Canada and the Anti-Inflation Program—One Year Later

Let's be frank. The psychological foundations of the controls program were thin, shaky. . . weak from the start.

Why? The situation, last October, was quite confusing!

Prices were going up, some without apparent justification, in anticipation of cost increases; other increases were quite justified . . . but not often perceived as such. Governments, federal and provincial, it was generally believed, were spending more than the economy could afford but could most often relate this spending to the requests of the public. But no country has ever had a "big inflation" without the "co-operation" of governments and the central bank!

Wage demands were becoming more and more detached from the realities of economic growth, productivity, unemployment and international competitiveness, but were made with an eye on the higher business profits of recent years, which in turn were held by the business community to be "illusory" because of the effects of inflation on business accounts.

Our political leaders had failed in 1974-75 to develop a consensus on voluntary controls. The public obviously did not take the problem seriously.

The federal government party had often said or implied that inflation would "go away", and had opposed mandatory controls just a few months before.

Most professional economists and commentators believed that, with the United States coming out of its recession into a moderate recovery without new inflationary pressure, things would straighten themselves in Canada, in due course, soon.

Most Canadians had not yet personally been bloodied by inflation. By Argentinian or British standards our rates were not too bad. Decisions were taken that managed to postpone the agony.

It was indeed a mixed bag of conditioning factors!

The debate at the time was mostly on who was most guilty for "stagflation"--the governments, labour, businessmen, "the others", and not on inflation, its causes, its effects and its remedies.

The thought that most of us could be collectively responsible in a diversity of ways for the malaise was not strongly expressed. Consequently, the precise reasons for price and income controls and how they fitted into the overall economic scene had never really "soaked into" the national conscience. Consequently, when controls were put on, there was no great surge of national will, energy and dedication, as one expects in moments of recognized emergency.

For fear of becoming the sacrificial lamb, official labour opposed controls; for a diversity of reasons, the opposition parties voted against the Act of Parliament creating them; some provinces delayed their entry into the program; businessmen approved of them mostly because they had lost control over their wage negotiations and were hoping that governments would be forced to reduce their expenditures.

The general public mood was that "something had to be done" but the why, the what, the by whom were uncertain. Only the "to whom" was clear enough: it was "to somebody else, not me." The "why me?" point of view of the C.L.C. reflected pretty well the feeling of nearly all of us.

All that is understandable and explicable in historical and psychological terms, but it is nevertheless regrettable because fighting inflation together would have been good for the program, obviously, but also for the national psyche.

Anyway, the government acted and many Canadians have made it clear that they don't like the action taken. But what alternative do they have in mind?

Would they prefer the exclusive use of fiscal and monetary policies? Would they be happier with that approach, bearing in mind that it would have loaded the burden of the battle against inflation so much on some people and so little on others? The sufferers would include, first and foremost, the additional unemployed. They would also include those whose incomes would have slowed down or even fallen while others in stronger positions would have been able to protect themselves from the pressures of a weaker economy. A temporary controls program is intended to keep to a minimum such unfairness in the impact of slowing increases in incomes and prices. Controls reduce or indeed eliminate the heavier sacrifices that would otherwise be imposed in a pure demand-management attack on inflation.

And a business audience, which may well find it difficult to accept the temporary limitation on profit growth by regulations, should not forget the severe declines in profits that can occur if sharply restrictive fiscal and monetary policy are alone relied on to squeeze inflation out of the system.

Even with an understanding of that point, people do not like controls and attack them from all sides. Part of the attack has been about the way in which controls were introduced and have been administered. I admit freely that the job has not been done perfectly. We have made mistakes. The need to change the price and profit rules has added to uncertainty and annoyance. The new rules are better. I wish we had had them in the first place.

It has been quite a year at the A.I.B.!

But what were the consequences of this shaky start, of this imperfect implementation? Can the program succeed without positive general support?

Because Canadians "backed" into controls--"defensive", "suspicious", slightly "confused and disoriented", as Judith Maxwell commented in a recent essay, Searching for a New Sense of Value, most of them, singly and as members of interest and pressure groups, have been and are still ambivalent about them.

Ambivalence is defined by my dictionary as "simultaneous attraction towards and repulsion from At object, a person, an action." Remember Doctor Freud and the love-hate complex! The fact is that Canadians can be and are, in good faith, with a good conscience, for and against the anti-inflation program, the price and income controls in particular. They can, like sick people--and inflation is a sickness of the collective body--want recovery and hate the remedy, both hate the doctor and love him if he cures them and if they can put the bill on the health plan! They can, personally or via their representatives, accuse the program of being at the same time too soft and too harsh, too soft on others and too harsh on them.

