Week 5: The Government in the Economy

1. Week 5: The Government in the Economy Keynesianism and the Depression & Crown Corporations

2. Rise of Keynesianism • The Great Depression brings previously unheard of economic despair to Canada and the Western World • Due to our reliance on exports, agriculture and manufacturing, the Great Depression hurt Canada more than most other countries.

3. Rise of Keynesianism • The Great Depression changed the view of state intervention into the economy. • Ultimately, it was decided that the marketplace could not correct itself. • It was up to government intervention to kickstart the economic recovery.

4. Rise of Keynesianism • John Maynard Keynes’ theories become prevalent in Canada starting in World War II. • The government needed to take an activist role in the economy by increasing spending and reducing tax rates. • Creating Crown Corporations and growing the size of government was just one way to achieve this.

5. Rise of Keynesianism • We recall that the rise of the public service was created out of the demands of easing the Great Depression. • Increases in business regulation. • Increases in social welfare services. • The idea that government could solve every problem from unemployment to socialized medicine. • The electorate voted in political parties who promised more government services.

6. Decline of Keynesianism • Keynes’ theories continued to dominate until the 1970’s, when other external and internal pressures made it impossible for government to intervene • i.e. increased cost for oil; high unemployment, high inflation

7. Decline of Keynesianism • Unfortunately, it was paid for with borrowed money. • The impact of the recessions of the 1970’s and 80’s left governments broke. • Governments turned from expenditure to inflation and budgetary control. • Rise of Neo-Conservatism.

8. The Return of Keynesianism • With our current economic crisis, there has been a return to Keynesian economics. • Governments are now going into debt to try to stimulate spending. • The Ontario government predicts an $18 billion deficit over the next two years; the Federal government predicts $34 billion over the same time period.

9. An era of Nationalization and Canadianization • Nationalization is the act of taking assets into state ownership • Occurs when government purchases an existing company or creates a new one • Done to enable the government to manage the economy better in terms of long-term development and medium-term stability • Give a recent example of where this is happening in the world?

10. An era of Nationalization and Canadianization • The creation of crown corporations in the 1960’s and 1970’s, plus the ever expanding role of government after World War 2 helped kick start this era of Nationalization (Canadianization)

11. Critics of Nationalization • Claimed that government measures distorted market values and resulted in inappropriate compensation. • The impact of the recessions of the 1970’s and 80’s left governments broke. • Governments turned from expenditure to inflation and budgetary control. • Rise of Neo-Conservatism

12. Neo-Conservatism • Neo-Conservatism takes hold of western nations, starting with the election of Margaret Thatcher in Britain and followed by the elections of Ronald Reagan in the US and Brian Mulroney in Canada. • Privatization, sliming down of the civil service, competitive treaties like NAFTA become the norm. • Mike Harris’ “Common Sense Revolution” is a prime example of Neo-Conservative ideals.

13. The Neo-Conservative Movement • The welfare state is important but no longer affordable. Causes structural problems in the economy. • The public sector is too large and too expensive. Reductions are needed. • Too much red tape and regulation. • Privatize crown corporations. • Need to cut taxes and balance the books.

14. The Welfare State • Term first coined during World War II • Becomes very prominent in Canada in the 1960’s • Has three main provisions: • Minimum income • Protection from economic insecurity due to sickness, old age or unemployment • A variety of social services

15. The Welfare State • While important, it is costly. • Deficits grew as government became involved in more aspects of peoples lives. • Government grew; every new program needs workers to administer it. • Governments became almost broke.

16. Government in the Economy • The 60’s and 70’s saw the creation of many Crown Corporations that competed directly with other private corporations. • Governments intervened heavily in the economy. • Deficit spending was common in the late 70’s and early 80’s as governments tried to spend their way to prosperity.

17. Government in the Economy • The Federal Government ran budget deficits every year from 1975 until 1995. • With the various stimulus packages, governments are once again trying to spend their way into prosperity, and the return of budget deficits.

18. Two Approaches to Running the Economy • One camp favors government intervention believing politicians and bureaucrats can orchestrate the economy from above. • Ideology: Democratic Socialism, John Maynard Keynes • The other camp argues for tax cuts and a reduction of governments role in the running of citizens lives. • This they argue is the only way to achieve productivity • Ideology: Neo-Conservatism, Liberalism, Adam Smith

19. Growth of Government • Canada’s well-developed welfare state has contributed to the creation of a large public service • Areas in which governments employ people: • Education • Health Care • Protection (i.e. police, fire and military) • Administration of programs

20. How did the Canadian Government Grow? • Most of the increased spending between 1965 to 1975 occurred in the form of transfer payments to individuals through higher unemployment insurance, family allowance and old age security payment. • Creation of new departments to administer new initiatives. • Significant growth of crown corporations and regulatory boards. • Increased specialization and professionalism of the public service to deal with greater complexity of problems.

21. Crown Corporations • A common target of government for privatization is crown corporations • A crown corporation is any enterprise that is substantially owned by the government • It is an institution brought into existence by government to serve a public function • It may function in many ways like a private company • The theory behind a Crown Corporation is that it is more efficient than a government department because it is arm’s length from the government, allowing it to be run like a business

22. Crown Corporations • Have the following characteristics: • A majority of the ownership must be vested in government • Management of its affairs must be relatively independent from government • Its primary role must be to provide goods or services to the private sector, not to the government • The prices its sets for these goods and services must reflect the costs of providing them

23. Why does government create Crown Corporations? • As nation building tool in the promotion of transportation, communication and resource development. • As a means to promote regional development. • Unwillingness or inability of private firms to provide important services. • Where the industry may lend itself to a natural monopoly (power, water). • Where the industry might experience wide price fluctuations and incomes (natural resource sectors). • Control industry that has “undesirable elements” in it (alcohol distribution, gaming).

