The Canadian Economy in the Post-Control Era
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The Empire Club of Canada Addresses (Toronto, Canada), 6 Oct 1977, p. 27-40
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Post, Dr. George, Speaker
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Text
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Speeches
Description
The Economic Council of Canada. The fourteenth Annual Review to be published about a month after this address. A discussion of some of the major issues facing the Canadian economy over the next five years. Economic Performance and Outlook. Causes of high levels of unemployment. Consumer prices. Balance of payments deficit. Suggestions for the government. Projections. Longer-term Issues. Some trends affecting the shape and structure of the Canadian economy concerning the rate of economic growth, international trade, industry structure, location, the level and nature of investment, a built-in inflation bias. The capacity of our society to respond to these complex and interdependent issues as they change. Suggestions for change. A minimization of the seriousness of the current economic slowdown in the western countries.
Date of Original
6 Oct 1977
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English
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The speeches are free of charge but please note that the Empire Club of Canada retains copyright. Neither the speeches themselves nor any part of their content may be used for any purpose other than personal interest or research without the explicit permission of the Empire Club of Canada.
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Full Text
OCTOBER 6, 1977
The Canadian Economy in the Post-Control Era
AN ADDRESS BY Dr. George Post, ACTING CHAIRMAN, ECONOMIC COUNCIL OF CANADA
CHAIRMAN The President, Peter Hermant

MR. HERMANT:

Ladies and gentlemen: Our guest today, Dr. George Post, has often appeared in print and on various other platforms discussing issues which affect Canada in terms of her economy-first from his position as vice-chairman of the Economic Council of Canada and later, of course, as acting chairman of that same body.

He has discussed banking and finance because he started his government career in the research department of the Bank of Canada in 1962 and became head of that department in 1969-later becoming chief of the new department of banking and financial management in 1971.

He has discussed economic policy from the position of assistant secretary to the Cabinet responsible for economic policy. And he has analyzed the academic side of the economy when he served as a lecturer at Queen's University for three years following his Ph.D. from Northwestern University in 1962.

From that background, you might imagine that when Dr. Post was interviewed by The Financial Post as to which three books he would like to be stranded on a desert island with-his choices would be predictable. Let me quote one of those choices then. "My third book is a rare bit of Canadiana for collectors of material on rural pioneer styles. Annapolis Valley Saga is a lively reconstruction of conditions in rural Nova Scotia more than a hundred years ago. It presents a believable and entertaining story of a family in the valley that reveals a great deal about the values and rigours of rural society."

Now having said that, and exposed the esthetic side of our guest of honour, I must reveal for the record that his first two choices were about money: Whence It Came and Where It Went by John Kenneth Galbraith--a question which many Canadians have been asking themselves lately. And speaking of John Kenneth Galbraith, I believe it was he who said, "One of the greatest pieces of economic wisdom is to know what you do not know." And book number two, The Joyless Economy by Tibor Scitovsky who, according to Dr. Post in his review of Scitovsky's book, "confesses his lack of faith in conventional economic dogma."

I suppose it is on the subject of the joyless society that Dr. Post is to address us today.

No policy in recent memory has been more controversial and has affected more Canadians than has the policy of wage and profit control imposed October 13th, 1975. The theory has been simultaneously advocated and condemned on all sides. Millions of words have been written and broadcast concerning all aspects of the theory and the practicality of the program. Almost every week there is an article, a newscast or an editorial somewhere in Canada predicting the imminent removal of the controls -and yet we are just approaching the second anniversary.

In the area of speculation, almost as much has been written and said concerning what might or might not happen when the program is ended and numerous meetings have been held between business, government and labour to try to ascertain the possible effects in the postfreeze period.

Obviously the Economic Council of Canada has been involved throughout the whole anti-inflation effort and, therefore, there is no one in the country in a better position to examine with us the implications on our livelihoods and our life styles of the time when the AntiInflation Board goes out of business-bearing in mind that time-worn definition of an economist as someone smart enough to run your business but too smart to run his own.

No topic could affect each one of us more.