Eric Nicol, the humorist, has described this mood of ambivalence very well (Vancouver Province, Sept. 25, 1976):

I too have been hit by (an A.I.B. wage) rollback. You never think that it can happen to you .... At the moment of impact it is very difficult to believe that what the A.I.B. has done to you is for the good of Canada .... Because it is inflation we are fighting, rather than Adolf Hitler, the sacrifice evokes a two finger salute not found in military manuals .... I wanted to exempt myself from the war against inflation on religious grounds. The A.I.B. violated my belief in the Almighty Buck.

The country is full of Eric Nicols! I meet them every day, on the street, in planes, in my office. They are not without sympathy: "You have a lousy job . . . I wouldn't take it . . . the Board is hurting me . . . look, here is my blood . . . but I agree, it was necessary. Something had to be done!"

Groups react the same way. Ambivalence is at the root of the attitude of official labour. The Canadian Labour Congress can't lose. If the program fails: "We told you so." If it succeeds: "It was because of our constant opposition that it was half decent." In the meantime most labour leaders, after exercising pressure on the A.I.B. by way of requests for reviews, references to the administrator or to the cabinet, occasional strikes, implement the recommendations of the A.I.B. or the orders of the administrator. If inflation goes down, they will be justified; if it doesn't, they'll be justified in asking for the reopening of agreements, on the basis that circumstances will have changed.

In Britain, the T.U.C. has recently, now that it is clear that the alternative spells disaster for all in the U.K., taken a much more positive view of controls! Last June 16, Mr. Norman Willis, Assistant General Secretary, declared:

The policy before this Congress is a demanding one; for some it once again means short-term sacrifices. But what we have seen in these last few weeks is a growing reaffirmation by our Movement that making these short-term sacrifices is much more sensible than suffering inflation and unemployment on a scale beyond all our experience ....

The policy did something even more important than the figures can yet show directly. It broke through the vicious circle of inflationary attitudes, in which people quite understandably based their demands on expectations of a higher and higher rate of inflation, thereby often contributing to the very process they were seeking to protect themselves against.

Ambivalence is also at the root of the attitude of official business, for example, of the Chamber of Commerce. They too can't lose. In its last resolution, the Chamber says "We cannot continue to support the program, as currently structured." It goes on: "We could support it if it included three points: 1. The burden of fighting inflation should be borne more evenly by business, labour and government. 2. Investment should be encouraged. 3. Government, at all levels, should reduce its share of the national income." It adds: "the prices and incomes program should be lifted as quickly as possible." And I'm told that the members were advised to comply with the Regulations.

I could generalize. Official business supported the program at the beginning but essentially as a way of taming the "eccentricities" of labour and government.

After the June draft changes were introduced to eliminate "inequities" among companies and to ensure the degree of restraint originally contemplated by the government, business decided to show its dissatisfaction and impatience. It, consciously or not, developed a number of themes:

- "The rules are still too complex." (Though they kept asking for the legal precisions needed to prevent arbitrariness.)

- "By not supporting the program, labour is getting a better deal." (There has been no change in the basic compensation rules and they are being firmly administered as you will see in the Annual Report.)

- "The rules have changed from pricing to profit rules." (The original rules were also profit rules and so were they in the U.S. at the time of controls.)

- "The rules are hurting productivity." (Little doubt about that, as a general proposition, though the Chairman of Imasco could declare: "We created and intensified internal controls within our divisions. We notified suppliers that we would expect them to comply with the government's guidelines. We established a committee of senior executives to review all cost increases. When these could not be strictly justified, we sought alternate sources of supply. Through it all, though our costs inevitably increased to some degree, we were generally successful in absorbing them internally." And they're helping in many other ways too.)

- "The rules are hurting investments." (They are affecting the business climate for future investments, and that is why "investment credits" have been included in the new rules to counter the effect. Let's also say that a slowdown of investments in 1976 had been predicted before October 1975; partly due to over-capacity and the fear of inflation!)

- "The economic climate is better in the U.S.A." (Possibly, at this particular moment . . . though a leading Canadian businessman could write: "Canada is a far superior choice. Corporation tax averages 40% here for manufacturing, with a two-year write off on new equipment, vs. a 52 % rate and a ten-year write off in the United States. That probably means a return on capital one third higher in Canada. Too much government in Canada? Yes, but the U.S. is no better." Rates of capital formation in Canada are at present 13.6% higher than they were in 1973, while they are 12.3% lower in the U.S.A.)

