The Economy Enters a New Decade

MR. MACDONALD:

When a small group of leading citizens met at Webb's Restaurant on November 18th, 1903, the outcome was the foundation of the Empire Club of Canada. The founding of this Club was based on a concern that a strong core of British Unity should be retained in the life of this country. Although the records are unclear, it is safe to presume from the history of the day that the Britain tradition was to be cherished, not only for its own distinctive value, but as an important element in Canada's national identity.

The British Empire has virtually completed its metamorphosis to Commonwealth, inspiring in its method and instructive in its lessons to the troubled world of today. The Canadian identity has also broadened and deepened into a rich mosaic of determined and self-determining people. What will that identity become and what will shape it? Presumably, the gentlemen in Webb's Restaurant were conscious of the magnetic attraction to the south, just as we are today. That is one reason why we are devoting a large part of our programme this year to the contemplation of those matters which will contribute to a richer Canadian identity. In that manner, I believe we are carrying forward the historic objectives of this Club, in a contemporary setting.

For the same reasons, we were particularly anxious that Dr. Arthur Smith, the distinguished Chairman of the Economic Council of Canada, should be our first speaker in 1970. We are entering a decade that could well be vital, not only for Confederation, but also for the Canadian economy and the quality of life sustained by it. Before we are fully launched in a new cycle of the urgent taking precedence over the important, we have an opportunity in this first week of the new decade to assess the long-term potential of Canada and the policies prerequisite to its fulfilment. In the long run, we may all be dead as Lord Keynes suggested but, in the short run, we suffer from anxiety neuroses in matters of the economy. The corps de ballet of prices, production, employment, profits, stock values, bond prices and interest rates dances with such frenzy that we forget the prima ballerina waiting to come on stage.

To the eternal credit of Arthur Smith, his predecessor John Deutsch, and the members of the Economic Council of Canada, they have stressed the long-term problems and opportunities of the Canadian economy and appealed to our higher motives in terms of the social objectives of economic policy. This has not been an easy task; it never is and never will be, but we would be the poorer without it.

The story is told of the three professional men debating which profession was the oldest, medicine, engineering, or economics. The doctor claimed that medicine must be the oldest, because the doctor it was who fashioned Eve out of Adam's rib and, without that notable clinical performance, there would be no history of mankind. The engineer replied, however, that, before that event could take place, someone had to bring order out of chaos. That was the job of the engineer and he must have preceded the doctor. But the economist fixed a cold eye on both and said: "I want to remind you who created the chaos in the first place."

I realize that such an insinuation would be an insult to our speaker from anyone but another professional economist. However, Arthur Smith demonstrated a very orderly progression to the top of his profession, through undergraduate studies at McMaster University and a doctorate at Harvard. His career has been nothing if not varied: a Teaching Fellow at Harvard, an Economist from 1950-54 with the Federal Reserve Bank of New York, the Canadian Economist for the National Industrial Conference Board, and several key positions with the Private Planning Association of Canada.

From 1963-67, he was a Director of the Economic Council of Canada and became Chairman in 1967 when Dr. Deutsch was appointed Principal of Queen's University. His first Annual Review spoke of poverty and social purpose in Canada, revealing a concern that all Canadians should share in the rich promise of this land. His most recent Annual Review described some of the hard discipline that will be required to manage our economy and to exploit its great potential. If we are not equal to the task, the fault will not be Arthur Smith's. I am happy to invite you, Sir, to take us, now, on a journey along the route that should be followed by the Canadian economy "into a new decade".

DR. SMITH:

Mr. Chairman, Mr. Minister, head table guests and gentlemen. It is a great honour to have been invited to speak to you here today and when your Chairman invited me to come, I accepted with pleasure.

