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By Decebal, 2006; Revised
Category: 20th Century
Since the economic crises of the 1970s, a great shift in economic policy and ideology has occurred in several Western countries, most notably the United States, the United Kingdom and Canada. In the 1980s, under Reagan, Thatcher and Mulroney respectively, the governments of these countries undertook a series of reforms which greatly affected the economic outlook not only of the countries in question, but of the world. The movement which determined this shift in policy is often referred to as neo-conservatism, and the people who make up this movement are called neo-conservatives. This paper endeavors to describe the neo-conservative approach to economic policy in the three mentioned countries, but will focus on Canada. The background leading to the development of neo-conservatism will be examined first, followed by a summary of the ideology of this movement. The next step will be to examine neo-conservative economic policies in the U.S, U.K and Canada and to examine how the ideology of neo-conservatism actually conformed to the rhetoric put forward by the governments. It will be argued that although certain neo-conservative policies were implemented, such as free trade, the neo-conservative government in Canada was of a different brand than the “true” neo-conservative governments in the US and the UK. This difference can be attributed to typically Canadian problems: primarily the question of national unity but also the Canadian need for independence from the Americans. Since this paper focuses on Canada, we will examine the success of the Mulroney government in dealing with the Canadian economic problems of the 1980’s and 1990’s, and how the neo-conservatives in Canada ended up making different mistakes than their counterparts in the U.S and Great Britain.
To understand how the neo-conservative movement came about, we need to take a quick look at the world economy, from the end of World War 2 to the beginning of the 1980’s, when the neo-conservatives came to power in these 3 countries. After the war, the United States enjoyed an unprecedented period of economic prosperity. The most important reason for this was the fact that its main economic rivals (the West European countries, the Soviet Union and Japan) emerged from the war with great losses, both demographic and economic. Even after the Marshall plan, and the miracle recovery of Japan, the United States still continued to expand their economy at a comfortable pace. The main reason for this was the very cheap price of oil, and one of the main results was the fact that the world currencies were tied to the American dollar, which itself was tied to the gold standard . During the late 1960s and early 1970s, the American economy had become relatively too weak to keep on being tied to the gold standard, and so the U.S abandoned it in 1971-1972 . This would lead to world-wide inflation, but wasn’t in itself a reason for a recession. Unfortunately, in 1973, the Arab oil boycott imposed after the Yom Kippur War had the effect of soaring oil prices. From 1945 to 1972, the price of oil hovered around $2 US a barrel, but in 1974, the price jumped to $10.41. After a brief recovery, the price soared again even further, following the Islamic revolution in Iran, and reaching $35 by 1980 . The combination of inflation due to the abandonment of the gold standard, and an economic crisis triggered by the dramatic increase in the price of oil, led in the US, UK and Canada to a phenomenon known as stagflation. This constituted of a stagnating economy combined with high inflation and was disastrous for the economies of the 3 countries. The blame was laid upon the Keynesian policies which had been followed by their governments throughout the post-war period. Some have argued that in fact it would have been Keynesian policies which could have saved the situation in the late 1970’s and early 1980’s, and that these policies would in fact not have been needed at all during the years of economic boom . Nevertheless, the electorate and certain think-tanks chose to point the finger at these policies. Years of economic growth had enabled state corporations to grow massive and inefficient, while government programs used up a huge amount of resources in welfare states such as Canada and the UK. Economists and politicians argued that this was a big waste of resources and the way to move out of the recession was to modernize the economy by letting free market trends govern it, rather than the government. Interestingly enough, the ideas of neo-conservatism had their root primarily in the United States, where government had never been as involved in the industry as in Canada or the UK. It can be argued that in fact, many of the neo-conservative ideas are derived from the philosophy of evangelical Christians in the United States. The primary theme to these ideas is that man is inherently imperfect (“sinful”), and will take advantage as much as possible of a system where the state attempts to intervene on behalf of the less fortunate. The state must therefore intervene as little as possible, let market forces govern the economy, and minimize state corporations which are conducive to abuse and are therefore inefficient and uncompetitive . In fact, neo-conservatism represents quite a radical change from the old conservative movement, which although concerned with fiscal responsibility and opposed to high taxes, was in fact very concerned with the welfare of the unfortunate in the society and was not adverse to social programs designed to help the poor.
