Tuesday, October 04, 2011

David Frum Embarrasses Himself Yet Again: His Attack on Trudeau: Part 2

Pierre Trudeau took office at a moment when commodity prices were rising worldwide.


When Trudeau was first elected as a MP inflation had started to rise. However, after Trudeau was elected PM, inflation actually dipped and dropped to a low of 1% in December 1970. More to the point, commodity prices were not on the rise when Trudeau took over and had been stable for some time. Frum is flat wrong. Most notably, the price of oil had remained remarkably stable for almost a 100 years.

However, by 1971 everything had started to change. The world had lost faith in the US's "ability to pay" that is to exchange dollars for gold at a fixed rate. As a result, the Bretton woods system of fixed exchange rates began to implode and by 1973 was gone entirely.

The collapse of the Bretton Woods system helped spure on a spike in commodity prices at the start of 1973. And things were made all the worse, of course, by the oil embargo at the end of the year. The price of oil went up 4 fold and overall commodity prices doubled that year.

Good policy-makers recognize that commodity prices fall as well as rise. Yet between 1969 and 1979 — through two majority governments and one minority — Trudeau tripled federal spending.

After 1973 commodity markets have seen huge up swings and dips, but Frum is wrong in trying to paint the Bretton Woods era with a post Bretton Woods brush. The level of instability in commodity markets that has existed after 1973 simply did not exist during that time. Furthermore, to imply that the "Nixon Shock", the subsequent collapse of Bretton Woods and the OPEC oil embargo were immediately foreseeable and somehow par for the course is ridiculous.

The problems for Frum do not stop there. Yes, spending did triple between 1969 and 1979, but the figure Frum cites is not adjusted for a decade of record inflation, indexed to population or GDP growth. In other words, it is meaningless. No one, except an utter armature or someone wishing to advance a political agenda irrespective of the truth, would make, for example, a meal out of the fact that federal expenditures were 10 times higher in 2000 than in 1970. What counts is how much federal spending increased as percentage of GDP. And when you factor out the amount of money devoted to debt servicing -- which went up three fold between 1975 and 1995 -- the amount of Federal spending as percentage of GDP remained virtually unchanged between 1959 and 1989. Where there was a marked increase in spending during this time was at the provincial level.

In order to appreciate the scope of Frum's intellectual dishonesty it worth pointing out that in Trudeau's first 7 years in office, Canada's debt to GDP ratio shrank and so did Canada's debt in inflation adjusted dollars. Contrary to popular wisdom, you do not need to run surpluses to shrink the debt in real dollars. If depreciation of the debt outstrips deficits, then a real reduction in the debt will be achieved and that is precisely what happened.

His spending spree did not include the military. He cut air and naval capabilities, pulled troops home from Europe, and embarked on morale-destroying reorganizations of the military services. In 1968, Canada was a serious second-tier non-nuclear military power, like Sweden or Israel. By 1984, Canada had lost its war-fighting capability: a loss made vivid when Canada had to opt out of ground combat operations in the first Gulf War of 1990-’91.

At the height of the Korean war military spending was 8% of GDP. That figure slowly fell year after year until it sat at 2% in 1968. Trudeau let it dip slightly in the mid 1970s and then raised it in the first part of the 1980s to correspond with the Reagan built up. When Trudeau left office in 1984, the amount Canada spent on the military as percentage of GDP was virtually what it was in 1968. Now, given that military spending does not need to be tied to population growth the way that spending on services needs to be in order to remain as effective, it is likely that the Canadian army was better equipped in 1984 than it was in 1968. The demands placed on the military were pretty much the same and in absolute terms, the amount of money Canada was spending was significantly more. The economy was bigger.


When I first read Frum's article I assumed he was saying that Trudeau's decision to increase spending was premised on commodity prices remaining low. Given that commodity prices had begun to rise just as he took office he should have foreseen the spike in commodity prices in 1973 and what that would mean for the Canadian economy and Canada's bottom line. Having watched the following debate between Frum and Lawrence Martin I now realize that I had things backwards and that I was giving Frum far too much credit. http://www.cpac.ca/forms/index.asp?dsp=template&act=view3&pagetype=vod&hl=e&clipID=6030
Frum contends that when Trudeau took over commodity prices were riding high and that Canada took it on the chin -- and here I guessing -- when the commodity boom ended just as he was leaving office in the 1984. Frum's argument is bizarre. There is no other way of putting it. As I have already pointed out, there was no commodity boom when Trudeau took over nor was there reason to believe that commodity prices would double in single year. There goes Trudeau's motivation. Worse for Frum, according to Frum's logic Canada should have boomed right along with commodity prices, but, of course, Canada suffered from stagflation the way other Western economies did. Whatever revenue gains were made in 1974 and 1975 were more than matched by a rise in costs and revenues in real terms plummeted as the economy worsened. For 14 straight years Canada's debt to GDP ratio had sank, but in 1976 that ended. Expenditures as percentage of GDP had fallen sharply after having spiked in 1974, but revenues despite no commensurate drop in commodity prices nose dived. By 1979 expenditures as a percentage of GDP had fallen by 3%, but revenues as a percentage of GDP had declined by 4% of GDP and sat some 2 points lower than the 30 year medium.

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