It is a pleasure then to ask Dr. George Post, acting chairman of the Economic Council of Canada, to address us on the subject, "The Canadian Economy in the PostControl Era".

DR. POST:

Mr. Chairman, ladies and gentlemen: It is an honour for me and for the Economic Council of Canada to have this opportunity to address your members. The autumn seems to be the season when the views of economists mature and are taken to market. This appears to have been a particularly bountiful year because I can't remember when I have seen such a crop of forecasts, analyses and warnings as my fellow economists have produced in the last few weeks. The staff at the Council has been caught up in this seasonal harvest and we will publish our Fourteenth Annual Review about a month -from now. I -cannot tell you what recommendations the Council may make in that Review because that will not be finally decided until the Council meets on October 17. I do, however, want to talk to you about some of the major issues which are facing the Canadian economy over the '-next five years or so.

My primary concern is that we may focus too much attention on our immediate problems and not enough attention on the more basic structural adjustments that are required to maintain a healthy economy.

Economic Performance and Outlook

Let's face it; the present performance of the economy is disappointing-and to nobody more than to me, because a year ago I was one of the most optimistic people around. The principal indicators of this poor performance are excess capacity and high levels of unemployment. The immediate causes are quite apparent:

- The growth of our exports to the United States and other OECD countries has been relatively modest for the early stages of a business cycle recovery.
- Business investment spending for both capital facilities and for inventories has been slack.
- The growth of government expenditures has been tightly controlled.
- Consumers' inclinations to spend out of disposable income have been very subdued and when they have spent they have bought a lot of imported goods.

The reasons behind each of the components of this weak aggregate demand picture are also fairly apparent. Fear of inflation and oil import costs has made many countries shy away from aggressive demand stimulation policies; excess capacity and slim rate of return projections have discouraged business investment; uncertainty about controls, inflation and even Confederation have cast a gloomy shadow over both businessmen and consumers, and governments have received a clear indication that public opinion favours restraint.

The recent evolution of prices is also discouraging in spite of more moderate wage settlements. Raw materials and food commodity prices that were weak last year have been stronger in 1977, and energy prices continue to rise. Profits have been slack due to weak productivity performance so that businesses can justify passing along cost increases without violating the AIB guidelines.

By the coincidence of these developments, we find ourselves in a situation where unemployment is a good deal higher than a year ago and especially high for young people, consumer prices are going up faster than a year ago and our balance of payments deficit is large and persistent.

To alleviate this gloomy assessment it is probably useful to remind you that the Canadian economy has been growing-however slowly. Since the second quarter of 1975 (when the U.S. recession is assumed to have touched bottom) employment in Canada has increased by 381 thousand or 4.1 per cent, industrial production has increased by 9 per cent and exports have grown by 15.7 per cent.

With present excess capacity and unemployment, traditional stabilization policy would call for government measures to stimulate the economy and hence make use of the resources that would otherwise be idle to create goods and services that would otherwise be foregone. But Canadian authorities find themselves in the same quandary as governments in other relatively small countries that are highly dependent on international trade (e.g., Australia, Belgium, Holland and Sweden). First, there is little they can do through domestic measures to stimulate export demand. If they do stimulate domestic demand some of this will spill over into increased imports and aggravate balance of payments deficits that are already high. Further they risk getting into a position of capacity utilization that will limit their ability to compete in export markets when international demand picks up. Secondly, increased government deficits to stimulate the domestic economy may push up domestic interest rates and/or the foreign exchange rate which will depress business investment, housing and exports. Finally, stimulation may undercut domestic programs to reduce cost and price increases. It is certainly tough to be a Minister of Finance these days.

The projections prepared by the Council staff suggest that with the risks of continuing cost pressures after the ending of controls, it will be desirable to stimulate demand and employment growth rather carefully and that it may take several years to achieve acceptable unemployment and inflation targets. Though we foresee a modest recovery led mainly by exports in the next two years, with present policy settings the growth in GNP is expected to decelerate steadily as we move into the 1980s. Domestic capital spending will be sustained by the energy-related construction projects initiated in this period, but the stimulus will likely be localized. Employment is not expected to grow much faster than the labour force; as a result, unemployment is projected to remain high. On the inflation front, cost-push pressures still present in the domestic economy combined with projected relatively high inflation rates in other OECD countries are likely to subject Canadian prices to continuing upward pressures.

