Leaning to the left

By Philip Demont, The Financial Post, Saturday 5 April 1997

Economists like Leo de Bever are starting to question whether deficit reduction and deregulation have gone too far. Like a growing number of ordinary Canadians, they think the bloom may be off the free market rose

Leo de Bever's world is not as certain as it once was. The vice-president of the Ontario Teachers' Pension Plan Board used to think that a healthy dose of free market-type policies would be enough to solve most of the ills facing Canada's economy.

Now he's not so sure. De Bever, one of the country's better known private sector economists, figures deregulation and fiscal restraint as practised by federal and provincial governments may not solve all of Canada's economic woes after all. "I don't like to see the less well off in society being stepped on," he says. "I figure there is about 20% that falls into this category. And I'm frustrated by the lack of a mechanism for getting a reasonable solution."

De Bever is not alone in having doubts. In the past few years, prominent Canadians and Americans have begun to question the efficacy of the deficit-slashing and deregulation policies of provincial, state and federal governments.

Since 1990, governments of all stripes have implemented programs to cut public spending, reduce the regulatory burden on corporations and shrink social-welfare programs. Canadian governments as ideologically dissimilar as Roy Romanow's NDP administration in Saskatchewan and Ralph Klein's Conservatives in Alberta have built their political reputations on getting rid of budgetary deficits.

But in the past 15 months, some polls reveal that Canadians are becoming disenchanted with "slash-and-burn" spending policies. They also appear to be embracing the deregulated marketplace in the same way cousins hug, with a distinct lack of enthusiasm.

"The idea was that there was a kind of magic in market economics that answers all important questions. It can't be explained that way," says Frank Cunningham, professor of philosophy at the University of Toronto.

A January 1997 poll conducted by Environics shows that 57% of Canadians want the federal government to spend more money on creating jobs and on health care. Only 35% say Ottawa should keep focusing on the deficit.

In government-slashing Ontario, Mike Harris' Conservatives now trail the opposition Liberals in some recent opinion surveys, albeit by a small margin.

Even in Conservative-friendly Alberta, where Klein recently won a second term as premier, 67% of the sample in a recent Angus Reid poll say they are uneasy about the government's approach to health care reform.

But that doesn't mean people are uneasy about government in general.

"Small government is not the objective. What's the real role of government? That's where the problems lie," de Bever says.

Indeed, there's some evidence that Canadians now view government in a better light and business in a worse one than in past years.

Pollara, a Toronto-based polling company, has found that, since 1992, the number of people who view government as a positive force jumped by 54%. In the same period, Canadians' positive perceptions of business dropped by 8%. "Confidence is being re-established in government, particularly at the federal level," says Don Guy, Pollara's vice-president for public research.

And, he adds, these results are in spite of Ottawa's recent debacle over the reform of the goods and services tax.

If Canadians are becoming lukewarm to free market solutions, Americans seem downright frosty. Since U.S. House of Representatives Speaker Newt Gingrich led the Republican party to an historic Congressional victory in 1994, the right-wing policies advocated by his Contract With America have become increasingly unpopular and contributed to Bill Clinton's overwhelming victory in last year's presidential election. "The Contract With America threatened the safety net," says William Schneider, a fellow of the American Enterprise Institute, a Washington-based conservative think-tank. "The Republicans went too far."

Still, the hardening attitude toward business and free market solutions and the corresponding softening toward government in general that showed up in recent polls doesn't necessarily add up to an endorsement of renewed big public spending. "That would be too strong," Schneider says. Despite recent trends, he argues that, since 1965, there has been a decline in the confidence people have in governments.

Politicians, however, aren't the only ones caught in the public backlash in the U.S. In a March 1996 survey conducted by pollster Lou Harris and Associates Inc., 71% of Americans said business already had too much influence over their lives and 72% felt corporate shareholders were the only beneficiaries of government deregulation polices.

That's a bit ironic, considering that key business figures are among those who have questioned the gutting of social programs and the elimination of all government rules as a political cure-all.

In February, prominent U.S. investor George Soros used an Atlantic Monthly article to warn against excessive reliance upon free market policies. "Unless [laissez-faire capitalism] is tempered by the recognition of a common interest, our present system is likely to break down," he wrote.

Soros has been joined by management guru Peter Drucker who has written recently about a looming backlash against wealthy Americans. And Robert Kuttner, a columnist with Business Week, just wrote a book arguing the need for government in the U.S.

America's increasingly dubious attitude toward minimalist government and free market solutions has some prominent economic thinkers perplexed.

"We're in a state of paralysis. It's very discouraging," says Robert Heilbroner, professor emeritus at New York's New School for Social Research and the author of The Worldly Philosophers, which profiled great economists.

People and politicians cannot make up their minds which direction they want economic policy to go, he says.

Americans have voted to cut welfare for immigrants, but many voters profess to being increasingly concerned about the state of the U.S. social safety net, Heilbroner says. "I'm waiting to see what crystalizes out of this," he says.

Such angst and uncertainty among U.S. thinkers shouldn't be surprising, says Gregor Smith, a professor of macroeconomics at Queen's University in Kingston, Ont. "That is the country where there was the most glaring income inequity problem," he says.

Between 1977 and 1996, American families in the lowest 20% of incomes had their after-tax earnings drop by 11.6% in real terms, according to Citizens for Tax Justice, a Washington-based labor-sponsored think tank.

By comparison, the 1% of Americans making more than US$438,400 saw their after-tax earnings jump by 109.6%.

In Canada, the income disparity between rich and poor is narrower and that has led to smaller ideological swings, Smith says.

"We have had less of a problem than in the U.S."

Canadians are searching for new answers to the problems of high unemployment and greater anxiety about the financial future.

But, in the past 20 years, various governments have tried Keynensian policies, which call for more government spending in bad times; monetarist theories, which advocate the stable growth of the country's money supply; and the supply-side approach, which promotes lower taxes.

"The last 25 years have been difficult for economists," says Robert Lucas, a professor of economics at the University of Saskatchewan.

None of these policies has been ultimately successful in achieving their touted goals, mainly owing to misuse by politicians, he say.

The recent reliance upon the private marketplace for all economic solutions has proven no more robust, Lucas says.

"The extreme view that the only thing government should do was defence [and a few other minor functions] was never held by prominent economists," he says.

"This has been parlayed into an ideological thing outside the profession."

Still, there is some hope that governments can provide some leadership even as Canadians and Americans face an uncertain economic future.

Bill Clinton has implemented a series of small-scale policies, like mandating V-chips in new television sets so parents can control their children's viewing.

"He's attempting to rebuild trust and convince them that government is working," Schneider says.

Such an approach might work up in north as well.

"There is still a lot of mistrust to bold ideas that appear to expand the role of government. But, if a great little idea comes along that government can fill, these are going to be popular," says one longtime political observer.

If this government watcher is correct, Prime Minister Jean Chretien, who won the 1993 federal election touting a national infrastructure program as a big job creator, might be better off with a slogan of "small is beautiful" this time around.