Canadian Public Policy

[Economic Policy: Can We Manage the Economy Any More?]: CommentAuthor(s): Gideon RosenbluthSource: Canadian Public Policy / Analyse de Politiques, Vol. 2, No. 4 (Autumn, 1976), pp. 561-563Published by: University of Toronto Press on behalf of Canadian Public PolicyStable URL: http://www.jstor.org/stable/3550193 .

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Comment

Comment

GIDEON ROSENBLUTH / Department of Economics, University of British Columbia

Of course governments can govern. It takes remarkably little wisdom, skill or even luck to maintain a reasonable level of law and order and keep the economic system from collapsing. In western industrialized nations there appears to be almost no limit to the incompetence in its chief executive that such a system can tolerate without breaking down. When we ask whether governments can 'manage the economy' we are setting a much more ambi- tious standard of performance. We are asking whether governments in a western capitalist economic system, and more particularly in Canada, can maintain full employment, rising living standards, increasing equity, and (if we want to count it separately) a rising or at least not declining 'quality of life,' without 'undue' inflation. The verdict of history is that governments have achieved these objectives for only limited periods. Their patent failure to achieve them now has brought on the current spate of conjecture.

The analysis of government performance still, with some few exceptions, consists of conjecture rendered plausible by means of anecdotes. Let us hope that we will progress to more rigorous formulation and testing of hypotheses.

I find some of Ian Macdonald's conjectures difficult to accept. I do not believe that the existence of a federal system has to frustrate the pursuit of Keynesian fiscal and monetary policy by the central government. The central government must view provincial and local governments as independent agents whose behaviour it modifies by its policies, just as it views business

561

depression followed by a war, and the concern was that Canada might not find a way to withstand heavy unemployment and economic dislocation. In fact, we embarked upon a thirty-year period of growth and development of unpre- cedented character. Now, I believe we need to stand back and look at the fundamental direction of Canada and our economic future, and to consider the options available to us today.

In conclusion, I believe that we can manage the economy - at least as well as we have ever managed it although not without a great deal of difficulty. The real issue, as always is:

i) to identify our goals and objectives; ii) to agree upon the appropriate and most effective economic policy as a

means of achieving those objectives; iii) To ensure that we have the skill to apply that policy and the determination

to do so. The first must be a task for the people and the politicians, the second a challenge to the professional economist, and the third principally the respon- sibility of the public administrator. However, much greater effort is required to ensure that each understands the other and in that process of communica- tion and translation lies our greatest challenge.

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562 / Gideon Rosenbluth

firms and households. Just as it must have a macro model of business firm behaviour and a macro model of household behaviour, so it must have models of the behaviour of provincial and local governments and of their responses to changes in fiscal and monetary variables. Their behaviour and responses differ, of course, from those of business firms and households, but they are no less amenable to theoretical and econometric study. Their revenue and ex- penditure patterns are in fact quite narrowly circumscribed by budgetary and political considerations and, as Macdonald points out, by federal-provincial agreements. Through the mechanism of fiscal transfers and shared cost pro- grams the central government has special tools for influencing the behaviour of the junior levels. The large Ontario and Quebec provincial budgets do no doubt create special problems in the implementation of Keynesian policies, but they do not render the Keynesian analysis inapplicable.

Nor do I believe that there are insuperable difficulties of diagnosis and forecasting. Since the war there have been continuing and impressive ad- vances in the collection and presentation of data, in computer technology and, on these foundations, in the building and use of econometric models for diagnosis and forecasting. Macdonald is right when he says, 'it is remarkable how much good analysis has been done and how little impact it has had on national policy.' The main problem has not been the inability of economists to diagnose current conditions, but the existence of political constraints on the implementation of suitable policies.

This statement may seem too strong when one considers the current prob- lem of stagflation. Economists do not agree on the diagnosis of its causes and that fact certainly makes it more difficult for governments to manage the economy. The political constraints on government policy mean, however, that even if one set of'experts' had the correct diagnosis, and even if clear-cut policy recommendations followed from the diagnosis, governments would not be free to implement those policies.

I cannot claim to have the explanation for the current stagflation, but I doubt if Macdonald's diagnosis is correct. The increase in administered pricing is not a recent phenomenon. United States studies suggest that the relative importance of highly concentrated industries in the economy is not greater today than it was before the war, and there is no reason to suppose that trends are significantly different here.

The recent spread of labour organization into the public sector and its success in raising wages there may well be a contributory factor. On the other hand there is no good reason to suppose that recent declines in the rate of productivity advance are more than a cyclical phenomenon. It does not seem plausible that the gradual increase in expenditure on services should be a major factor. Recreation and health are typical of the services on which expenditure is increasing. Recreation is quite intensive in the use of goods, transportation services, and tourist facilities, and in all these industries there is considerable scope for improved productivity through the application of known techniques and through technical innovation. In health services im- provements in productivity through the better use of paramedical personnel are retarded only by the feather-bedding customs of the medical profession.

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Comment / 563

So I do not believe that declining productivity advance is here to stay or can only be reversed by special measures. Nor is there good reason to believe that there is now a built in tendency for 'consumer expectations to run ahead of productivity.' I take it that the data on which this sort of conjecture is based consists of wage settlements in labour contracts that exceed recently experi- enced inflation by more than recently experienced increases in overall pro- ductivity. But there are alternative explanations of such settlements that seem to me more plausible. As a general explanation the build-up of inflationary expectations shared by both employers and employees is, I think, the most important, and in particular cases 'catch-up' has clearly been involved.

I see no convincing evidence that 'we are entering into a new social and economic order' or that we face a choice between curbing our individual greed as consumers and stimulating productivity by making the economic environ- ment more congenial to profit making. There are structural changes to which the Canadian economy has to adjust, but these are mainly external - the growing economic power of Europe, Japan, the Middle East oil producers, and other third world areas. The major source of stagflation is also external. It was, after all, a world-wide phenomenon, and it has not happened in the period of recorded statistics that major swings in United States employment and prices have not been reflected in Canada. As has happened frequently before, the recession in output was less pronounced and the recovery has been slower in Canada. Wage and price increases have been more pro- nounced here, reflecting the internal response of monetary policy and inflationary expectations to an originally imported inflationary movement.

We come back, then, to the question whether the government can control swings in output and prices, and more particularly in the Canadian context, whether it can control externally generated fluctuations. I would suggest that the main reason for the lack of success of Canadian governments in this area is that the control of economic fluctuations can never be their main objective. Their overriding objectives have been to maintain themselves in office and to maintain the support of major business groups, and these objectives place severe limits on the range of stabilization policies that are viewed as feasible. If it is desirable to antagonize neither exporters nor importers, for example, the exchange rate must be fixed or controlled by a 'dirty float' policy, with consequent restrictions on monetary and fiscalpolicy. No doubt governments are often mistaken in their assessment of the political consequences of alter- native policies, but the expected consequences, right or wrong, constitute a constraint on feasible policies. In the sense implied by Macdonald's theme, governments cannot govern because they must stay in power.

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