Longer-term Issues

Quite apart from these problems of cyclical economic performance which receive a lot of attention there are other issues which are longer-term challenges for the Canadian economy. So I want to shift your attention to a more distant time horizon by discussing the trends affecting the shape and structure of the Canadian economy. -The five issues I will mention are substantially interrelated and each will require considerable adaptability of perceptions and behaviour.

The first trend is that the potential rate of economic growth in Canada is likely to slow partly because population growth will slow and partly because the pattern of the demand seems likely to shift towards service activities where productivity improvements will be harder to achieve. The average age and the average level of skill in our labour force will, however, be higher. The Council has stressed this trend for some time so I won't belabour it today. The main implications are that Canadian wages will remain high by international standards while the hard core of unemployment should gradually fall. Canadian business should be aware of, and concerned with, this trend.

The second issue concerns our international trade. Our current account deficit is high and Canada's share of world exports has been declining steadily in recent years, particularly in more highly processed exports. We should anticipate increased competition from the other developed countries and especially the U.S. as a result of negotiated tariff reductions. We should also expect increased competition from developing countries because they will be desperately pressed by population growth and by food and fuel costs to sell more abroad. North American based multinational corporations will be helping them with the capital equipment and the marketing contacts needed to produce and sell standard technology products in world markets. We should expect too that Canadian imports of services from foreigners will continue to climb-whether in the form of tourist expenditures, business fees or interest payments.

In this longer-term perspective, we Canadians must choose the extent that we should earn our imports by exporting raw materials rather than manufactured goods or services and the extent that we should rely on foreign savings rather than domestic savings. These issues of international competitiveness and national identity are not yet sufficiently resolved in Canada. Canadian businessmen should be concerned about the trends in our balance of payments.

A key determinant of trends in international trade is, of course, our industry structure. To quote from Agenda for Co-operation, recently published by the federal government, "We have too many industries in which we are not competitive, too few firms which meet world standards of productivity. If we are to continue to grow at rates we all consider desirable we will have to shift resources from some existing industries to other industries, and from some firms to other firms." This could involve a redistribution of resources between manufacturing, resource industries and services, to reflect changing market opportunities and changing technologies. Planning for structural change must also recognize changing national objectives and public attitudes. There must be a better match between the jobs provided and the education, interests and expectations of the people involved. I am not a central planner; I believe in decentralized decision-making by the people directly concerned and I believe that the economic system should serve the population-not the reverse. Hence the pattern of incentives and the framework for private economic decisions should be realistic and clearly understood. We are only asking for trouble if we try to force a labour force educated for the nineteen eighties into an antiquated manufacturing sector or an obsolete industrial relations system.

Whatever the nature of Canadian business activity I am firmly convinced that much more attention will have to be given to its location. It does not make sense economically or socially to have a steady agglomeration of industry in the largest cities where there is a labour shortage while there are substantial pockets of unemployed and underemployed workers in other regions. In a recent study, Canada as a Conserver Society, the Science Council has made an eloquent plea that economic policy decisions and the price of output should reflect all of the costs concerned -both those that are external to the firm such as pollution or community dislocation as well as those that are internal to the firm. Nowhere, I think, is this principle more important than in the decisions about the location of plants and production. The true costs of failing to use available resources in our depressed regions are enormous when you take account of the waste of resources and the income maintenance payments in lieu of employment. Even then, transfer payments and handouts are no substitutes for the self-respect that comes with jobs in a work-oriented society. Let me repeat, I do not believe in elaborate industrial strategies or government control over the location of new plants. I do believe that the true costs of locating an additional plant in an area that is already congested should be recognized. Canadian businessmen should be concerned about the composition and location of our business activity.

