[PEN-L:1784] Response to Doug Henwood's questions (long)

[D Shniad <shniad@xxxxxx>]

In responding to my upload of the piece on the IMF
and its role in Canada, Doug Henwood poses two
questions.  First he says that while he sympathizes
with Canadian lefties who decry austerity, that he
rarely hears them say anything about Canada's debt
problem. He asks if it's a real problem, as opposed
to being an invention of Moody's, the IMF, and the
right-wing press, and, if it is real, then what is
to be done about it?

Canada does have a huge debt.  But it existence and
growth can only be understood in context.  The
federal government is now running a current account
surplus and has been doing so for at least a couple
of years now.  The factor that is generating
Canada's crushing debt burden (and depressing the
economy) right now is the government's insistence
upon maintaining a tight money, high interest rate
policy regardless of the social and economic cost.

Where does this fit in with the rest of what's
happening? In a paper entitled G.A.T.T., THE CANADA-
U.S. FREE TRADE AGREEMENT AND N.A.F.T.A.: ECONOMIC
RESTRUCTURING AND THE CORPORATE GAME PLAN that I
delivered to a tri-national conference in Mexico
three years ago, I made offered the following
explanation:

     This damaging tight money policy was initiated shortly
     after the Canada-U.S. was signed in early 1989.  It was
     widely believed to have been put in place at the
     insistence of U.S. trade negotiators, who demanded it
     as a condition of their signing any agreement.  These
     suspicions gained substance in 1991, when Sinclair
     Stevens, who had earlier been a Cabinet member in the
     Conservative government, stated publicly that this was
     an unwritten part of the trade agreement that was
     included to satisfy the demands of the American
     corporate sector.

     Stevens' story is consistent with the fact that when
     the deal was being negotiated, business organizations
     like the U.S. Chamber of Commerce were insisting that the
     low value of the Canadian dollar was giving Canada an
     unfair advantage in its trade relations with the States
     and promising to fight against the signing of any deal
     until our dollar rose in value.

     The tight money/high interest rate policy had the
     effect that the U.S. corporate sector was seeking.
     The increase in interest rates caused a huge inflow of
     financial capital into Canada, increasing the value of
     the Canadian dollar on international money markets.
     This, in turn, dramatically raised the price of exports
     which, according to Stevens, is what the American
     negotiators had demanded.

     From the corporate perspective, this move had two
     salutary effects within Canada. First, it increased the
     money paid to the financial sector as interest on
     government debt.  Second, the increase in interest
     payments played an ideological role, exacerbating the
     very deficit "crisis" that the Conservative government
     was using as the rationale for its savage attacks on
     social spending.

In response to the question of whether the Canadian
deficit crisis is a figment of the IMF and Moody's
imaginations, I heartily recommend a fascinating
book entitled _Shooting the Hippo_ by Canadian
journalist Linda McQuaig.  (The title refers to the
hysteria that was generated in New Zealand in the
name of combatting that country's deficit "crisis";
apocryphal tales were told about the country's zoo
animals being slaughtered because the government
was no longer able to feed them.)

In her book, McQuaig decribes an interview with
Vincent Truglia, one of the senior analysts at
Moody's bond rating service in New York. It seems
that Truglia was non-plussed by his unique
experience in dealing with representatives of the
Canadian government and financial institutions.
Every time Truglia gave Canadian bonds a favourable
credit rating, he would be deluged with complaints
from Canadian government and business reps,
insisting that he tone down his positive statements
and place more emphasis on the threat posed to the
country by the size of its deficit and debt.

Until recently, it was widely acknowledged within
Canada that the country was not facing a debt
crisis.  A June 10, 1993 Canadian Press article
that ran in _The Gazette Montreal_,was headlined
"Canada's Debt Position Exaggerated, Moody's Says."
Excerpts:

     ....The federal government's gross debt at the end of
     1982 totalled $374 billion. But about $28.5 billion was
     held by the treasury of the Bank of Canada -- an
     amount that must be subtracted to get an accurate
     picture, said Vincent Truglia, a senior analyst with
     Moody's.

     Based on these figures, Canada's debt is 50.3 per cent
     of gross domestic product....

     That ratio is lower than some other Aaa-rated countries
     and is only slightly higher than that of the United
     States which stands at 47.9 per cent, Moody's said.

     "I don't want to minimize the fact that budget deficits
     must be addressed," Truglia said....

