Canadian Public Policy

Canada in the New Monetary Order: Borrow? Devalue? Restructure! by Michael HudsonReview by: B. L. ScarfeCanadian Public Policy / Analyse de Politiques, Vol. 6, No. 1 (Winter, 1980), pp. 131-132Published by: University of Toronto Press on behalf of Canadian Public PolicyStable URL: http://www.jstor.org/stable/3550080 .

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Reviews/Comptes rendus / 131

Canada in the New Monetary Order: Borrow? Devalue? Restructure! by Michael Hudson. Institute for Research on Public Policy. Toronto, Butterworth, 1978. Pp. vii,117. $6.95.

This book addresses an important and topical subject, namely Canada's balance-of-payments problem. It begins by contrasting so-called structural vs. monetarist approaches to balance-of- payments analysis, moves on to discuss the extent of Canada's international indebtedness and her growing volume of payments on debt-service account. It then asks the question whether Canada's balance-of-payments problem can be solved by further borrowing, by de- valuation or by restructuring, and comes down in favour of restructuring, but without being particularly explicit about what this would entail.

Both from an analytical/descriptive and from a policy point of view this is a highly con- fusing work. The presentation is both jumbled and full of analytical non-sequiturs and un- documented assertions. Inconsistencies abound; for example, Canada cannot be both a price- taker on many of its export markets as well as facing inelastic work demand for its exports. (In any case, I suspect the price elasticities in Canada's trading, and probably travel, accounts are sufficient to offset by a considerable margin the perverse effect of currency depreciation in her debt-service account, provided that one allows for the existence of some adjustment lags.) In addition, the strawman dichotomy of structuralists vs. monetarists is totally unpro- ductive; indeed, no existing Canadian monetarist would recognize himself at all as a propo- nent of the views blithely attributed to monetarists by the author who, although a self-admit- ted structuralist, from time to time presents arguments along obvious monetarist lines. If it is to have a major impact on public policy, the IRPP clearly needs to publish studies of a higher standard than this.

What ought to have been stated from the outset is that while both money and monetary policy have important inter-actions with the overall balance of payments (excluding official exchange-account transactions) and the exchange rate, both nominal variables, Canada's longer-term balance-of-payments problem is a problem of composition. To change this com- position in favour of smaller capital inflows and a smaller current account deficit must entail some restructuring of real economic magnitudes. In particular, if we wish to reduce the cur- rent account deficit by monetary expansion and currency depreciation, it is essential also to use fiscal policy to reduce the size of the overall government sector deficit, and thereby per- haps lower the real interest rate in Canada while simultaneously allowing room for the cur- rent account balance to expand. The attempt to disabsorb by monetarily-induced depre- ciation and associated inflation alone cannot guarantee that the necessary resources will be released to permit a reduction in our current account deficit, given the absence of money- illusion in the system.

What is clear in retrospect is that in reaction to its excessively easy monetary policies of 1971-1974, the Bank of Canada initiated in the fall of 1975 a monetary policy which was excessively tight, and continued to be so until the spring of 1977. The motive behind this was perhaps to make the AIB controls program appear more successful on the price front in its early stages than it turned out to be later on. But the impact of this policy was to create an historically large interest rate differential vis-a-vis the United States, to generate large-scale capital inflows, and to postpone the necessary downwards adjustment of the Canadian dollar that our previous inflationary excesses had made inevitable. The unemployment cost of this policy has probably been substantial, while the ending of the controls program coincided with a higher observed price inflation rate than would otherwise have been the case. This is not to say that the Bank's policies were not in the right direction; only that they perhaps were applied with undue zeal.