The fourth basic issue that I want to raise briefly is the level and nature of investment. There is substantial agreement among observers that a relatively high level of investment will be required in Canada over the next five years to incorporate new technology and cut costs, to conserve energy, to develop new energy sources, to increase capacity and so on. Ours will surely continue to be a capital intensive economy. Sometimes, however, I wonder if capital may be too plentiful in Canada, in the sense that we don't always use it effectively. Over the last twenty years the average level of productivity in Japanese manufacturing improved from a level only half as high as that in Canada to a level that is equal to our own yet the capital stock in Japanese manufacturing is only 60 per cent of what we use. With the incentives and institutions we have to encourage saving and stimulate investment we sometimes end up with very poor output to capital ratios-and not just in the public sector. On the other hand, we may not be investing enough in some industries like tourism or public transportation. Canadian businessmen should be concerned about the adequacy and allocation of investment in this country.

The final long-term issue I want to discuss today is the 'existence of a built-in inflation bias. It is most intractable because it is poorly understood and surrounded by vast amounts of emotional rhetoric. The problem, as I see it, is essentially the following. Over the past three decades governments have gradually assumed responsibility for managing the overall level of demand in the national economy. The result of the continued application of this policy is that it is easy to raise prices but few prices ever fall. If there is excess capacity and unused resources the accepted strategy is to sit tight and hope for a more stimulative demand management policy which will improve activity and demand and bring the unused resources or unemployed people back into use. Professor Galbraith has argued that these demand management policies have provided a particular incentive for large businesses and labour units to develop and use their market power to avoid competitive behaviour during periods of slack activity. In the short-term full employment policies make a lot of sense, but in the long-term they create rigidities and cost-push tendencies that are very troublesome indeed.

If it is widely believed by all major groups in the economy that there is no need to accept a cut in their own real incomes in order to sell their output, each group will immediately attempt to pass on any price or cost increase. Accordingly, any external shock or adverse development which implies an inevitable drop in real income will set off a continuing round of price changes until the shock is finally absorbed by increases in production in the system or by certain weak or gullible groups that can't or don't protect themselves. The dramatic shift in purchasing power from oil users to oil producers was a shock that we have still not absorbed.

Please note this is not a tale of villains even though there is lots of opportunity for name calling and finger pointing. Businesses marking up their cost increases become "profiteers"; unions protecting their real incomes and anticipating price increases over the contract period are "greedy" and governments incurring deficits to create employment and maintain demand are "growing out of control". But of course all act according to their own interests and clearly perceived responsibilities; it is the role of unions to protect their members and it is perfectly normal for businessmen to maintain a healthy rate of return and we all expect government to assume the responsibility for job creation and to maintain high levels of activity. We have an economic structure which in the long term is inherently inflationary.

This diagnosis isn't new and some economists argue that it is not a particularly worrisome state of affairs so long as inflation in one country doesn't get out of line with the rate in its major trading partners. Nor is there any shortage of proposals to break out of this structural dilemma. But most of the solutions require businessmen to stop acting like business executives, union leaders to ignore the interests of their members and government leaders to tolerate much poorer economic performance. Let me offer some of my own views about how we should respond to these structural problems.

These issues are complex and interdependent, so I am really talking about the capacity of our society to respond to change. Based on recent experience, I have to admit that I am not very optimistic about the capacity of Canadian society to make necessary adjustments.

In the long-term perspective, Canada is a very fortunate country and Canadians have a relatively promising economic future provided they can maintain a capacity to cope with the problems of a prosperous but complex economy. It is also my view that we have in this country an unnecessarily large amount of distrust, confrontation, uncertainty and all-round "bad blood".

What can we do? We can and must understand our problems more clearly, complex though they be. We must recognize that the legitimate interests of different groups may conflict and must be reconciled through compromise. We must recognize that the basic problems facing us cannot be "solved" by government. I will elaborate just a bit on each of these statements.

