Strategies of Economic Policy-Making: Canada/United States

Another area in which the United States has a clear and longer standing lead over the Canadian government is in the provision of an effective competition policy. At present in Canada, it is fair to say that there is virtually no effective mechanism to ensure the fairness and competitiveness of our markets. Yet the guarantee of free and effective markets is one of the primary responsibilities of government, one which could contribute greatly to the efficiency of the Canadian economy. Unlike the other areas that I have mentioned thus far, competition policy can work across the entire economy. Some sectors might not be affected at all, and in others the change might be minute in nature. But the cumulative impact over the course of years could be enormous. Again, I want to make it clear that Canada cannot simply adopt the U.S. system holus bolus. Both our economic structure and needs, and the basis of justice in Canada dictate that a made-in-Canada competition policy is the only acceptable alternative.

Finance capitalism has always been regarded as the top rung of the free market ladder; and with the United States as the pinnacle of the capitalist system, the uninitiated might expect to find the most highly competitive capital market arrangements of the world in that country. One might also expect to find the strongest encouragement to the generation and the efficient use of saving.

In certain respects these expectations are fulfilled. United States financial markets are highly developed and relatively efficient in handling mergers and takeovers, recycling petrodollars, and financing speculative activity in almost every commodity. But in some respects, especially in the generation and efficient use of personal savings, the U. S. system is remarkably backward and perverse. A strong streak of Puritan antiusury ethic combined with memories of depressionera bank failures and a deep commitment to protecting the "little person" against financial manipulators have shaped the system.

Though changes are now underway, US. savings institutions have been strictly regulated as to what they could invest in, how much interest they could charge, what interest rates they could pay and so on. The system has been notorious for discouraging savings, and for diverting savings to particular channels, even though the rates of return were uncompetitive. Over and beyond this, the US. personal tax system has been sharply slanted, and still is, toward encouraging the use of credit, rather than saving. It allows, for example, interest on consumer credit and mortgages to be deducted in reckoning taxable income. Beyond this, the lending and loan guarantee activities of many US. government agencies have strongly supported a system of cheap credit for housing.

It is little wonder, therefore, that U. S. savings rates have been low, that U. S. housing investment figures have been high, and that many observers feel that these two elements are among the most important distortions in the U. S. economy. These are not the only problems however; other regulations on U. S. financial institutions have prevented the development of a nation-wide banking system, and may have slowed innovation in the provision of banking service.

In the next five years or so, the United States stands to make considerable gains--by altering its tax system to remove disincentives to saving, and by improving its system of banking regulations to match the growing needs of the U.S. economy. I should add, however, that there is one slight drawback in the recent moves toward reform of the US. financial structure; it has taken hold so quickly that it has been extraordinarily difficult for the U.S. monetary authorities to measure the changes in their monetary aggregates and to judge the tightness or ease of the system. It seems that changes to the financial regulations have made the monetary lever somewhat more difficult to manage -at least in the short-run.

One area in which the United States may learn from Canada is with respect to something which we in Canada take almost for granted. That is, our economic infrastructure. Throughout Canada's history, our governments have co-operated to develop and maintain a very high calibre system of roads, bridges, communications systems, and the like, often in co-operation with the private sector. Principally through measures such as shared cost and regional development programs between the federal and provincial governments, it has always been possible to ensure that the responsible levels of government were able to meet their commitments with respect to the necessary infrastructure support.

This has apparently not been the case in the United States where infrastructural development, which may have been initially supported by federal government funds, has in large part been left to state and local governments for maintenance. The state and local levels of government have not always proven capable of maintaining this infrastructure, and as a result the network of roads, bridges and so on which link the United States together, and the systems of public transportation and sewage treatment and water supplies, have deteriorated. Business Week, a magazine not given to declaring crises lightly, commented in its October 26 issue: "So serious is the decay of the nation's infrastructure and so poor the prospects for its refurbishment that many sophisticated businessmen and economists believe the US. is entering a period of severe crises for state and local government." The implications are quite clear. Without engaging in considerable efforts to help state and local governments to maintain and upgrade basic infrastructure, real economic development could be seriously eroded. Perhaps more importantly, the quality of life in the United States could decline substantially.

For Canada the problems are much less severe. Our basic economic infrastructure is sound, and we have maintained the mechanisms necessary to ensure that the various levels of government are able to meet their responsibilities. Certainly we must continue to upgrade our system, but we face nothing like the impending crisis which the U.S. must head off.

The United States infrastructural needs are matched in Canada by our enormous potential with regard to major individual investment projects. Energy is one clear area where I think we are all aware that new investments over the next decade and beyond have a good chance of providing the basis for strong economic growth. But there are many other investment requirements in transportation, further development of western agriculture, high technology growth industries, and the adaptation of existing industries. According to the Major Projects Task Force, Canada will require some $400 billion capital for major projects from now to the turn of the century, and this represents only one-fifth of the total projected investment in the economy.

The needs of the U. S. economy are likely to be equally great. Business Week estimates a need for $700 billion for infrastructure in the next ten years alone, and to this demand must be added projected increases in military spending, the great need for industrial restructuring in traditional manufacturing areas and the potential demand for new investment in the rapidly expanding sunbelt.

