Monday, June 18, 2007

How The MacDonald Commission Changed Canada

With the Conservative governments announcement of further bi-lateral free trade agreements, we should return to the roots of this policy. One that was developed by the Liberals over twenty years ago. Credit where credit is due, the Liberals set the agenda for the development of Free Trade which the Conservatives under Mulroney and Harper have merely inherited. Proving once again the axiom, Liberal, Tory same old story.

Tracing the roots of Canada’s contemporary involvement in North American free trade back to the Royal Commission on the Economic Union and Development Prospects for Canada in 1985 – also known as the Macdonald Commission – Gregory J. Inwood offers a critical examination of the commission and how its findings affected Canada’s political and economic landscape, including its present-day reverberations.

In this case the recommendations that led to the reinvention of the Liberal government as a Neo-Liberal government began with the Commission they set up under Donald MacDonald.

Macdonald represented the Toronto-Rosedale riding for 16 years as a federal member of parliament. He served nine years as cabinet minister in portfolios such as national defence, finance and energy, mines and resources. He was high commissioner for Canada to the United Kingdom from 1988 to 1991, and from 1982 to 1985, he chaired the Royal Commission on the Economic Development Prospects for Canada (known as the Macdonald Commission).

What the Liberals didn't do was follow the MacDonald Commission recommendations on UI/EI.

Moreover, instead of following the Commission’s recommendation for increasing federal contributions to UI during recessionary periods, the government eliminated all contributions to the program by 1990. And there is no evidence that the government has seriously considered proposals made by the Commission and others for experience-rating the program’s financing.

The intensity rule and benefit clawback of 1996 were sold as “worker-side experience rating” (see Nakamura and Diewert (2000)), but they proved as politically unpalatable as employer-side experience rating of premiums. Indeed, since the mid-1990s and continuing today, the feds’ most notable attitude toward EI is that the program is a handy, covert source of net funds for other governmental purposes.

Nor did they follow the Commissions recommendations for a Guaranteed Annual Income.

The Universal Income Security Program (UISP) was the Commission’s other major recommendation for reforming income security. In essence, the UISP was a guaranteed income scheme that would have replaced other programs such as the Guaranteed Income Supplement, Family Allowances, the refundable child tax credit, child and marital tax exemptions, federal social housing programs, federal transfers to the provinces for Social Assistance (SA), and the income support functions of UI. UISP payments were to be made on an income-tested basis, with a tax-back rate of 20 percent applied to all income in addition to the normal personal income tax rates. The Report stated, “The UISP seems to Commissioners to be the essential building block for social security programs in the twenty-first century.

Instead they applied a neo-liberal approach of tax credits, which increased the taxable income of those who received government supplements. So in effect the working poor, paid for a benefit they received from the government. The Federal government let the provinces off the hook by paying their share, and allowing them to cut Social Assistance on the promise that the savings would go back into broad based public programs for the working poor.

The reality was a claw back of provincial benefits, real cash in your pocket, for a credit chit from the Feds, your tax dollars at work. The ensuing benefit not being taxed, meant that the working poor moved up the income tax scale. Not unlike the current Conservative Child benefit; their so called universal child care program.

Second, beginning in 1998 the National Child Benefit (NCB) System subsumed the CTB and replaced its earnings-related benefit with a substantial cash supplement for lower income households with children. Under agreements with the federal government, most provincial governments reduced their SA benefit rates for children by amounts equivalent to the NCB supplement. Again, this scheme pursued a Commission goal of reducing the disincentives for welfare beneficiaries to seek or return to work. These changes also reduced the break-even
income levels for welfare beneficiaries, though the provinces have not reduced phase-out rates for their own benefits. The “reinvestment” of provincial savings from reduced SA cash benefits into in-kind benefits for the working poor and welfare beneficiaries promoted the lowering of the welfare wall, but the benefit phase-outs further aggravated disincentives for the working poor.

Despite the visible positives from the NCB initiative, the scheme also mirrored the
hidden deficiencies of the Commission’s UISP scheme. That is, the NCB supplement phase-out sharply raised the effective marginal tax rates faced by many working poor and near-poor families. The NCB scheme did reduce the “welfare wall” but simultaneously erected a higher “success wall” keeping the working poor and near-poor from advancing to higher earnings.

What made the MacDonald Commission unique was the near unanimty of the political economists who agreed that Free Trade was the panacea for Canada's stagnating economy. An economy that was no worse off nor better off than any other at the time of global recession. However dissident voices were not to be found amongst the Academics of the day who promoted Free Trade saying There Is No Alternative. And so the Liberals led the push for Free Trade despite John Turners tearful denials in his debate with Mulroney and Broadbent.

Policy makers who want a policy initiative in place may well foster the research to support the initiative. This fostering could come in various forms: commissioning background studies from sources known to favor the initiatives; designing the terms of reference in ways that will yield favorable results; “advertising” favorable results while “burying” unfavorable results; or, reviewing the research with suggestions tilted towards influencing the results or having them presented favorably.

In Canada, the signature recommendation of the Macdonald Royal Commission of 1985, was for a bilateral free trade agreement between Canada and the U.S. That recommendation led to the Canada-U.S. Free Trade Agreement (FTA), negotiated between 1985 and 1987 and implemented January 1, 1989. The research of the Commission was extensive, involving 280 studies done mainly by 300 different academics in 70 volumes.