     "But what we're saying is that the underlying debt
     situation still leaves Canada among the premier
     borrowing nations."

     Truglia said he issued the report yesterday because
     he's received so many requests from international
     investors wanting clarification about Canada's debt.

     He would not say specifically who made the negative
     comments, other than to indicate they were in
     published reports or in speeches he'd heard
     recently...."

Less than five months later, on January 15, 1994,
with no fundamental change in Canada's economic
position, Moody's issued another report, described
in Greg Ip's _The Financial Post_ article headlined
"Moody's Warns About Canada's Debt Buildup."  Even
the FP writer noted the abrupt turnaround.
Excerpts:

     "The sharp buildup of debt throughout the public
     sector poses a potential risk that must be addressed,"
     Moody's said in a lengthy report on Canada. "The
     trajectory in the buildup of debt must be genuinely
     reversed in order to allay market concerns. Overall
     creditworthiness could be affected if these trends are
     not reversed."

     Moody's also distributed a three month-old review of
     provincial finances, Friday, which concluded the
     provinces' latest budgets had taken a "more aggressive
     stance against budgetary imbalances."

     That "should prevent further erosion" in their credit
     ratings, "although the possibility of limited credit
     rating adjustments cannot be precluded," it said.

     ....Friday's report was noticeably more negative than
     Moody's last comments on Canada. Last June, Moody's
     said the federal deficit was mostly cyclical and would
     fall to 1% of GDP by 1998. "Clearly, the federal
     government's fiscal position is not out of control."

     By contrast, Friday's report said the deficit, at 6.2
     per cent of GDP, is partly structural and the Liberal's
     promise to lower it to 3% in three years is "a more
     difficult task."

     Furthermore, while the federal deficit alone is not
     "far out of line" with that of other triple-A
     countries, the markets are concerned about rising
     provincial deficits, which have raised the total public
     deficit to 9% of GDP, the report said.

I would argue that the government and its corporate
allies are consciously using deficit hysteria as a
political tool, just as it was used in New Zealand.

The details of this strategy were described at some
length by the same journalist, Linda McQuaig, in
her 1991 book, _The Quick and The Dead -- Brian
Mulroney, Big Business and the Seduction of
Canada_. In that work, McQuaig provides a
fascinating description of how Canada's Business
Council on National Issues (an organization
composed of the CEOs of Canada's largest
corporations) fabricated the deficit crisis as part
of a long term strategy to destroy Canada's social
programmes:

     Set up in 1976, the BCNI was an unabashed replica of
     the U.S. Business Roundtable.  As the BCNI took
     stock of the situation in the aftermath of the [right
     wing's defeat of the] MacEachen budget, it saw an
     opportunity.  [Alan MacEachen was the Liberal
     Finance Minister whose November 1981 budget,
     according to McQuaig, that budget went
     "unabashedly" after the wealthy.]...Now was the time
     to regroup and launch a new assault -- an assault much
     broader and more all-encompassing that the assault on
     the MacEachen budget.

     What business had in mind was a fundamental
     reorientation -- an end to the dominance of government
     and a shift of power to the private sector.  This
     process had already been successfully launched in the
     U.S., where Ronald Reagan was entrenching corporate
     power even further and tying the hands of government.
     But Canada wasn't the United States.  Canadians had
     long accepted a strong role for government. (pp. 95-97)

     Over the next eighteen months, the BCNI honed its
     ideas into a coherent program, which it presented in a
     detailed discussion paper in August 1984 -- one month
     before the federal election....[T]he most crucial
     thrust of the new BCNI approach was the attack on
     something that was central to the concept of Canada in
     the eyes of most Canadians -- the social welfare
     system.  Interestingly, the BCNI was well aware of the
     importance Canadians attached to it.  In its discussion
     paper, the business group acknowledged that there was
     a 'broad consensus' in Canada in favour of large public
     sector spending, which amounted to some 40 percent
     of the Gross National Product (GNP)....For the BCNI,
     this would have to change.  Canadians would have to
     change.  They would have to abandon their
     priorities....

     ...[T]he BCNI wasn't leaving anything to chance.  In
     the same paper, it outlined in detail exactly what the
     new government was to do.  It even provided the
     argument for the changes it envisioned -- changes that
     would amount to an undoing of the Canadian
     consensus.  The argument was simple  -- we could no
     longer afford the social programs we evidently valued
     so much.  The deficit had changed all that.

