August 16th, 2008
The economic and military crisis the United States is undergoing today brings to mind Canada’s experience in 1994 and 1995. The second Quebec referendum presented Canada with a threat to its national survival, and its public debt burden – which had soared to equal its GDP and was second-worst in the G8, after Italy – was a threat to its economic viability. Looking back almost fifteen years, it is clear that Canadians made some tough policy choices, and the outcome was a much stronger country. Perhaps Americans can learn from Canada’s experience.
The federal government’s activist response to the referendum, in which an ambiguous version of sovereignty-association was rejected by the narrowest of margins, was to seek the Supreme Court’s opinion about what would constitute a valid secession process, in response to enact the Clarity Act, and to raise the federal government’s profile in Quebec (the latter encompassing the ill-fated sponsorship program).
The public debt load, which had been growing for a long time, ultimately came to be perceived as a crisis because global capital markets lost their confidence in the “full faith and credit” of the Canadian government and began referring to the currency as the Northern Peso. The federal government’s response was dramatic: increases in taxation combined with sharp cuts in spending to restore fiscal balance within three years.
The conditions for bold measures to tackle both these problems were favorable. Prime Minister Jean Chretien’s government had a large parliamentary majority and a weak and divided opposition. There was strong public support for action on both sovereignty and public finance. The economic program was consistent with conservative ideology so, enacted by a Liberal government (like Nixon reestablishing diplomatic relations with China), it faced little opposition from conservatives. Robust economic growth compensated for the deflationary impact of both tax increases and cuts in government spending.
The current situation in the US is both comparable to and different from to what Canada faced fifteen years ago. The war in Iraq, while not a threat to national survival, is expensive, unpopular, and a distraction from the country’s primary security objectives. The ongoing housing crisis, the disarray in the financial sector, stagflation, and the rapidly accumulating national debt pose a more daunting set of economic problems than Canada faced in 1994.
America’s dichotomy between low taxes rates and an increasingly activist government — militarily by choice and economically by necessity – can be accommodated only if overseas sources, particularly sovereign investment funds, are willing to hold ever more of its public debt and corporate equity. American politicians have not been candid with the public about the precariousness of the current situation, and the external world has not sounded warnings comparable to those Canada received. Compared with Canada in 1994, the US now faces a more severe economic situation; while there is certainly public malaise, there is less sense of crisis or widespread resolve to support bold changes.
The Bush administration is being pushed by public opinion and economic necessity to embrace policies it does not prefer. So it is defining a withdrawal date to the Iraq; spending billions to support the housing industry, the financial sector, and consumer demand; and reluctantly acquiescing to action on climate change. It is exhausted, marking time until a new administration takes office.
The new administration faces enormous challenges. Its first challenge will be the same as the Canadian government faced in 1994, talking straight to the public about the magnitude of the challenges and the severity of the remedies that will be needed. To quote the American economist Paul Romer, “a crisis is a terrible thing to waste.” The Canadian government, assisted by the global capital markets, leveled with the Canadian people in 1994, and Canada’s economic crisis was not wasted. We can only hope the next American administration will do likewise.