A closer examination of the neo-conservative ideas and policies is now in order. The cornerstones of neo-conservative thought are a free economy and a state which is strong yet doesn’t control the economy, but is strengthened by it instead. These two issues may seem at first to be antagonistic. A free economy implies as little state intervention as possible; therefore this means that the state should have little say in the economy, impose low taxes and that state corporations should be avoided at all costs. This suggests a state that is greatly reduced and therefore weak. The neo-conservatives believe though, that since a free economy is ultimately an efficient economy, this will maximize the amount of revenue brought in by taxes and ultimately strengthen the state. The state will always be needed to police the market and the society, and will be necessarily strong because of that, but should act only as a moderator and not as an active player in the economy. This inherent paradox present in neo-conservative ideas has to do with its genesis in both liberal and conservative thought . On an economic level, the neo-conservatives believe that the social democratic programs should be cut, that taxes should be lowered, and that state corporations should be privatized as much as possible. Supply side economics dominate as opposed to Keynesian economics. These are typical liberal policies. The conservative influence on neo-conservative thought can be seen in their attitudes towards the state. The state must be strong enough to remove the vestiges of socialism such as high taxes and expensive social programs, to police the market order, to make the economy more productive and finally to uphold the social and political order .
It is by no coincidence that Reagan was a neo-conservative and also was one of the US presidents most virulently opposed to communism. Communism and socialism are seen as great evils in society by the neo-conservatives, which must be fought at all costs.
The biggest problem that the neo-conservatives face is the actual implementation of these policies in a democratic society. This is especially the case in Canada and the UK, which by the early 1980s were virtual welfare states, with massive social programs, free healthcare and education. Such programs quickly become very popular with the general population, and the voters tend to feel very strongly about their disappearance once they’ve gotten used to them. Cutting taxes is popular with the electorate and the business community, but cutting social programs is not. Big governments have a lot of inertia and are very resistant to change, while privatization of state corporations can lead to mass unemployment in the short run. Certain economic policies can face considerable opposition from the part of trade unions, which often carry a lot of clout and can be an important factor in the next election. As we shall see, neo-conservative governments in Canada, the US and the UK have had to deal with these problems during their tenure in the 1980s.
In the all three countries, there was a considerable deal of deregularization and trade liberalization. In the early 1980s, the top priority of the governments was at first to control inflation. The way that this was achieved was by raising interest rates, and by controlling public expenditure. Concomitantly, income taxes were lowered, but sales taxes were raised. This had the effect of discouraging consumption and encouraging savings instead. In the UK, the value added tax was almost doubled from 8 to 15%, while the average income tax was lowered from 33 to 30% . In Canada, the Federal Sales Tax (FST) which was widely condemned for damaging Canadian competitiveness, by favoring imports over domestic production, was replaced by the GST on January 1, 1991 . Although this move was seen as necessary by most tax experts, this was also quite an unpopular move. The raising of interest rates and the restructuring of taxes combined in the short term with the earlier economic conditions to create a massive government deficit. The solution to the deficit was to cut back on the generosity of state programs and thus to enable further tax cuts. In the US and in the UK, this was done on a large scale. In the UK, cut-backs in 1980 alone amounted to 1.5 billion pounds . In Canada however, although the rhetoric of the government was similar, very little headway was made in cutting back on social programs. Although the economy rebounded sharply after the recession of 1981, the progressive conservative government of Mulroney chose to turn a blind eye to the potential future problems generated by the massive deficit. During the mid 1980s, public debt in Canada was mounting at a rate of $100 million dollars a day. The failure of the government to deal with this can partly be attributed to their desire to stay in power. While both Keynesian and conservative economics advised a balancing of the budget, the Mulroney government preferred to ensure their popularity for the next election by letting the debt mount . However, as we shall later, in Canada, unlike the UK and the US, the government had other issues to worry about besides purely economic considerations.
National unity was also an important factor in the equation, and the government had to be careful about imposing measures which alienate Quebec.