But I recall that on the last occasion on which I was invited to speak to this Club, now a little over seven years ago, I talked about a subject which subsequently had some consequences for me! And I thought perhaps I should be more careful today. On that occasion I spoke about four or five weeks after the government of the day had indicated in a speech from the Throne that it intended to set up a new institution in Canada to be called the National Economic Development Board. I thought it might not be inappropriate on that occasion to talk about some of the issues arising from this proposal. I entitled my remarks then, "Some Questions About Economic Planning for Canada." My intention, as I stated it at the time, was to promote some public discussion and dialogue about what kind of a role such a new institution might play in this country. I had little appreciation of the fact that within a period of about ten months, those remarks were going to be used as part of a persuasion to encourage me to accept an appointment to just such a new institution, the Economic Council of Canada, when it was established in 1963. So I shall be very cautious in what I say today.

At the beginning of a new decade there is, I think, a great temptation on the part of all of us to escape from the horizons of our day-today tasks and concerns and to think a little bit about the future. Today I am going to succumb to that temptation. One of the remarkable things about the developments of the past quarter century--one of the things that distinguishes it, I think most profoundly, from the preceding quarter century--is that in many new and different kinds of ways, and in many different places in our society, we have come to think more and more about the future.

Over the preceding period from the First World War to the Second World War, we went through a whole series of pressures and crises and dislocations of various kinds preoccupations with the problems of the First World War, then with some of the problems of the turbulent twenties, then with the grim Depression problems of the thirties, and then with a new round of problems in war again.

We went through that sort of period in a situation in which the great weight of attention was focused almost continually on current issues. I think this is perhaps rather well summed up in a little story that is told about Lord Beaverbrook when he was in charge of aviation production in the British Wartime Cabinet. He apparently arrived at his office every morning and, after assembling his senior staff, invariably started off the discussion with the same question: "Gentlemen, what is the bottleneck this morning?" It is said that on one such occasion one of his staff members truthfully and promptly replied: "Bottles, sir."

This was a period in which there were no conferences on the future, little written on the future, and very little study of the future. There was a constant preoccupation with problems as they arose or, perhaps more typically, hectic efforts to try and cope with problems after they had arisen. Among the more forward looking initiatives that appeared from time to time there was a very high death rate, as the urgencies of the moment regularly became superimposed on efforts to look further forward. It was, in other words, a period in which there was very little development of thought, information or ideas relating to the future.

Then, just near the end of the Second World War, the scene suddenly changed. It changed very dramatically within a few years. In particular, in Canada and in the United States and the United Kingdom, there was a breakout of concern about post-war reconstruction, about certain kinds of changes that might help to create in the post-war period a new and different kind of world in which the stagnation and dislocation problems of depression could be averted and avoided. New hopes and new efforts were directed to the possibilities not only for repairing wartime damages and for facilitating adjustments from wartime to peace-time conditions, but also for creating new structures and new policies to facilitate sustained domestic growth at high employment, and to foster both strong growth in world trade and the development of a stable international monetary and payments system. Some of the best minds in the world were encouraged to design a number of new kinds of institutions, new bases for policies, and new ways of approaching problems, with a view to establishing a radically different environment in which the dangers of returning to the difficulties and problems that had been experienced before the War would be minimized.

In the development of these new institutions and policies, Canada played a very important, indeed in some respects a pioneering role. This is a role which we can be very proud, of, as Canadians--a role which has perhaps not been fully and adequately recognized by most Canadians. The hallmark of these remarkable developments a quarter of a century ago was the emergence of future-oriented policy planning.

In the past twenty-five years, something like a revolution has taken place in the field of "looking ahead"--perhaps particularly in the field of "economic looking ahead". It used to be considered to be the main task of economists to explain what had happened and why it had happened. But increasingly it has become their responsibility--increasingly they have been expected--to foretell what would happen and why it might happen, or what should happen and how it could be brought about.

I have already referred briefly to that remarkable period at the end of the War and the early post-war period when efforts were made to "look ahead" over a number of years into the longer-term future and to try to create a new basis for good performance in our domestic economic system and in the international economy.

