click to enlarge, double click to reduceCanada’s last two recessions before The Great Recession were in 1982 (-6.7% GDP over 18 months) and 1990 (-3.2% GDP over 12 months). But the disruption to the Ontario economy was much more acute in 1990.
Bob Rae: the poster child for Keynes gone wrong
Bob Rae: the poster child for Keynes gone wrong
Keynesian economists blame high interest rates meant to fight inflation and tight fiscal policy from federal debt burdens as the cause of the recession in 1990. Others suspect that a global recession, oil shock, a newly instituted Value Added Tax which threw national pricing for a loop, and structural economic adjustments to NAFTA as more likely causes.
In 1990 the NDP party led by Bob Rae swept into office in Ontario, surprising the pollsters and the electorate. Ontario's economic forecast was not optimistic; economists projected a $1.5B deficit from a $1B surplus a year earlier. Rae, armed with his mandate, quickly went to work.
His response to the recession, a classically Keynesian approach of public sector spending, aligned well with his socially far left constituency and political view. He passed rent control laws, employment equity legislation, banned replacement workers during strikes, significantly increased education and public sector wages, social assistance, housing and child benefits, capped enrollment on medical schools, declared a moratorium on nuclear energy, proposed public auto insurance which never passed, and raised taxes for high-income earners while lowering rates for 700,000 low-income earners. Does any of this sound familiar?
The resultant deficit of $9.1 billion was a gobsmacking historic record and budged unemployment not an inch. A little over a year later, the province now reeling, Rae slowly began to get religion; he began budget cuts (he berated the federal government for doing the same thing 2 years before) and froze public sector wages which he had just significantly expanded. His lipstick on a pig cost containment measures only served to alienate his core union constituency who now hated him.
United States emerged from the recession in late 1992. Ontario, mired in a mountain of debt, crawled out in 1995, leaving soaring rates of depression, alcoholism and drug abuse.
The differences between Rae then and Obama’s situation now are not so much ideological; Obama’s stimulus package was heavily prejudiced in favor of government bureaucracy over private sector jobs and his planned policies eerily mirror the reforms Rae put in place in 1990. That the nature of green energy reform remains virtually unchanged twenty years later is a testament to the consistency of the socialist agenda.
But the structural differences are huge. Obama has the Federal Reserve and the Treasury Department amplifying his Keynesian approach. The crony capitalism in American politics is gargantuan. He has the power of the presidency and the benefit of the world’s de facto currency to keep the reality of his financial situation at bay. And while Ontario has a Parliamentary system in which to act, the triumvirate system in the USA is meant to prevent the accumulation of power, and ironically works as a barrier to disseminate it.
Whatever happened to Ontario? A renewed conservative party required a decade to restore fiscal viability to the driving engine of the Canadian economy by dismantling NDP socialist contracts. The NDP receded into obscurity. Rae left the NDP party and has publically stated that his largest mistake was to believe that Keynesian priming of the economy was possible.
Mike Harris, the conservative architect who restored Ontario’s surplus has often said his greatest mistake was lack of speed. He first considered that a slower transition was less disruptive, but as the years progressed, he noticed the faster he instituted pro-growth policies, the faster the economy grew and unemployment dropped. As Homer Simpson says, "Doh!"
In 2005 Rae was asked in an interview of Tony Blair’s “third way,” the British Labor party’s concession that socialist collectivist ideology was incorrect; there were tremendous opportunities in capitalism, although the public sector could still play a vital role. Rae’s response was simple. When government involvement exceeds 30% of GDP, it no longer does any good. Further, government should stay away from administrating institutions since they aren’t good at it. One might ask Rae why he still insists on stopping there.
No one is suggesting that we shouldn’t find an economical way to provide health care or aid to the disadvantaged in America. And certainly conservative talking points lend themselves to the leftist caricature of cold hearted, greedy, homophobic rubes. But even an over educated socialist must admit to the mountain of evidence on the inefficiency and statist effect of bureaucracy.
So Americans have two choices. They can subsidize and incent individuals to improve their lives, leaving markets to innovate and control costs. Or they can subsidize institutions and manipulate whole sectors of the economy to do the same thing. We still understand the monumental difference, don’t we?