     In its simplest form, the deficit boiled down to a
     shortfall in government revenue.  The government was
     spending more than it was taking in.  At least part of
     the problem lay in the fact that, as government
     spending had increased over the previous two decades,
     Ottawa had at the same time introduced a wide array of
     tax breaks -- particularly for business -- that left
     the federal treasury with less and less money to pay
     for the programs.  Corporate taxes, for instance, had
     declined from roughly 50 percent of total revenues to
     little more than 30 percent....

     ...[W]hile the deficit problem was real, the solution
     advocated by business -- cut popular Canadian
     spending programs and raise taxes on ordinary
     Canadians -- was by no means the only solution.
     Business had defined the solution in a way that suited
     its own interests.  It was happy to part with social
     programs, to make Canadians tighten their belts.  It
     was less keen about tightening its own belt. (Pages 98-
     100)

McQuaig notes that "...business had to tread
carefully. Using a battering ram against something
that enjoyed a 'broad consensus' of support was
poor politics, and was likely to rally the country
to its defence.  So a front assault against social
spending was out.  What was needed was something
that attacked from an unprotected flank, something
that would lead to cuts in social spending without
coming right out and saying so, something
like...well...the deficit..."

     ...While politicians wouldn't last long railing against
     Canadian social programs, they could freely travel the
     country denouncing the deficit.  And once the public
     had been prepared for a war on the deficit, the
     government could then start chopping social programs
     -- in the name of fighting the deficit.  Canadians
     might sense something was wrong at that point, but the
     Trojan horse would be well inside the gates.  Thus the
     deficit became a crucial weapon in the business
     arsenal, a powerful concept that could be trotted out
     to back up the business claim that government spending
     was out of control. (Page 103)

In other words, the deficit reduction/cut social
spending mania that we have been witnessing over
the past while should be seen as the successful
implementation of the BCNI's long term strategy.

Doug Henwood poses "another thorny question for
Canadians", referring to complaints about Canada's
loss of national sovereignty, a complaint which is
often voiced by the same people he alluded to
above.  Bro. Henwood then asks how much sovereignty
Canada has really enjoyed and whether Canada would
be a rich country if it hadn't been riding in the
slipstream of the US. Is national sovereignty that
good a thing, he wants to know.

First off, what do you mean by the phrase "riding
in the slipstream of the US", Doug? That Canada
could never have become as "developed" and
"civilized" as it is without the beneficent
influence of the US of A?  American lefties often
seem non-plussed when they hear nationalistic
statements from progressive Canadians.  It seems to
me that folks Stateside have a uniquely
universalist perspective on the world, viewing it
as they do from inside the belly of the beast.

I don't have a "scientific" answer to your
question, Doug. But until the election of Mulroney
in September 1984, Canada and the States pursued
dramatically different social policies.  Notable
among these were Canada's much more generous
unemployment insurance and welfare rates.  Under
the conditions of the country's contrived deficit
crisis, however, these are undergoing a series of
dramatic changes that is leading to their demise.

I would make the case that these and other
significant differences between the two countries
(which together were part of a generally more
interventionist approach to the economy) made it
necessary for the States and its political and
economic allies in Canada to foist the US-Canada
Free Trade Agreement on a strenuously objecting
Canadian citizenry as well as to fabricate the
deficit crisis as a means of attacking the social
programs that Canadians came to take for granted
and that Americans never dreamed of.

In short, it was on the basis of their ability to
construct such programs that Canadians rooted much
of their sense of national identity and
sovereignty.  And it was the undermining of their
ability to maintain and expand such programs that
formed the basis for their concerns about the
eroding of their national sovereignty.  (Those
readers who were around then will remember the
discussion of all this in the course of the flaming
debate between progressive nationalists and
progressive internationalists that raged here on
Pen a few years back.)

When Brian Mulroney became Prime Minister, he made
a statement to the effect that "If you the Canadian
people give us two terms in office, they won't
recognize the country."  Because he had run for
office on a tepid platform, including vociferous
statements in opposition to free trade, nobody paid
much attention at the time. Unfortunately, Mulroney
and his corporate buddy villains have been
successful beyond their wildest dreams and our
worst nightmares.

I trust that this goes some way to answer your
questions, Doug.

Sid Shniad