

"Brian Mulroney, balanced Canada’s operating budget after 1984. But to squeeze out Trudeau-era inflation, the Bank of Canada had raised real interest rates very high. Mulroney could not keep up with the debt payments. The debt compounded, the deficits grew, the Bank hiked rates again — and Canada toppled into an even worse recession in 1992."

Yes the main reason that the debt exploded under Mulroney was that the Bank of Canada was trying to "wrestle inflation to the ground". However, Frum makes it sound that such a policy was first pursued under Mulroney. This is simply not true. Ever since the 1973 OPEC oil crisis, stagflation had plagued every Western economy. At the beginning of the 1980s, the US Fed chairperson Paul Vocker decided to do something about it. He declared a war on inflation. The Bank of Canada followed suit. Both the BOC and the Fed purposely drove the economy into a deep recession by greatly increasing interest rates. An example should put things into perspective. In July 25th 1980 interest rates stood at already ridiculously high 11%; on December 16th 1980 the US Fed had raised them to 21.5%. US policy resulted in a spike in inflation in Canada and BOC raised interest rates in response. In Canada interest rates reached a high of 23%! Interest rates were no where near as high under Mulroney. (By the way, the dolts who claim that the NEP somehow sunk Alberta real estate in the early 1980s would do better to blame BOC policy. Mortgage rates went through the roof and the oil industry, as capital intensive as any, faced massive burrowing costs.)

The war on inflation was won, but it came at a terrible cost. Sky rocketing interest rates meant that the amount of money used to finance the debt went through the roof, the spike in unemployment greatly reduced government revenues and unemployment insurance claims put further stress on government coffers. Furthermore, the quick success of the BOC's efforts meant that Canada's debt to GDP ratio went up at much faster rate than it would have had inflation remained high for a longer period of time. By the time Mulroney took over in Sept 1984 inflation had sank to 3.7% from a high 12.9% in May 1981, but interest rates, remained sky high for considerably longer. As a result, Canada was not able to inflate away some of the value of that debt as it had after World War 2.

"Pierre Trudeau was a spending fool. He believed in a state-led economy, and the longer he lasted in office, the more statist he became. The Foreign Investment Review Agency was succeeded by Petro-Canada. Petro-Canada was succeeded by wage and price controls."

And wage and price controls were copied from Progressive Conservative leader Robert Stanfield -- "zap your frozen" -- and Republican Richard Nixon. Jesus.

"Other Western governments recovered from the stagflation of the 1970s by turning toward freer markets. Under the National Energy Program, Canada was up-regulating as the U.S., Britain, and West Germany deregulated. All of these mistakes together contributed to the extreme severity of the 1982 recession. Every one of them was Pierre Trudeau’s fault."

What utter nonsense. The notion that the recession of 1981 1982 was brought on by Trudeau's fiscal policies is even more absurd than the notion that Trudeau's 1970s era spending was behind the debt crisis in the 1990s. The recession in the US and Canada was in large measure self inflicted yes. However, the cause was monetary policy and not fiscal policy. A 10 point hike in interest rates was designed to slow down growth and worked like a charm.

Furthermore, the implication that the US did not go into recession too is simply wrong. Unemployment, for example, in the US nearly doubled and stayed at 10% for much of 1981 and 1982. As for West Germany and Britain, unemployment doubled in W. Germany in 1981 and unemployment in Britain was above what it was in Canada and remained above 10% until 1988.


Peter Wrightwater said...

Thanks for this excellent contribution to debunking David Frum's screed.

I'm looking forward to part two.

Annie said...