The long and short of this picture is that both countries face an era of unprecedented economic investment and demands for capital. To meet these demands without undue reliance on foreign capital investment will require both countries to foster their own resources, to increase personal savings and reduce government's dependence on debt financing. Moreover, as choices emerge among investment projects, both nations are going to be faced with the need to insure that the most economical projects receive the greatest priority for funds and assistance. I am not suggesting here that governments should actively intervene to ration funds. But I do suspect that governments will be playing roles in these major projects, and must therefore be extremely cautious not to tip the scales in favour of politically attractive, but low payoff investments.

As I noted earlier, by freeing up its financial system and taking steps to encourage savings, or at least to eliminate taxation prejudices against savings, the US. will be able to make significant gains. In Canada, on the other hand, we must be careful to avoid policies which discourage savings. These policies might appear attractive during short-term economic slowdowns, but their long run impacts could be devastating. The Canadian financial system must become more innovative in matching funds to the needs of its borrowers, especially in times of high and fluctuating interest rates. I am thinking here, for example, of the needs of mortgage borrowers who have been thrown unaware into what has become a large, and expensive floating crap game of fluctuating interest costs. But the business sector is also affected by these problems, and some novel and realistic approaches are required to handle the new economic realities.

The need to deal effectively with widely fluctuating interest rates is itself symptomatic of another aspect of the current and prospective economic environment--inflation. Now I am not in favour of inflation, and I think we can reduce inflation rates without the extremes of Thatcherism. But there is no way of guaranteeing that inflation will disappear overnight, or forever. Therefore it is vital that we learn, if not to live in an inflationary environment, then at least to cope with its impacts.

One area where we have made considerable gains in this regard in Canada is in terms of individual incomes. Our social welfare system is now almost fully indexed to adjust for the effects of inflation, as is the personal income tax system. However, in two areas, the employer-based pension system, and the corporate accounting system, we have been far less successful.

The Canadian pension system, including government plans and employer-based plans, is still not adequate to meet the present needs and expectations of Canadians. Part of the inadequacy stems from the relative lack of coverage offered by private pension plans, and the lack of portability of these plans which severely reduces employee mobility. But the private pension plans also generally fail to reflect adequately the impacts of inflation. This shortcoming must, and will be resolved eventually. Either private schemes must change or, as some are advocating, the government's Canada Pension Plan or some other governmental system will be expanded. The status quo is unacceptable.

Room for improvement also exists with respect to the problem of adjusting corporate profits to reflect the impacts of inflation on asset values, costs and profits. I won't burden you here today with yet another description of the perfidious impacts of inflation on businesses, of how inflation distorts corporate tax positions, cash flows, and undermines the investment decision process. Nor will I indulge the temptation to reflect on the various options which are available to ameliorate these effects. But I do want to make it very clear that the failure to cope with the effects of inflation within the framework of the measurement and taxation of business income could seriously erode the investment potential of Canada and the United States in the future.

I have far from exhausted the list of areas where I think improvements in efficiency and reductions of distortions are possible and necessary. I haven't discussed areas of regulation, such as in agricultural products for example. I have not as yet made a dent on the special problems and needs of specific regions and sectors of the Canadian and United States economies. I have not even mentioned the scope which exists to reform the social welfare system to improve it as a set of social programs as well as to improve economic performance.

In all of these areas, and others, exist scope for the small changes which will cumulatively strengthen our economies.

These small changes are certainly not politically sexy. They will not excite masses to march on Parliament. These changes are not simplistic solutions. Finding the appropriate policies is going to be a matter of research and hard analysis and a high order of political skill and commitment. But taken together, these small changes can make a major difference to the economic development of Canada and the United States over the next decade or so. The time is ripe to make a beginning.

My priority list for the United States would include better rates of return in electrical utilities and railroads, reform of financial regulation, promotion of personal saving, strengthening of state and local government finance, deregulation of natural gas production and distribution, and a more economical use of government credit to support private activities.

My priority list for Canada is very different. It includes tougher efficiency tests for our electrical utilities, solution of the Crow rate problem, less regulation of airlines and trucking, a less regulatory solution to the problems of Canada's farmers, maintenance of saving, continuation of the existing strengths of Canada's provincial and local government finance, improvement of housing finance, reform of business taxation and of private pensions.

Harry Johnson, perhaps the greatest economist Canada has produced, wrote in one of his many essays of the legend of two giants named Gog and Magog whose fate it was to run around the world throughout eternity. Gog ran around the world forwards, never seeing where he had been. Magog circled the globe in reverse, never seeing where he was going but knowing full well where he had travelled. Neither of these giants would be successful at plotting a course for Canada over the next decade. But the two together would be one heck of a team. Our requirement is to be able to look back over where we have been, to see what we have done and learn from our experiences. And we have to be prepared to look realistically to the future, to see the pitfalls in advance and prepare accordingly. It won't be easy. But it will be worthwhile.

The thanks of the club were expressed to Dr. Slater by John Herrick, a Director of The Empire Club of Canada.