Wednesday, October 05, 2011

Frum's Trudeau was a disaster column

Frum's September 28th column in the Ottawa Citizen is littered with factual errors and non-sequiturs. It is an embarrassingly bad piece of journalism.

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.

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

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.

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. Whatever the case, Frum's argument is bizarre. There is no other way of putting it. Yes when Trudeau was first elected as a MP inflation had started to rise. However, when Trudeau was elected PM, inflation was falling and continued fall. It dropped to a low of 1% in December 1970. Moreover the cause of the mid sixties rise in inflation was not due to a commodity boom. Indeed, Frum's very line of reason is wrong. He is guilty of 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. Most notably, the price of oil had remained remarkably stable for almost a 100 years. With that goes the motivation Frum assigns Trudeau. Worse for Frum, according to Frum's reasoning 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 a 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.

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.

"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!

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 the disbanding of Bretton Woods and the 1973 OPEC oil crisis, stagflation had plagued every Western economy. At the beginning of the 1980s, the US Fed chairperson Paul Vocker, with prospect of another energy Crisis looming over the economy, 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 high 11%; on December 16th 1980 the US Fed had raised them to 21.5%. US policy coupled with surging oil prices brought about by the Iran Iraq war resulted in a spike in inflation in Canada and so the BOC responded in kind. In Canada interest rates reached a high of 23%! Interest rates were no where near as high under Mulroney.

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 and for part of the 1970s.

"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."

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 partially a self inflicted wound 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.

When Pierre Trudeau was elected prime minister in 1968, Canada faced a small but militant separatist challenge in Quebec. In 1970, that challenge erupted in terrorist violence: two kidnappings and a murder of one of the kidnapped hostages, Quebec cabinet minister Pierre Laporte.

Trudeau responded with overwhelming force, declaring martial law in Quebec, arresting dozens of people, almost none of whom had any remote connection to the terrorist outrages. The arrests radicalized them, transforming many from cultural nationalists into outright independentists. As he did throughout his career, Trudeau polarized the situation — multiplying enemies for himself and, unfortunately, also for Canada.

Violence did not "erupt" in 1970. It errupted in 1963. Between 1963 and 1970 the FLQ had carried out some 200 bombings, kidnappings, and robberies. They had also killed 7 people prior to killing Laporte. Furthermore far from "radicalizing" anyone, Trudeau's actions undermined those advocating further violence in two important ways. 1) The bold actions drew attention to the issue of political violence like never before and forced the public to pass a verdict the legitimacy of actions that had been carried out for 7 years. Quebecers overwhelming rejected such tactics and this greatly undermined FLQ base of support within Quebec society. As a former Bush speech writer, I find it odd that Frum would decry such actions but enthusiastically endorse the Bush maximum that "you're either with us, or against us". But I digress. 2) The sheer popularity of the Trudeau's actions helped convince even some members of the FLQ, most notably Pierre Vallières, that violence was counterproductive. The October crisis turned out to be the FLQ's swan song.

Would it really have been so impossible to achieve a Charter of Rights without plunging Canada into two recessions, without wrecking the national finances, without triggering two referendums, without nationalizing the oil industry, without driving not only Quebec, but also Alberta to the verge of separation?

Frum notes in his debate with Lawrence Martin that demographic change in Quebec society has dampened separatism's appeal and indeed it has. The notion of Quebec nation based on the archaic notion of "blood" has been undermined by high rates of immigration and most important of all the huge income and social disparities between Francophones and Anglophones in Quebec are gone. Despite this Frum seems incapable of following his own reasoning back. Namely, not only has demographic and social forces muted separatism appeal, but it was precisely these forces that gave birth to separatism in the first place. Instead, Frum contends that Trudeau's actions during the October crisis, which were wildly popular both inside and outside Quebec, "radicalized" Quebec nationalists setting in motion the 1980 referendum. Frum gives no credit Trudeau for helping the no side win the 1980 referendum despite his obvious popularity in Quebec. This is quite the oversight. The Liberals took 68.2% of popular vote in Quebec and 74 of 75 seats just three months before the referendum took place.

As for the second referendum, unlike the first, at least there is a sequence of events started by Trudeau that leads up to it. That said, Frum's accusation that everything can be traced back Trudeau having pulled the old bait and switch is simply wrong. There was no bait and switch. No, Trudeau's failing was that he believed that a government headed by René Lévesque and dedicated to the break up of the country would ever negotiate in good faith to secure Quebec's place within Canada.

Now despite the absurdity of Frum's claim that Alberta was ever on the verge of separation, Frum is right in saying that Trudeau alienated "the West". However, the West's displeasure with Trudeau went far beyond Trudeau lavishing goodies on Quebec. Indeed, the main source of the collapse in Western Canada was the more emphasis Trudeau placed on individual rights and a commitment to linguistic equality the more the rest of the country, particularly the West, resented the Liberals' inability to put a stop to bill 178 and and 101 and its willingness to make special accommodations for Quebec. Quebec's Official Language Act spelled doom for the Liberals in Western Canada from the mid 70s until collapse of the Progressive Conservatives in 1993.

Of course, whatever faults Trudeau had in this regard they paled into insignificance when staked up against Mulroney's pathetic pandering to Quebec nationalists. Mulroney wrongly believed that he could satisfy the demands of Quebec nationalists and Western Canada would happily go along with any proposals he might make. He was wrong on both accounts. Not only did Quebecers reject the Charlottetown Accord but the Accord was soundly rejected in Western Canada. 68.3% of British Colombians, for example, rejected the deal. It was Mulroney's idiocy that lead to the emergence of not one regional party by two (i.e., the Reform party and the Bloc). It is also what lead to the collapse of his own party. Forgetting that 1968 was a high water mark for the Liberals and only in BC had the Liberals had any kind of success in Canada's 3 most western provinces since 1953, Frum makes a big deal out of the fact that Liberals went from 27 seats West of Ontario in 1968 to down to 2 in 1980. He says that it good indication that Trudeau alienated the West and it is, but a much more telling figure is the fact that the Torries went from 54 seats West of Ontario, Western Canada being their traditional base of support, in 1984 to 0 in 1993.

Finally, as for nationalizing the oil industry, it is really too bad that never came about. Norway did and it has used its oil revenues to fund the most generous social programs in the world and still has money to burn. An oil fund started in 1990 now sits at $600 billion and is the largest sovereign oil fund in the world.

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