About the same time, in the late nineteen-forties, we became increasingly interested in questions of economic stability and in questions relating to shorter-term developments in the economy, within business cycles. Along with that came the major development, initially largely in the Department of Reconstruction, of assessing short-term business trends. It is a little-known fact that, as part of this development, the first econometric model for forecasting purposes was created in Canada in 1947, and that this model is still in operation today. It is now in the Department of Finance. It is the oldest continuously operating forecasting model in the world. More generally, we devoted growing analytical resources to shorter-term assessment of recent business conditions and the short-term business outlook. Economics has greatly improved its performance in this field over the past two decades. We have had enormous improvements in information and data in the development of new foreshadowing statistics of various kinds, in technical developments, in the development of expertise and skilled manpower in this field in many parts of our economy, both in the private sector of the economy and in government.

Then, in the mid-nineteen-fifties we had another outstanding development in "looking ahead" in Canada. A Royal Commission was appointed on Canada's Economic Prospects. This Commission produced a long-term view of the future development of the Canadian economy. There was a great deal of value in the final report of that Commission and in the numerous accompanying studies--a great deal that is valuable and that was never as fully exploited as it might have been. Perhaps one of the reasons is that unfortunately this work was completed (the final report appeared in 1957) just on the threshold of a rather extended period of slack and poor performance in the North American economy. In such periods attention inevitably tends to get focused on the problems of the moment. The longer-term projections of this Commission were rather less relevant to many of the concerns and problems at that time. Yet that report stands--again not merely in the Canadian historical context but in the world context--as an outstanding venture, an outstanding contribution in looking to the future.

Against the background of the rather poor performance in our economy in the late nineteen-fifties and the early nineteen-sixties, and of increasing frustrations about how to get improved performance in our economic system, another new venture in looking ahead emerged in the early 1960's in the form of the Economic Council of Canada. This body was established to take a look into the medium- and longer-term future with a view to clarify some of the goals and objectives which we, as Canadians, ought to set for ourselves, as well as to assess how the economy was progressing towards goals of these kinds and to consider what kinds of decisions and policies would facilitate the maintenance of sustained progress towards our basic economic and social goals.

There are many other illustrations of "looking ahead" which might be cited. Among these are efforts to develop what might broadly be termed "private planning". We have, in fact, had a very remarkable development in Canadian business in looking ahead in many different ways, in examining market prospects and possibilities, in considering investment plans for the future, in developing (more recently) increased interest and attention to manpower planning, to management development, and to research and development activities. Similarly, as governments have grown and as a great many new programmes and activities have developed, an increasing amount of looking ahead and planning has been introduced in various ways within government, too.

This increasing orientation to the future has come to affect almost every aspect of our lives and of our society, and I would suspect that as we move through the nineteen-seventies, we will find ourselves giving increasing attention to more systematic, more comprehensive, more sophisticated means of looking into the future and of preparing and planning for the future. In this context, I would stress particularly, certainly in regard to the field of economics, that concern about medium- and longer-term future is a crucial matter. One of the most important lessons we have learned over the post-war period is that once major economic problems develop--once major shortfalls from high standards of performance occur, for whatever reason--there are usually no quick or easy solutions to these problems.

When higher unemployment developed in North America at the end of the nineteen-fifties and built up to very high levels in Canada by 1960-61, it took several years to reduce these high levels of unemployment significantly. Even by 1963, after a couple of years of significant expansion of the economy, we still had five and a half per cent of unemployment, as you may recall. Similarly, in the last few years, we have seen the emergence of substantial and persistent price and cost increases. These, too, have proved to be very difficult to slow down even with very powerful demand restraint policies that we have had operating in Canada. To take a completely different field, when housing starts fell back in 1966 and housing completions in 1967, against the background of very rapidly growing households in Canada, we developed housing shortages which created imbalances and difficulties which have persisted even up to the present time in the housing field. There are many more illustrations that could be cited in other fields and I think there are a whole series of important lessons that could be learned from these experiences--our frequent failure to grasp the magnitude and severity of emerging economic problems until they have become serious; the fact that most policies for coping with such problems, given the nature and complexity of our economy and social system, take a considerable length of time to produce significant results; the fact that the most effective policies for dealing with any serious set of economic problems are, therefore, not likely to be those currently in operation or even recently implemented but those introduced much earlier; and the fact that far too much energy and attention tends to get focused on methods for dealing with serious problems after they have arisen, in relation to the energy and resources devoted to analytical and advisory mechanisms for anticipating potential problems before they arise. We are still very much at a stage where the preponderance of effort is in searching for cures rather than in finding effective means for preventing problems from arising.