In summary, our real choice has not been between borrowing or devaluing or restruc- turing; our real choice has been the appropriate balance of borrowing, devaluing and restruc- turing to apply. On this, there can be a variety of views, but having chosen to borrow sub- stantially and nevertheless having depreciated the currency as well, it is time to realize that the most important restructuring that is required is to get both Canadian saving and foreign borrowing into productive domestic investment rather than into the financing of current government sector deficits. The capacity-utilization effects of a maintained value of the Canadian dollar in the 83-85US cent range, and the ending of price and wage controls, are

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132 / Reviews/Comptes rendus

important ingredients in this package. Productive real investment of the Alberta Heritage Savings Trust Fund across Canada is another. Nevertheless, with the OPEC (and Alberta) surpluses being what they are, the rest of the world (including Canada) cannot and should not expect to get into overall current account balance; indeed, various attempts to do so via 'austerity programs' and 'protectionist policies' are largely unproductive from a global point of view. Moreover, once it is realized that widespread protectionist policies also lead to off- setting effects on the exchange rate, it is not clear that they make sense from the point of view of the balance-of-payments composition objective of an individual country either.

B . L. S C A R F E / Department of Economics, University of Alberta

Health Expenditures in Canada and the Impact of Demographic Changes on Future Government Health Insurance Program Expenditures by J.A. Boulet and G. Grenier. Discussion Paper 123. Ottawa, Economic Council of Canada, 1978. Mimeo. Pp.x,98.

Of all features of the economy, population structure should be the most reliably projected over the short term. Next year's population, subject to the qualifications of death and migra- tion, is already here, only younger. This information should be valuable in projecting varia- bles influenced by age structure, such as pensions, education and health spending, and baby carriage sales. Such improved projections should in turn assist in policy formation; hence this paper.

J. A. Boulet and G. Grenier have combined existing point-in-time data on utilization and costs of hospital and medical services by age and sex class, with projections of the Canadian population, numbers and structure, between now and 2031. From these they generate esti- mates of health care spending, total and per capita, on the assumption that prices/costs per service and age-sex specific utilization rates do not change. They then consider the present and expected future impact of health spending on the overall economy, and make several suggestions as to how cost increases might be contained and the health care system made more efficient. The result is a paper with several useful points, a couple of egregious errors, and a large and glaring omission. On balance, however, it is still a useful paper.

Surprisingly, the 'Great Aging' of the Canadian population will have a significant, but not overwhelming effect. Their various projections of per capita hospital and medical costs in 2031 are 27.7%-45.5% higher than in 1976, depending on fertility and migration assump- tions. But such costs (adjusted by the CPI) rose 286% from 1953 to 1971, a period one third as long. Hospital costs per capita may rise 41.6%-58.1%, but medical costs only 11,8%- 16.6%. Moreover the main impact is in the next century, cost increases to 2001 are only 12.1 %- 17.0% (hospital 14.7 %- 20.7%, medical

6.2%--8.5%). This information is most important. It suggests that present attempts to justify major increases in health system capacity to cope with impending demographic shifts are as falla- cious as similar explanations of the 1953-71 spending boom. Whatever drove or will drive increases, it is not population structure. Boulet and Grenier also debunk the myth of cost escalation caused by universal public health insurance, a hardy import nourished by US opponents of such plans. Since 1971, Canadian costs have been a relatively stable share of GNP, while US costs in a fragmented and partially privatized funding system have raced ahead with no end in sight.

By 2031, though, the over-65s may dominate acute care hospitals (52.2T%-59.6% of all use). Most observers feel present use is unnecessarily high and Boulet and Grenier note some suggestions fror reduction. They err badly, though, in assuming that length-of-stay reduction will lower costs proportionately. For numerous reasons, costs drop much less if at all. Simi- larly the prospects for cost control through prevention are very small, escalation is at least as likely. Sad but true (specific exceptions!) despite the PR people. But most of their sug- gestions are reasonable if not new, and they should be congratulated for not falling into the standard economists' trap of charging patients. That again tends to raise costs (see the US) though not for governments!

But the gaping hole is the neglect of the supply side. In suggesting, for example, that 2%

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