My first suggestion simply reflects the view that it takes a lot of information, a lot of analysis and a lot of forward thinking to cope with a complex economy in a specialized and interdependent world. I guess that sounds like a plug for the long-term research and analysis by the Economic Council. I do believe in what we are doing; I think we should have even more understanding of longterm trends and structural alternatives. I only wish that people like yourselves were paying as much attention to how the economy should work in the period after the present controls and how to avoid controls next time the economy reaches full employment as you are to when the controls will end.

My second point is that we need better mechanisms for consultation in this country. By that I mean a lot of discussion, a lot of communication, between interest groups motivated by a willingness to understand divergent points of view. Let me admit frankly that whatever pride I feel in the Economic Council as a research body, our efforts to provide a forum for consultations between business and labour have met with disappointment. There have been new initiatives towards consultation in recent months by the CLC, by business and by governments. I hope they continue. I must say that I don't think a single tripartite body is the answer; partly because Canadian interest groups are not yet ready for the degree of delegation that it would require and partly because the concept does not recognize the pluralistic, federal diversity of the system we are dealing with. My own view is that Canada needs a variety of consultative groups. There could, for example, be one on energy matters, one on regional disparities, one on commercial policy, and so on. These consultative groups might bear some resemblance to royal commissions although the membership should be larger and should in most cases include government people.

We should not forget that a great deal of consultation already occurs on some issues and we should try to build on our successes. I think, for example, about the construction of northern gas pipelines where, thanks to private business and the regulatory process, there has been a good discussion of the basic issues. I wish that we had people like Justice Berger animating and organizing a discussion of the other questions I raised earlier, such as the extent we want to finance imports through the export of raw materials and how far we want to go in relying on foreign rather than domestic savings.

My third suggestion is that the longer-term issues we are dealing with are too complex to be left to government alone. Certainly there is a very important role for governments to provide information, to legislate incentives where needed, to facilitate adjustment by compensating those who will be injured by necessary changes, to negotiate with foreign governments and so on. But governments cannot pass laws that lack broad support (witness the efforts to reform the Competition Act) nor can they legislate the details of behaviour. Moreover there is some evidence that when government does intervene to regulate, there is a risk that these regulations will be used by dominant interest groups to protect themselves from competition and change. There are many requests that government should provide more leadership and a clearer definition of national goals, but think of the trauma whenever that "leadership" questions our cherished preconceptions. No, I am afraid that all of the major interest groups are going to have to shoulder some of the responsibility for ensuring that our economy works.

In summary, I would not want to minimize the seriousness of the current economic slowdown in the western countries. The waste of time and talent, particularly among our young people and in our most depressed regions, is frustrating and unacceptable. Yet the persistence of inflation even with this underutilization of our physical and human capital reminds us that our economy does not adjust and adapt smoothly. This leads me to conclude that we have basic conflicts both about objectives and about means in the Canadian economy.

The system is complex and interdependent. Interest groups have reasons for trying to protect themselves from competition, exploitation and technological change. Yet if we are going to maintain the dynamic adaptability which has been a source of Canadian prosperity and ensure that it serves broad national interests, all of us should be prepared to take a longer view. Nowhere is this shortsightedness clearer than in the declaration that "governments got us into controls, let governments get us out." You need only ask yourself who sets most of the wages and prices in Canada to realize the private sector had a big hand in getting the government into controls. I think it is in the interest of the private sector to help figure out how we can get enough flexibility to run this economy effectively after controls.

The appreciation of the audience was expressed by Col. R. H. Hilborn, M.V.O., M.B.E., C.D., a Past President of The Empire Club of Canada.

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The Canadian Economy in the Post-Control Era


The Economic Council of Canada. The fourteenth Annual Review to be published about a month after this address. A discussion of some of the major issues facing the Canadian economy over the next five years. Economic Performance and Outlook. Causes of high levels of unemployment. Consumer prices. Balance of payments deficit. Suggestions for the government. Projections. Longer-term Issues. Some trends affecting the shape and structure of the Canadian economy concerning the rate of economic growth, international trade, industry structure, location, the level and nature of investment, a built-in inflation bias. The capacity of our society to respond to these complex and interdependent issues as they change. Suggestions for change. A minimization of the seriousness of the current economic slowdown in the western countries.