Despite the increased attention to looking forward to future economic developments, which I have already stressed, there is a need for still more comprehensive and systematic looking forward as a basis for policy planning both in the government and the private sectors of the economy. Moreover, it is clear that we need to find, especially in today's world, extraordinary wide choices available to us (in relation to the limited means), more appropriate mechanisms for reaching a broad and intelligent consensus in our society about our future needs and objectives, together with stronger and more explicit commitment generally by decision makers to the goals which emerge from the social consensus.

There is an annual cycle in many aspects of human affairs and we are now in that season of the year when a great deal of attention typically tends to get focused on the shorter-term economic outlook for the coming year. We are now in one of those periods of economic troubles and uncertainties in which there is a widespread tendency to concentrate a very large part of our attention on short-term problems. Yet it is precisely in these kinds of conditions that it is more than usually important to take a good look further ahead in order to minimize the danger that short term and ad hoc solutions to deal with current problems may lead to new problems or to impede further progress towards good performance.

We are entering the nineteen-seventies with an economy that is certainly in much better shape than we entered the nineteen-sixties, but we have a very wide array of perplexing questions: What are the causes of, and appropriate measures for dealing with, the large, widespread and persistent price and cost increases about which so many Canadians are concerned? Will the slower productivity growth, the slower employment growth and the more moderate advances in production and average real living standards that emerged in 1969, persist in 1970? How can we ameliorate the disturbed capital and credit market conditions and avoid threatened imbalance in investment, when initial indications are that we may have too few resources going to housing and perhaps too much to business investment in 1970? How can we deal with serious poverty and regional imbalance problems which slower growth is tending to exacerbate? What may be the implications for our economy of an international environment which in some respects may be much less favourable than during much of the 1960's as a basis for good performance here?

I think it is hardly surprising that these kinds of questions are being asked and that a lot of attention is being focused on these sorts of questions. I would think it would hardly be surprising if over the course of the next few weeks and months we had even more attention focused on some of these problems because it is by no means inconceivable that during the course of the coming year we may have some aspects of economic performance which may fall even further short of the high standards to which Canadians aspire in our modern system.

There is one brief comment on the current scene that I would make--namely, that I think it is surprising that so much of the current debate on the short term outlook is focused on the question whether the Canadian economy or the North American economy will have a recession in 1970. Whether business trends follow a pattern that can, with the aid of technical measurements, be determined to be a recession or not, is, I think, not so important. As Arthur Okun, the former chairman of the U.S. Council of Economic Advisors, said not long ago: "We still suffer from 'business cycleitis"'--or what he called, a "recession syndrome", in which people approach questions of performance of the economy with the rather simplistic view that expansion is good and recession is bad. In reality the situation is rather different especially now when in both the United States and Canada we are in a situation in which we can visualize a very high potential growth rate in our economy, in which we have a very rapidly expanding capacity over the medium-term future to grow. In these circumstances the key question really becomes not whether we are going to have a recession or not but how large a gap may emerge between the actual output in the system and the potential output in the system--how large that gap may become and how persistent it may be.

We found quite clearly at the beginning of the nineteen sixties when a large and persistent gap opened between actual and potential output, that a number of significant imbalances emerged in our system which we could not cope with easily. They posed very difficult problems for us. The tremendous investment boom from 1963 to 1966, for example--spawned because of a lack of adequate investment in the late nineteen-fifties and early nineteen-sixties--posed some very serious problems and difficulties, including very harsh price and cost pressures and distortions in our system.

The crucial question on which we should keep our eyes focused in the coming year is this gap, the gap between actual and potential output. That gap has been tending to widen in 1969 and it threatens to widen somewhat further in 1970. It is this concept of potential output--and the question of how to assess the performance of the economy in relation to potential output--that has been, I think, one of the major contributions which the Economic Council has sought to make since it was established six years ago.