The other important ways in which the neo-conservative governments of the UK, US and Canada proceeded about restructuring the economy, were the privatization and deregularization of state enterprises and the introduction of free trade. This constituted advances towards the free economy that is one of the pillars of neo-conservatism. In Canada, the government sold de Havilland and Canadair. Mulroney declared that the country was bankrupt and that the government would put an end to PIP grants and some of the Canadian disastrously unprofitable big businesses . However, his rhetoric did not quite live up to his actions. The Canadian government did not close down the unprofitable Mirabel Airport, did not end subsidies to Via Rail, and engineered costly bail-outs of Canadian banks which failed anyway. This can be compared to the fiscal policy undertaken by Britain, where the National Enterprise Board was forced to sell assets worth 100 million pounds, where the regional support budget was cut by a third, and where major companies such as British Telecom, British Gas and British Airways were privatized . In the US, the popular attitude was mistrustful of big government to begin with. Reagan’s presidency fed on anti-Washington feeling and a conservatism which led to a major attempt to scale down the size and activities of governments, which were already proportionately smaller at federal, state and municipal levels than their Canadian counterparts . Therefore, the deregularization and privatization of state businesses was a lot more popular in the US than in Canada. In all fairness, the American
economy was lot more robust and diversified than the Canadian one, so that measures such as cutbacks and restructuring by the government would have less of an immediate impact on the working class. Combined with the attitude of the electorate in general, this meant that the American government could enact their neo-conservative policies without worrying so much about the next election, unlike Canada, where the indiscriminate application of these policies would have meant sure defeat in the next elections. In Britain, the impact of the deep tax cuts all while maintaining a certain level of public expenditures, was largely minimized by the windfall provided by the discovery of oil in the North Sea. Also, the impact of the restructuring of the state businesses and the subsequent rise in unemployment was partially offset by the discovery of oil and by new business created as a result of the tax cuts. Without the windfall resulting from the oil, it is unlikely that the British government would have remained popular enough to be reelected in the 1987 . The Canadian government did not benefit from a large diversified economy like the US, nor from an unexpected windfall like the UK, so therefore it could not keep pace with the economic reforms implemented by their counterparts.
Free trade was another important issue in the neo-conservative agenda. Free trade is one of the characteristics of a free economy and it also agrees with the supply-side economics favored by the neo-conservatives. For the UK, the tendency for free trade has manifested itself in its dealings with other countries in Europe, and the forming of the European Common Market and then the European Union. The treaty of Maastricht in 1992 has cemented these relations and it came on the heels of the neo-conservative government of Thatcher . In North America, Canada and the US first started considering the possibility of a free trade agreement during the Shamrock Summit, in Quebec City, in 1985. The accord was then ratified in January 1988 and became valid on January 1, 1989. This agreement committed the two countries to remove nearly all barriers to trade over a 10 year period. Following this accord, Mexico requested to enter in a free trade agreement with the US. Fearing to be left on the outside, Canada asked to join the talks. Thus, NAFTA was ratified in 1992 and came into effect in 1994 . It is unlikely that an old fashioned Canadian government would have pushed forward for a free trade agreement with the US. The traditional and popular attitude of Canadians in the 20th century was that they did not want to become a satellite of the US (at least not any more than we already are). During the 1960s and 1970s, the Canadian government practiced an interventionist and protectionist policy towards Canadian enterprises. NAFTA marked a major change in direction from the part of the Canadian government, in that it exposed Canadian enterprises to direct competition with American and Mexican businesses. Due to the nature of the Canadian economy which relies on massive exports of raw materials to the United States, this shift has proven to be benefic so far to the Canadian economy and thus to be popular with the general population. Time will tell though whether free trade might actually constitute a problem in the long run, as it might impede the Canadian economy’s ability to diversify. In the short term though, Canada along with the US and the UK, have benefited from the free trade agreements pushed forward by their neo-conservative governments, and enjoyed a period of economic boom in the 1990s.
We shall now examine some of the particulars of neo-conservative policies and actions during the 1980s and the early 1990s in Canada, and how they were influenced by some very Canadian issues. We have discussed before about how there are some differences between the neo-conservatives in Canada and the neo-conservatives in the US and the UK. The main reasons for these differences are the problem of national unity and the Canadian fear of losing the country’s independence to the US. Added to this, there’s another difference between Canada and the US only, in that Canadians are much more attached to socialist institutions such as free health care, and are much more receptive to big government than Americans are. For these reasons, the Canadian brand of neo-conservatism has been much less radical than the American and even the British one. In some ways, this was the Canadians neo-conservatives downfall. In the US, Reagan was a very popular president and today the neo-conservative dominated Republican government is stronger than ever. In the UK, Margaret Thatcher has been one of the most successful prime ministers ever, certainly since Churchill, and today the British economy is doing quite well, thanks largely to the reforms implemented during those years. By contrast, in the 1993 elections, the Canadian Progressive Conservative party was destroyed in the elections and was engulfed a decade later by a regional-based neo-conservative party, namely the Alliance . The party which replaced it, the Liberals, also has some neo-conservative tendencies, as far as free trade is concerned, but does not have the same aversion to social programs that neo-conservatives should.