The importance of academic research to the Commission is also illustrated by the fact that 84 percent of the 1,014 references in the final report are to research studies (67 percent from the academic literature and 17 percent from the background research studies of the Commission which tended to synthesize the academic research). Only 10 percent of the references were to briefs formally presented to the Commission and 6 percent from references to transcripts of the public hearings (calculations from data in Inwood, 2005:181).

The fact that the academic research generally favored free trade while the briefs and public hearings generally involved advocacy positions opposed to free trade, suggests that the research also had a greater impact (Inwood, 1998:18).

The research on trade had a number of important characteristics that likely facilitated its
impact on public policy. It was high quality research done by top researchers in the country and coordinated by a prolific and respected trade economist. The computable general equilibrium models were particularly influential, especially because they captured the indirect productivity enhancing effects of the restructuring that would occur because of the economies of scale for producing for a large market. The research of the Commission generally involved a synthesis of the cumulative stock of existing research, the vast majority of which favored free trade. The near consensus perspective favoring free trade is illustrated by the fact that “only one academic could be found to make the anti-free trade case out of the approximately three hundred hired by the Commission” (Inwood, 1998:35).

This homogeneity of perspectives within economics and the rigor with which they are advanced made economics prominent as a source of policy advice to the Commission (Simeon, 1987). Brooks and Gagnon (1988:109) conclude that this is a more general phenomenon: “There can be little doubt that economists remain pre-eminent among social scientists in their integration with the policy process.”

The research also had champions who made the case for free trade to the Commissioners and to the politicians, and who defended it in the heated public debates that ensued. Trade unions strongly opposed the FTA and organized public forums against it. In countering this, Macdonald (2005:11) acknowledges the important role played by an Industrial Relations academic, John Crispo, for “his robust platform technique which ultimately frightened away the union leaders from contested meetings where initially it was they who had brandished the verbal brass knuckles.”

There were certainly attacks on the research and on the academic case for free trade. However, the attacks tended to be polemic and based on more nationalistic denunciations of free market economics in general. They tended not to provide alternatives based on different methodologies, and the work was generally simply presented at conferences or published in forums of contemporary opinion as opposed to peer-reviewed academic journals (Inwood, 1998:5).

The term neo-liberal was coined in this period to note the shift that mainstream political economists were making in calling for Free Trade, reductions in social benefits, reinventing government, contracting out services and privatization. All these went hand in hand, and while promoted by neo-cons elsewhere in Canada they truly were policies of the New Liberals; neo-liberalism.

Begun by Trudeau and MacDonald they were then carried through in the nineties by Chretien and Martin. The current Conservatives are the beneficiaries of the Liberal restructuring of the state.

While free trade was the signature recommendation of the Macdonald Commission, numerous other recommendations were made backed by labor and social policy research. As Riddell (2005) indicates, many of these
recommendations were implemented into policy, including unemployment insurance reforms; active adjustment assistance policies; income supplements to the working poor; national testing of student achievement; and deemphasizing minimum wages.

In his overall assessment, Bradford (1999/2000:158, 159) concludes: “The Macdonald Commission report remains the essential component reference point for the host of era-defining policy innovations, ranging from continental free trade to restrictions on unemployment insurance and retrenchment of the federal role in social assistance, legislated between 1985 and 1997 by successive Conservative and Liberal governments.”

Freer trade was also regarded as a potentially effective way for the federal government to pressure provincial governments to adopt market-oriented reforms given the substantial control they have over policy initiatives in Canada’s system. This was especially the case since there was a backlash against the nationalist and government interventionist policies that prevailed during the 1960s and 1970s, including wage-price controls, energy price fixing, foreign investment restrictions, government procurement policies, and a state trading corporation to
assist smaller Canadian firms to sell to centrally planned economies (Chant, 2005:14). Such policies were often regarded as contributing to the worst recession Canada experienced since the Great Depression of the 1930s.

Interestingly, while he was previously in political office, Macdonald himself presided over many of these interventionist strategies including a national oil policy, a state-owned petroleum company, government investment in oil developments that were avoided by the private sector, price controls on uranium exports, and the wage-price control program. He attributes his conversion to free trade and less government intervention to: “My experience in the private sector after my departure from government made it clear that state-controlled programs
had failed to achieve the rates of growth to which we all aspire” (Macdonald, 2005:9).

This rejection of nationalist-interventionist policies also occurred for Prime Minister Trudeau who had earlier instituted many of the policies in the 1970s. By 1982, he indicated: “Personally, I remain convinced that the primary engine of economic development must be a dynamic private sector and that the marketplace is in most circumstances the best allocator of scarce resources”

The Liberal reinvention of government in this period meant the whole scale contracting out of government services, in particular computer based IT as well as P3 programs and the sell off and lease back of government buildings. Which has resulted in the the various scandals and boondoggles from the Gun Registry to the RCMP pension fund scandal.

That the Conservatives could get former Liberal Industry Minister David Emerson to cross the floor days after his election to occupy his old cabinet seat shows how interchangeable the two parties are when in power. After all Emerson is simply following through on Liberal policy even as a Conservative.

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