Mulroney's economic legacy

Brian Mulroney's* memoirs came out this week. The initial reactions have so far concentrated on his settling of accounts with Lucien Bouchard, but there have been a few comments about Mulroney's desire to polish his claim to a positive judgment from future historians. This is of course the goal of all former politicians, but when it comes to economic policy, Mulroney's case is stronger than most:

FTA/NAFTA: The treaty and the 1988 election upon which it was largely based occurred when I was in grad school. At the time, my impression of the general consensus among economists was that the FTA was on the whole a good idea (we understand the theory of comparative advantage), but that it wasn't all that big a deal. The US and Canadian economies were fairly similar, and already highly integrated: all the low-hanging fruit from the gains to trade had been pretty well picked over. And that consensus pretty much characterises what actually happened. The canonical study of the effects of FTA/NAFTA on the Canadian economy is Dan Trefler's 2004 AER article (26-page pdf), which concludes that its effects were - after a not-inconsiderable period of adjustment - small and positive: "a 3-percent rise in earnings spread over eight years will buy you more than a cup of coffee, but not at Starbucks." Nor is this view confined to the ranks of trained economists: public opinion polls suggest that 70% of Canadians support NAFTA. Small wonder it has survived five federal elections since then.

The GST: If you asked a specialist in public finance how best to raise tax revenues without tanking the economy, the answer would be 'Consumption taxes. Theory suggests that these are the least harmful to economic growth, and available evidence supports the theory.' This advice would be accompanied by the caveat that consumption taxes are regressive; it would be a good idea to implement a program of direct transfers to low-income households in order to compensate. I haven't read Mulroney's memoirs yet, but I'd be surprised if the decision to set up the GST didn't follow this scenario. The GST has never been popular, but it too has survived five elections. Sadly, it was wounded in the aftermath of the Conservative victory in 2006, when it lost a percentage point. But the GST credit survives - and is still the only federal targeted transfer program aimed at supplementing the incomes of low-income households.

Inflation targeting: Strictly speaking, this was a decision taken by the Bank of Canada, but Mulroney's government lent whatever credibility it could to the project. Implementing it was a painful process - the recession of the early 1990's was a brutal affair - to Kim Campbell's and John Crow's cost. But again, this policy is still in place after five elections - and inflation has fluctuated  in a narrow range around 2% for some 15 years.

Fiscal Policy: Although the Liberals - and Paul Martin in particular - get pretty much all the credit for finally conquering the federal government deficit, they really only deserve about half of it. As documented here, slaying the deficit dragon required transforming an operating deficit of -3% of GDP to a surplus of 6% during the period 1984-2000. The Mulroney government turned the -3% deficit into a 2% surplus before the 1991-2 recession brought it back down again. The Liberals are to be congratulated for finishing the job - but then again, they were the ones who had created the problem in the first place.

Scrapping the NEP: As explained here, the National Energy Policy amounted to a transfer from producers of oil to consumers, with a significant amount of deadweight loss along the way. Since the Trudeau Liberal govt of the time had broad support among the winners and almost no support among the losers from this transfer, they had few qualms about efficiency losses. Similarly, it's unlikely that Mulroney had those efficiency losses in mind when the NEP was abolished: he was rewarding his base. Notwithstanding, the efficiency losses were removed.

These programs generated significant adjustment costs. It was Kim Campbell's sad fate to pay the electoral price for them, and Mulroney has played the role of piñata in numerous accounts of the history of those times. But his government can fairly claim to have either implemented or to have set the foundations for the policy mix that has made Canada's one of the world's best-performing economies in recent years.

*For non-Canadian readers: Brian Mulroney was Prime Minister between 1984-1993.

Comments

[Michael]

How regressive is the GST? I understand the standard argument, but neither basic food nor shelter are taxed. For poorer households, that leaves only transport as a big item still taxed. I realize that some fraction of rents are ultimately subject to the GST (e.g. paint, utilities, and 3rd party services), but not always very much. Are there any numbers on these things?

[Stephen Gordon]

Yes, somewhere, I should think, but I don't have them. I do know that when the GST credit was set up, the idea was to make sure that people with an income less than a certain threshold would not be worse off - that is, the rebate they'd receive would at least compensate for the GST that low-income households had to pay.

[pangloss]

It should maybe be more Mike Wilson's legacy and not Mulroney's but that's splitting hairs, I guess. I still marvel at Canadian's "hate" for the GST. As I recall, though I think most tax policy officials would argue for consumption taxes over other forms, the main consideration for moving to a VAT type tax was to scrap the endlessly inefficient and administratively complex manufacturers sales tax. The political mistake with the GST was to allow exemptions contrary to officials policy recommendations. The other political mistake with the tax reform measures in the late 80's under Wilson was to de-link the '87 income tax reform from the implementation of the new GST. The substantial personal income tax reductions of most taxpayers couldn't be used to help balance the perceived increases of goods & services subject to the new GST.

Incidentally I can't stand Mulroney. His lace curtain traits become more and more embarrassing as he deeps into senility. He has no class and takes every opportunity to demonstrate it.