Let me touch very briefly on some of the highlights of the Council's new look at Canada's economic future in the 1970's, and then raise a few questions that I think we are going to find ourselves giving a lot of thought to in the coming decade.

The Council, in taking a new look to the mid-1970's in its last review, concluded that we are in a period in which the economy has a very high potential growth rate--very high by historical standards in Canada, and very high by international standards in today's world. We anticipated that on the average from 1967 to 1975 the economy could grow at about five and one-half per cent per year in real terms.

We discussed a number of factors that were involved in that rate and I might say it was prepared not on the basis of some far-reaching assumptions about how to maximize, at almost all costs, the growth capacities of the economy, but on the basis of some moderate and reasonable assumptions (largely based on postwar experience). One of the most important elements is that we are still in a period when our employment--our potential employment--growth can be very high. Over the whole period from 1965 to 1980 we will have, as estimated by the Council, an increase in population of less than 30%, but a much more rapid growth in our labour force and in employment--of the order of nearly 50%, as a great surge of young people from the earlier high birth rates in the postwar period, move into the labour force age groups.

We also took a look at the possible patterns of demand over this period to 1975 and concluded that here, too, most categories of demand--of consumption, of business investment, of government expenditures, of housing, of exports and imports--could advance at very high rates. Obviously what happens internationally will have a crucial bearing on our capacity to achieve growth rates of these magnitudes. But we will also require a high order of good economic decision-making and economic management in both the private and government sectors of our economy especially if we are to achieve high growth potentials along with reasonable price stability, balance of payments viability and a wide sharing of the fruits of economic progress among all Canadians.

The further development of the Canadian economy will, moreover, be taking place in a period in which very dynamic changes will be occurring in our system. Let me refer only very briefly to one set of these having to do with our population--population changes that will inevitably have very far-reaching effects on the structure of our system. In the nineteen-fifties, we had a growth of one million four hundred thousand children in Canada of five to fourteen years of age; in the nineteen-sixties we had less than half that amount--six hundred and fifty thousand. In the nineteen-seventies we expect, for the five-to-fourteen age group, a decline of seventy thousand in number. At the same time, consider the contrast with the twenty-to-twenty-nine age group. In the nineteen-fifties there was a relatively slow growth in this group--of one hundred and seventy-five thousand for the whole decade. In the nineteen-sixties this was rapidly stepped up to eight hundred and thirty thousand, and for the nineteen-seventies a further increase to one and a quarter million. Then, look at the forty-to-forty-four age group--the crucial group of mature, experienced workers and often the group from which supervisory and managerial talent is drawn in a significant way--a fifty percent increase in the nineteen-fifties and nineteen-sixties, but no change at all in the nineteen-seventies. The elderly group, of sixty-five and over, increased by about three hundred thousand in the nineteen-fifties and again in the nineteen-sixties; but there will be one and a half times this increase in the nineteens-eventies--four hundred and fifty thousand.

Also, consider the dramatic changes that are occurring in education--changes which would well have a profound influence in the future course of development of Canada. In 1950 we still had less than half of our fourteen-to-seventeen year old children in school in this country; by 1960 we had moved up very rapidly to sixty-seven per cent; for this year, for 1970, it is estimated that we will have ninety-two percent. We have, in other words, achieved virtually universal education for our younger teen-agers. In the case of the enrolment ratios for the eighteen-to-twenty-four enrolment group, we had only six per cent in 1950 (not much more than one in twenty); but one in ten by 1960 and one in five by 1970. The Council has estimated that one in three of eighteen to twenty-four age group will be enrolled in post-secondary institutions by 1980.

Let me turn, finally, to some of the basic issues to which I think we will need to give much greater attention in the nineteen-seventies. First, with recurring shortfalls from high standards of economic performance--especially, in the price and cost field--we are going to require in the nineteen-seventies much greater attention to what I would call "reconciliation policies"--policies for achieving consistently good standards of performance in relation to growth and employment together with prices, balance of payments, and a more equitable distribution of rising incomes in Canada. Further enlargement of our knowledge about appropriate "reconciliation policies" is urgently required, even though we have learned many new things in the last ten or twenty years.