- "The government doesn't really intend to get out of controls." (Notwithstanding official statements to the opposite, notwithstanding the Supreme Court decision which is based on their temporary nature. And the Prime Minister has just repeated his commitment to abolish them before the end of 1978. )

Again, what is the alternative?

Having backed into controls, being ambivalent about them, insufficient attention, I think, was given by business and labour leaders, by the public at large, to the very nature and value of the program.

The White Paper was unfortunately not read as intensely by Canadians as Mao's little red book of "Quotations" by the Chinese. But then there were fewer copies! Yet it is an important expression of political and economic objectives. As a former professor and practitioner of politics, it captivated me!

It makes essentially four points:

- The anti-inflation program is to be "global" (my wording), is to encompass monetary policy, fiscal policy (including government expenditures), structural policies and, in fourth position only, as it should be, being only a complement to the others, temporary price and income controls. All four policies would be run in parallel. The Chamber of Commerce writes: "The efforts being made by governments to curtail the rate of growth in public expenditures are welcome, (though) still more needs to be done."

The program, the price and income aspect in particular, is to be implemented in co-ordination by a variety of instruments--the federal cabinet, federal regulatory agencies, and the Anti-Inflation Board; the provincial cabinets, provincial regulatory agencies, provincial anti-inflation agencies (in Quebec and Saskatchewan), each instrument being mandated to apply the guidelines in its own area of jurisdiction. That was done in respect for the permanent constitutional structures of Canadian federalism. With some possible exaggerations, some delays, some lack of public justification for justified increases, for example in government services, this approach has generally been followed.

The program, the price and income aspect of it in particular, was meant to be gradual, in order to minimize the disadvantages of what is referred to as "rough justice". That is why there was to be no freeze at the beginning, either for prices or for incomes; that is why there was some flexibility in allowable wage increases, for example to protect "historical relationships"; that is why recognition is given to the importance of investments. All this would have been treated differently had the program been given a shorter duration.

The program, specially the price and income policy, was to be balanced. Controls would help prevent the extreme sacrifice that would otherwise have to be made by some. Everybody was to make a contribution to the "Attack on Inflation"--coupon clippers, professionals, white collar workers, blue collar workers, bankers, shoppers. The regulations and their administration by the A.I.B. reflect the objective of fairness. They are designed to permit the maintenance of the shares of profits and labour income in the G.N.P. They recognize the need to maintain relationships between various groups in the work force, subject only to the upper limit on income increases for the better paid. That upper limit does not seem to be an unreasonable price to be paid in return for a reduction of inflation to 8%,6%,4%.

So this was from the start a good anti-inflation program. It could work; it has worked well, unexpectedly well, in the first year.

I am convinced that the program is effective and fair. If I am right, why do so many people not share that view? Most people can be convinced by a reasonable presentation of the facts. Ergo, we have failed to convey the facts! We must do better! Please help us! There may still be time. As a matter of fact there must be a better understanding of it in the coming year if we are to "control", and later "decontrol" and "post-control" efficiently.

Because of the original reluctance to enter into it, of the ambivalence towards it, of the lack of understanding of it, of the mistakes made in implementing it and publicizing it, the prevailing public attitude to the program, to the price and income policy in particular, has been one of skepticism, varying from benevolent to belligerant.

It seems, to me at least, that anybody can attack the program and get away with it! The only people willing to give that person "a run for his money" are five or six members of the cabinet, the A.I.B. and staff, a dozen or so economists and economic commentators, half a dozen editorialists.

The same arguments are made over and over again.

"Controls don't work," says the president of G.M. the day before he announces a holdback on the prices of his 1977 models! And the media concentrate not on the fact that prices would be going up in the U.S. but on the fact that cars would be one foot shorter!

"The compensation decisions of the Board are confused." But the very application of the rules leads to decisions of 10 %, 12 %, 15 %, 20 % increases. Some people say, "The A.I.B. has granted a 20% increase," as if we had originated the wage agreement!

"The A.I.B. controls wages but not prices." But most companies live within their margins, and a hundred companies have been asked to dispose of excess revenues. Among them are G.M., General Foods, etc., as has been made known to the public.

"The A.I.B. has produced few tangible benefits to consumers," declares the Consumers Association, notwithstanding the decline of inflation from 10.6 % to 6.5 %.