24. Some examples of early Crown Corporations • Hudson’s Bay Company: while not owned by government, managed the majority of the land in Canada on behalf of the British Crown. • Canadian National Railway: Created to prevent a bankruptcy and monopolization of an important industry. • LCBO: Created to control the sale of alcohol (seen as an undesirable commodity)

25. Canada’s First Crown Corporation: CN • Let’s set the stage: • Canada was in the middle of World War I • There were political divisions between English and French Canada • 3 Transcontinental railways helped to create “The Railway Mess” • Royal Commission on what to do with the Canadian Northern Railway

26. The Railway Mess • 3 transcontinental lines for a population of 8 million lead to overcapacity. The lines were not economically sustainable. • The government already had an equity position in the Canadian Northern Railway from a bailout in 1913 and took over part of the Grand Trunk in 1915. • The railways all had substantial debt. • Inadequate rolling stock. • Great Britain bans the export of capital. • Canada’s creditworthiness as a nation and its ability to continue in the war effort were being called into question. • CNR and GT continued to ask for bailouts.

27. The Railway Mess • To allow these two railways to collapse would have been devastating financially to Canada. • Provincial governments had provided financial guarantees. • The Bank of Commerce would likely have failed as CNR was heavily indebted to it.

28. The Crown Corporation: CN • The Royal Commission minority report gave three options to Prime Minister Borden: • CNR take over the GT in the west • GT take over CNR in the east • The Government run the uneconomical linking railway between Quebec and Manitoba

29. The Crown Corporation: CN • The majority report recommended the government take over all rail lines except those operate by Canadian Pacific. • CP was worried about having to compete against a government owned railway. • Ultimately the government agreed to this recommendation.

30. The Crown Corporation: CN • The creation of this Crown Corporation was the best of many undesirable choices: • The government was heavily invested in these railways already. • Collapse of the railways would have been devastating to our banking industry and to our creditworthiness as a nation. • Pressures due to the war were contributing factors to the failings of the railways. • Ultimately it was the government’s allowing for the creation of the third line that brought the railways to the edge of disaster. • Government had no choice but to fix the problem them helped create.

31. The Attack on Crown Corporations • Crown Corporations were attacked by their critics as being: • Costly • Bloated • Unresponsive • Unaccountable • That they compete unfairly against the marketplace. • They have outlived their useful lives

32. Privatization of Crown Corporations • The reasons that government undertakes privatization are: • To improve efficiency • To reduce public sector borrowing requirements • To reduce government involvement in decision making • To gain political advantage

33. Arguments for Privatization Economic • Government may need to rid themselves of various enterprises to allow them to be more flexible and compete against the global marketplace. • Creates a negative impression for incoming foreign investment.

34. Arguments for Privatization Efficiency • Crown corporations are not efficient in achieving their goals and the public policy aims that they were created to meet can be better met thorough private sector ownership.

35. Arguments Against Privatization • Great skepticism in the free market • Underlying questions about the role of crown in nation building. • Concerns about big companies becoming even bigger. • Loss of government control in the economy

36. What has been the Impact of Privatization? • No substantial impacts of government deficits. • Receipts from sales could be negative as in some cases the governments overall investment exceeded market value.

37. Accountability in Government • How are government officials held accountable? • What is the difference between the elected officials and those that work in government?

38. A Government Divided • Any government in Canada is made up of two distinct parts that have very defined roles: • The Elected Officials • The Civil Service

39. Elected Officials • Elected officials are accountable to the public through the election process. • Elected officials derive their right to govern from the election process, and from the Rule of Law as laid out in the Constitution. • When government members are no longer deemed to be acting in the best interest of the citizens, they are often replaced.

40. Role of the Civil Service • While the civil service is theoretically supposed to be concerned only with the administration of policy, in practice the vast majority of government initiatives originates within the civil service. • This is because the civil service is a solution provider. While politicians are good at identifying problems they are not so good at fixing them.

41. Responsible Government • Keeps the best interests of the people as its ultimate goal. • Best interests are not always the most popular belief. • Often, politics ensures that the popular belief, not the right decision, is the one that ultimately is acted upon.

42. The Growth of Bureaucracy • Modern government bureaucracy really begins in the mid 19th century. This is when professional employees begin to handle the tasks of government. • Bureaucracy brought structure to organizational chaos. • Yet today, the word bureaucracy conjures up negative thoughts. Why? • Would we be better off returning to a time when there was no bureaucracy?

43. Perception of the Civil Service • While the perception of civil servants in the past was of a loyal, noble and professional civil service, that is not perhaps the prevailing view today. • During the 1970’s and 1980’s the Canadian economy was in a very difficult situation. The inability of the government to deal with this crisis and the growth of the welfare state led to broad mistrust and dissatisfaction.

44. Why Separate Administration from Politics? • Why is this necessary? • Civil servants must be able to present unbiased information to the decision makers. • Onus of decision and communication is on the elected officials. • Much like the law, the civil service must attempt to be impartial and impersonal.