The Three Key Moments in Canada’s Neoliberal Transformation

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By Jim Stanford *

Introduction: Canada, Then and Now 

The last three decades have witnessed a far-reaching transformation of the Canadian economy, politics, and culture.  Canada is not unique in experiencing this neoliberal transformation, of course, but it has been as dramatic, thorough, and socially destructive here as almost anywhere else in the industrialized world.  Even before that transformation began, Canada was hardly a model of inclusion, equality, and democracy. 

But in the latter years of the postwar expansion, Canada progressed both economically and socially.  Living standards were improving quickly for most – fueled by rising real wages (which doubled in a generation), and a dramatic expansion of the social wage (including the introduction of national medicare, unemployment insurance, and the Canada Pension Plan within six remarkable years, from 1965 through 1971).

We were catching up to the U.S. economically (and surpassing it socially), escaping our traditional status as “poor cousins” to the North.  And we carved a unique and somewhat independent role for the country in global economic, political, and military affairs.  This confidence, hope, and momentum was symbolized by Canada’s hosting of Expo 67 in Montreal, the year of the country’s centenary – officially opened with then-Prime Minister Lester Pearson’s claim that it constituted “one of the most daring acts of faith in Canadian enterprise and ability ever undertaken.”  

This expansionary postwar “golden age” eventually ran up against its own internal limits and contradictions.  As in other advanced capitalist countries, the happy recipe of strong profits and business investment, rising living standards, and Keynesian welfare-state fine-tuning, began to disintegrate.  The Polish economist Michal Kalecki presciently predicted after World War II, just as Keynesianism was being consolidated, that capitalism would eventually experience a “full-employment sickness.”  As workers were empowered by long-run employment and income security, their expectations would grow, sparking increasing conflict with the interests of capitalist employers in maintaining a compliant, disciplined, low-cost workforce.  A confident working class won a larger and larger share of the economic pie: in Canada, the labour share of GDP grew steadily through the postwar era, peaking in the late 1970s.

Even worse for employers, workers demanded changes in the workplace, and society, that constrained the freedom and power of business.  The expansion of an interventionist state meant rising taxes and stronger regulations.  Internationally, national liberation movements curtailed capitalism’s geographic scope.  Most importantly, business investment – the underlying engine of the postwar expansion – slowed appreciably. 

Neoliberalism represented a multi-faceted, deliberate, global strategy by elites (in both the financial and the real spheres of the economy) to turn the whole ship around.  A generation later, it is sobering to consider how successful that strategy has been.  It has clearly empowered and enriched corporations and those who own them, and put workers on the defensive everywhere.  On the other hand, despite these successes, neoliberalism has not succeeded in creating a world economy which is stable (witness the dramatic events of 2008-09), efficient, or succeeds in meeting real human needs.

Neoliberalism has been applied harshly in Canada, consistent with the international trend, but also reflecting the unique features (and weaknesses) of Canadian capitalism.  In my review of the history of neoliberalism in Canada, I identify three crucial transition points: historical moments when neoliberal principles and practices were introduced, consolidated, and ideologically cemented.

  1. A dramatic shift in the emphasis of monetary policy in the early 1980s.

  2. The implementation of Canada-U.S. free trade in 1989.

  3. A dramatic increase in the economy’s reliance on resource extraction and export (especially petroleum), beginning just after the turn of the century. 

The rest of this article considers each of these transition points in turn, and then concludes by mapping the transition points using a selection of statistical indicators.

Transition #1: Monetary Policy 

The cannon shot that truly heralded the advent of neoliberalism in Canada was the interest rate shock that occurred here in the early 1980s, overseen by the Bank of Canada’s then-Governor Gerald Bouey.  This was an echo of the similar shift in monetary policy that had occurred south of the border a couple of years earlier: the famous “Volcker shock,” engineered by U.S. Fed chairman Paul Volcker beginning in 1978.  This action, by an unelected economic authority, laid the foundation for the advent of neoliberal macroeconomic priority (abandoning full employment, prioritizing the interests of financial wealth, and ushering in a new ideology of tough-love capitalism).  The interest rate shocks were cemented politically in short order with the election victories of Margaret Thatcher and Ronald Reagan (and, shortly after, Brian Mulroney in Canada – although it wasn’t until Stephen Harper’s election in 2006 that Canada experienced unforgiving, no-holds-barred neoliberal government of the sort pioneered by Thatcher and Reagan). 

At that time, Canada was officially governed by the Trudeau Liberals, representing one of the last gasps of postwar Keynesian interventionism.  In fact, in his last term Trudeau oversaw additional (but contradictory) encroachments into the private sector (including through the now-infamous National Energy Policy).  But the true direction of capitalist governance was heading elsewhere, and Bouey’s decision to shock the Canadian macroeconomy with a cold monetarist bath, modeled on earlier U.S. and U.K. strategies, was a crucial turning point.  Following the now-disproven belief of hard-core monetarists that the central bank could directly control the growth in the money supply (and thus wring inflation from the system), credit growth was curtailed and interest rates shot up.  Prime lending rates reached an incredible, historic peak of 22.75 percent in summer 1981.  Monetary authorities showed they were willing to sacrifice the course of the whole economy in order to impose this painful new doctrine.  They demonstrated that reducing inflation and preserving the value of financial wealth (which suffered badly during the turbulent, militant 1960s and 1970s) was now the number one priority of economic governance.

Indeed, Bouey’s actions (reinforced by parallel measures in other countries) threw Canada’s economy into its first major postwar recession – and it was a brutal one.  Tens of thousands of Canadians lost their homes, unable to cope with exploding interest costs, and unemployment soared into the double digits.  This was no normal cyclical downturn, however: it was engineered, and aimed to achieve a permanent shift in the expectations and behaviour of the labour market.  Labour and social movements responded with some militance: the Canadian Labour Congress organized a coalition against high interest rates (that featured a massive rally on Parliament Hill), and local activists organized unemployed workers’ centres and other fight-back initiatives.  But mass unemployment was to become a deliberate, permanent feature of the economy.  The new macroeconomic “consensus” (which eventually abandoned the monetarists’ religious faith in directly targeting the money supply, but pursued the same ends more adeptly through direct interest rate manipulation) justified mass joblessness as reflecting a “natural” or “non-accelerating inflation” rate of unemployment.  In practice, however, this was a modern take on Marx’s century-old theory of the reserve army: the system must be managed (again, as Kalecki predicted) in order to maintain sufficient unemployment to threaten and discipline all workers.

Bouey was succeeded at the Bank of Canada by John Crow, who engineered an even more aggressive disinflation in the early 1990s (and that sparked another major recession), and ushered in the era of formal inflation targeting.  Subsequent leadership at the Bank has proven, in various ways, to be somewhat more flexible and pragmatic (especially in the wake of the 2008-09 financial meltdown).  But the fundamental tenets of neoliberal monetary theory have become well-entrenched, indeed.  The idea that an unelected (so-called “independent”) monetary authority must focus on controlling inflation at a very low rate, with no direct regard to other economic or social priorities (including unemployment), is now virtually sacrosanct in Canadian political-economy.

* Jim Stanford is an economist with Unifor. He is the author of Economics for Everyone (published in 2008 by Pluto Press and the Canadian Centre for Policy Alternatives), which has been translated into six languages. This article first appeared in Canadian Dimension magazine and is reprinted here with permission.

To be Concluded

JULY 2018

Vol. 12 - No. 12


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