"The A.I.B. has no effect on the price of food." But we have control jurisdiction from the farm gate and from the border to the consumers, representing 35, 50, 60% of the "final price", and there have been announced holdbacks of "excess revenue" from food companies such as General Foods and Monarch.

"The A.I.B. has a huge bureaucracy of well paid civil servants." We have often demonstrated that this is not so, and we have a number of employees from the private sector and from labour unions who are not better paid here than they were in their previous jobs.

"Let's get rid of the A.I.B." All through the year when the C.P.I. went up it was because "the A.I.P. and the A.I.B. were a failure." When it went down, "the A.I.P. and A.I.B. had nothing to do with it."

Not believing in it, the media, with some exceptions, have refrained from assigning full time reporters to the program, and have often commentated on it with declared skepticism, always looking for "la bete noire". I must admit though that the quantity of coverage has been extremely good!

The reluctance, the ambivalence, the lack of understanding, the skepticism lead quite naturally to the temptation of getting out of controls.

The temptation is here. Every inkling of success brings with it a call for the termination of the program. Strangely enough so did every inkling of lack of success earlier on.

It's hard to keep on going to church when you never had the faith! It's difficult to stay "on", "with it", "hot" for three years of controls when the reasons why they were put on in the first place are not accepted or understood, when leaders are either asking for their immediate withdrawal or seem to be wavering on their continuation until the job is done.

Mr. Macdonald has accurately and forcefully described what might be the effect of premature withdrawal: "We have made a good start. But if any of us, individuals, corporations, or governments, were to relax our co-operative efforts to win the battle against inflation, we would run the risk of prices accelerating once again. All our progress to date would be squandered."

Let them accomplish their task before removing them. It takes time for "the actual role of inflation to become the expected rate of inflation". The evidence from the U.S. experience suggests that expectations lag significantly behind the actual rate of inflation. Why? Judith Maxwell says: "One of the many weapons in the battle against inflation is psychology. If the government declares the battle over before everyone is persuaded that prices have stabilized and then some people in the community attempt to make a big gain in their wage or their price, the chances are that the battle will be lost because inflation expectations will be triggered again."

I have described the attitude of the population, of the interest groups in particular, vis-a-vis the A.I.P. and the A.I.B. as reluctant, ambivalent, lacking understanding, skeptical, impatient. I am not saying that there is no justification for that collective mood. Is that attitude so bad that it can prevent the success of the program?

I think that the program can succeed with limited open support, with a sort of a pact of friendship and solidarity with the public, a pact of non-aggression with most interest groups, a pact of contained warfare with labour. As a matter of fact, it is succeeding, admittedly with the support of providence by way of good prices at the farm and at the border! The cost of living is coming down--at annual rates 6.5 in September, closer to 6% than to 7% expected next month.

At this point one must be reminded of the two main objectives of the price and income policy: (a) to provide a temporary framework for decision-making in prices and incomes, in order to counter the expectation of more inflation; (b) to provide a breathing period for substantial changes in attitudes, techniques and institutions necessary to prevent a return to "rampant inflation".

It appears to me that with the present collective Psychology:

1. Canadians can reduce inflation itself to the objectives of 8 % , 6 % , 4 % in three years, though the possibility of a bubble after the end of the program has not yet been removed.
2. The temporary framework appears generally good enough for the duration of the program.
3. Not enough has been done yet by way of bringing about "structural policies" and the needed changes "in attitudes, techniques and institutions" still have to be better defined and collectively felt. Here I agree with the Chamber of Commerce: "The underlying causes of inflation remain and effective solutions are still required."

In other words, the present mood is good enough, in my estimation, only for half the job. For the other, and toughest, part of the exercise, we need psychological changes, changes of attitudes towards the restraint program itself.

Governments, at all levels, must display much stronger dedication, competence, consistency, staying power, which, in my view, would also help them regain public confidence, an essential prerequisite of ultimate success. Businessmen must assume their full responsibility, do some of the things they talk about in their speeches--explain and justify their beliefs, implement their noble ideas about collective bargaining, profit sharing, co-participation, research and marketing. Official labour, after its October 14 "show of strength", must show greater flexibility, willingness to compromise. Labour leaders can't ask for "a role in government" and then object to everything that governments, even socialist ones, do.

The public at large needs to get involved and to support these efforts. Otherwise, I repeat, the job will remain only half done.

The appreciation of the audience was expressed by Dr. H. Ian Macdonald, a Past President of The Empire Club of Canada.