Volume Ten, Number One   January 2005   www.columbiajournal.ca

Putting Economic Policy back on the Election Table

 Marc Lee

Ed note: given the Liberal minority government in Ottawa, and the near miss in the collapse of the government over Throne Speech amendments, the possibility of another federal election may not be far off. We thought readers might want to keep some of these ideas in mind.

In the 2004 election, economic issues have not been front and centre. Accountability, rights issues and health care have dominated the stage, while the economy has essentially been taken for granted. That is too bad because the contending parties have very different visions of what makes good economic policy.

Over the past decade, Canadians have had both federal and provincial tax cuts. The result federally is that program spending, at around 12 per cent of GDP, is at its lowest level since the late 1940s. A key question is whether we have already gone too far in reducing the size of the public sector.

Part of the reason why issues like municipal infrastructure and health care have been prominent in this campaign is that tax cuts have hobbled the ability of governments to provide these services at adequate levels. It is as if, in the great rush towards tax cuts, we forgot what taxes actually pay for.

Under a Harper majority government, this situation is likely to get worse. The Conservative platform plans cuts in corporate income tax and capital gains tax, plus the elimination of the 22 per cent personal income tax bracket.

The rationale for tax cuts is that they will improve economic growth. But while it is common for the Canadian elite to associate lower taxes with a better economy, the evidence -- in particular from the Scandinavian countries -- does not support such a belief. We can make a moral choice to have lower taxes and fewer public services, but don't expect an economic payoff from that choice.

Obviously, no one likes mismanagement of public funds or corruption. But despite the high profile of Liberal scandals, the amounts involved are small relative to the $187 billion in federal revenues this year. Most of this money gets spent on things that enhance economic growth, including health care and education, infrastructure and industrial development. Even income transfers, which many believe hurt growth, have been shown to be growth-enhancing in econometric studies.

Another major shift that could arise from a Harper government is the dismantling of economic and regional development programs--part of a plan to eliminate “corporate welfare” subsidies, grants and loans. The danger of this approach is that it paints all efforts at industrial policy with the brush of corporate welfare. In doing so, it ignores the important role played by industrial policy in every advanced nation.

Contrary to the rhetoric of “free markets,” there has always been a role for government in developing new industries and spurring economic growth by protecting “infant industries,” building requisite infrastructure, creating supportive public institutions, and leading the charge on research and development.

In Canada, the National Policy of the 19th century is a classic example of government-led development. Modern examples include cultural industries, the generic drug industry, and the Auto Pact.

Strategic government involvement played a huge role for East Asian countries that used industrial policies to attain leadership positions in many high tech industries.

Even the US, perhaps the most “free market” of industrial nations, engages very deliberately in industrial policy through its $400 billion per year defense budget. The software industry and the Internet--pillars of the modern economy--have their roots in research supported by the US government.

It has become a conservative truism that “governments cannot pick winners and losers.” But the historical record suggests the opposite. Not all the time, of course, but successful ventures can have huge economic payoffs.

Governments are ideally poised to shoulder some of the risks involved. The key is that we ensure that these programs are accountable and transparent, and that we learn the lessons from past mistakes--points highlighted by the Auditor General.

In addition, some investments will not bear fruit because the interplay between innovation and markets is fickle. For this reason, the Conservative focus on repayments for programs like Technology Partnerships Canada is much too narrow.

Both the Liberals and the NDP, to differing degrees, are advocating for an emphasis on green technologies and power sources as a cornerstone of Canadian industrial policy. Rather than abandon Kyoto, as the Conservatives would do, an alternative approach is to embrace the challenge and make a national project out of meeting, even exceeding, the Kyoto targets.

Finally, the Conservatives envision a move to a customs union--the next step in economic integration beyond free trade--with the United States. This would be a mistake, as any gains are very limited and would come at a price of losing control over Canadian trade policy. Joining a customs union with the US means accepting US embargoes on Cuba and Iran. It would mean giving up on plans to supply generic drugs for AIDS patients in Africa. And it would mean giving up regulatory powers to implement Kyoto.

Canadians need to think long and hard about whether such a radical shift in economic policy is warranted. Giving up policy tools in the areas of trade and industrial policy, while further undermining our fiscal capacity to deliver public services, may further enrich certain vested interests, but is not likely to deliver a better economy for most working Canadians.

Marc Lee is an economist in the BC office of the Canadian Centre for Policy Alternatives.