We have already discussed how the Canadian economy cannot be compared to the American and British economies and that the Canadian government would have had some inherent difficulties implementing cutbacks and reforms, as opposed to the UK and US. There are other reasons, other than economic though, which also contribute to their failure to implement such reforms. The first reason why the Mulroney government couldn’t implement all the neo-conservative policies it might have wished to implement, has to do with Quebec. During the 1980s, Quebec held a failed referendum dealing with its sovereignty, and the fear was that another referendum, successful this time, might occur. This fear is exemplified by the Meech Lake and the Charlottetown Accords, which attempted to placate Quebec, but ended up alienating the rest of the country instead. Quebec also happens to be arguably the most socialist province in Canada. It was clear to the Mulroney government that true neo-conservative actions such as cutting public expenditure and privatizing crown corporations with the resulting unemployment, would be extremely unpopular in Quebec. The risk was therefore that a truly neo-conservative government could have completely alienated Quebec and in the process broken up the country . The second reason why the progressive conservative party, during their tenure did not pursue certain typically neo-conservative policies such as privatizing crown corporations, was the ingrained Canadian fear of losing the country’s independence to the Americans. The government in fact ended up propping Canadian corporations for the simple fact that they were Canadian. The Mirabel Airport, Dome, Via Rail and other Canadian companies were more than simply companies in the public eye: they also represented points of national pride in the eyes of most Canadians. Opening up the market to foreign companies and stopping subsidies and grants to Canadian companies, even if they were unprofitable, would have gone against a deep Canadian prejudice against foreign business in general and American business in particular . In recent years though, some of that prejudice has waned enough for neo-conservative inspired entities such as NAFTA to be popular with the Canadian public. Even so, privatization and deregulation of Canadian public-held companies would have been very unpopular with the public and would have probably resulted in sure electoral defeat. Overall, it can be said that Canadian neo-conservatives, even if similar in rhetoric to their counterparts in the US and the UK, were forced by some specifically Canadian realities not to implement some crucial neo-conservative measures, namely cutting public expenditure and privatizing state companies. They did take some neo-conservative measures, such as pushing for free trade agreements and reforming the tax code. Ultimately, the combination of action in the trade and taxes area and inaction in the area of public expenditures resulted in the very non-conservative, huge deficits which the Mulroney government ran throughout its tenure.
We have described the neo-conservative approach to economic policy in Canada, the United States and the United Kingdom in the 1980s and early 1990s. The background leading to the development of neo-conservatism was examined, and it was explained how it was possible for the neo-conservatives to take power in these three countries. The ideology of this movement was examined and the roots of neo-conservatism in both liberalism and old-fashioned conservatism were pointed out. A comparative description of the neo-conservative economic policies in the U.S, U.K and Canada was done, and we examined how the ideology of neo-conservatism actually conformed to the rhetoric put forward by the governments, particularly in Canada. We have seen that although certain neo-conservative policies were implemented, such as free trade, the neo-conservative government in Canada was indeed of a different brand than the “true” neo-conservative governments in the US and the UK. This difference was attributed to typically Canadian problems: primarily the question of national unity but also the psychological need of the Canadian public for independence from the Americans. These problems ultimately made the Mulroney government fail to deal with some of the economic problems of the 1980s.
1. Andrew Gamble, The Free Economy and the Strong State: The Politics of Thatcherism (Southampton, 1988), pp. 39
2. Gamble, pp. 40-41
3. Monte Palmer, The Politics of the Middle East, (Peacock Publishers, 2002), p. 236
4. Gamble, pp. 42-43
5. David J.Rovinski, In Search of Canadian NeoConservatism
6. Gamble p.28
7. Ibid p. 32
8. Gamble p. 99
9. Kenneth Norrie, Douglas Owram, J.C. Herbert Emery, A History of the Candian Economy (Nelson, 2002), p.419
10. Gamble p.99
11. Michael Bliss, Right Honourable Men, (Harper Collins, 1994), p.290
12. Michael Bliss, Northen Enterprise, (McClelland and Stewart 1987), p.575
13. Michael Bliss, Northern Enterprise, p. 575
14. Gamble, p.116
15. Michael Bliss, Northern Enterprise, p. 570
16. Gamble, p.123
17. Robert Gilpin, Global Political Economy: Understanding the International Economic Order, (Princeton 2001), p. 37
18. Norrie, p.417
19. Michael Bliss, Right Honourable Men, p.311
20. Michael Bliss, Northern Enterprise, p. 578
21. Michael Bliss, Right Honourable Men, pp.294-303