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Mulroney's Economic Legacy
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Author:  Toro [ Sat Sep 15, 2007 4:29 am ]
Post subject:  Mulroney's Economic Legacy

From the excellent Worthwhile Canadian Initiative blog

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.

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