In particular, I think we will need to be examining new possibilities for increasing the effectiveness of a whole range of policies that may help to promote productivity improvement--to facilitate flexible adjustments to change, to stimulate greater competition, and to strengthen innovative processes. The nineteen-seventies, I believe, will be a period of rapid advance in technological application.

Second, I think the future pattern of growth will continue to involve a rise in the relative importance of service industries. We need to have much better understanding and knowledge about this area of our system, an area in which three out of every five Canadians now work. We have had in the past, and continue to have now, a very heavy orientation towards the goods industries--in research and analysis, in policy matters, in the institutional structures in our economy. Very little research has been done on the Canadian service industries and available information about some of these is very skimpy indeed. In the area of policy, relatively much more attention has been focused on the problems and needs in such fields as agriculture, minerals, forestry, fishing, manufacturing, housing, and business investment than on the problems and needs of the service industries. Tariff policies, combines policies, many other policies have been concerned almost wholly with our goods-producing industries. This emphasis on the goods industries is also reflected in the structures of government departments, of labour union organizations, of business associations as well as in public discussion and dialogue about economic matters. In this enormous country, with its historical attachments to land and resources, and with its intensive striving towards industrialization, I think that few Canadians have yet fully comprehended the simple fact that an overwhelming part of the frontier of recent and future growth is in the service activities. In the nineteen-seventies I think we will become rapidly more conscious of that fact.

Similarly we have not yet adjusted our thinking, again because of geographic and historic considerations, to the fact that Canada has become a highly urbanized society and that we will rapidly become more so. Our rural population is declining. In the nineteen-seventies almost all of our population growth will take place in our larger cities. In many senses therefore the cities have become the frontiers of growth and change, and this is producing a rapidly widening range of problems with which we don't really know how to cope yet. Here is another field which I think will occupy greater increased attention in the seventies.

In another direction we have been moving, I think especially in the latter part of the nineteen-sixties, to a growing concern about social problems and inequities--problems of poverty and alienation, of adequate health care, and the preservation of law and order. Here, too, we are essentially at a stage of concern about problems rather than at a stage of moving confidently and knowledgeably towards solutions. I think it is unquestionable that the nineteen-seventies will be a decade in which these issues will become much sharper and will occupy the attention, not merely of governments, but also of business concerns and private organizations--and to a much larger extent, perhaps, of the universities.

Finally, the nineteen-seventies will, I suggest, be a decade of increasing sharp questions about the ultimate performance and objectives of our economic system, with its greatly enlarged capacity for producing goods and services. "Growth for what?" is likely to be a question that more and more Canadians will be asking. The fact that this question is already arising in a number of different directions is I think an indication that that shift in thinking is already taking place.

In its last Annual Review, the Council took up this issue by focusing attention on what it called "Achievement Goals"--goals relating to the way in which we use our resources to satisfy human wants and aspirations. They cover a numerous range of activities, interests and concerns of our society. In this discussion of goals in the Sixth Review, the Council said: "The Council has no illusions about the difficulty of compiling achievement goals and ordering the priorities among them, but the priorities will be established in any event. The real question is whether they will be established in a comprehensive, systematic and forward-looking manner or in a wasteful ad hoc and frequently short-sighted manner. Setting the goals and priorities will require hard choices among competing demands. In a democratic system such as Canada's, it is not the role of the professional expert or advisor to make decisions about the allocation of resources or about the priorities among competing demands for available resources. Such decisions are properly made by government, business firms, labour unions, consumers and other decision makers operating within the broad framework of our political, economic and social system and ultimately subject to the ratification or rejection by the Canadian public in their dual role as consumers and voters. Good decisions about these matters require good information and analysis prepared by experts. They also require an informed public dialogue and public understanding of the issues involved."

If the decade of the nineteen-seventies is to be one of great achievements in Canada I think one of its main hallmarks should be the emergence of a clearer and more knowledgeable consensus in our society about the needs and the wants and aspirations of Canadians to which we should be harnessing our energies and our capacities and our growing resources.

Dr. Smith was thanked on behalf of The Empire Club by Mr. P. W. Hunter.