[Halifax] – The author of an award-winning study of Atlantic Canada’s economy says a recent attack on his work distorted his book, attacked arguments that he never made, ignored arguments he did make, and even got time periods wrong.
Fred McMahon, senior policy analyst at the Atlantic Institute for Market Studies and author of Looking the Gift Horse in the Mouth, met one of the chief critics head-on today at the Atlantic Canada Economics Association annual meeting at Mount Allison University. He debated Wade Locke of Memorial University, one of the three authors of Should our Concern be the Gift Horse or Ideological Bull?
Gift Horse, which won the $10,000 US Sir Anthony Fisher Memorial Prize for international excellence in economic analysis, traced the pattern of federal transfers to Atlantic Canada over recent decades. It argued that not only did these policies fail, they also did more harm than good.
“I show how cutbacks in recent years have reduced wage distortions in Atlantic Canada, making us more competitive,” McMahon says. “This is reflected in the competitiveness report released at the Atlantic Vision conference this month and in the fact Atlantic Canada’s economy, per capita, has grown faster than the national average as spending has been cutback. It is also shown in our strong export growth.”
This is in stark contrast to the situation in the late 1960s and early 1970s, when Ottawa was transferring considerable wealth to the region and government was building up its presence. As increasing amounts of money went into government programs, Atlantic wages rose too high too fast for market-driven businesses to match. One result was that some earned more. But the other result was higher unemployment; businesses not at the government trough couldn’t afford to create new jobs.
“Government employment growth and make-work programs set government up as a competitor with the private sector for the best workers – the most important factor in any firm,” McMahon told the economists assembled in Sackville. “Businesses with connections and rich government contracts or subsidies also competed for workers against businesses which had to control their costs to compete in tough markets. . . . All this damaged the most important thing an economy can have going for it: skills development.”
The phenomenon of economic harm caused by ill-spent windfalls is not new to economists. The Dutch, for example, underwent a well-documented and similar problem when they pumped huge amounts of North Sea oil money into government-driven programs. In recent years, the Dutch have recognized their wage problems and moved aggressively to correct them, resulting in renewed growth.
Ideological Bull simply ignores this, and the spending/monetary framework behind it. “Maybe they disagree with the framework. But, in a book devoted to attacking my work, they should have at least mentioned the key analytical concept and, if they don’t like it, explain why. Who knows where they stand on it if they don’t discuss it,” McMahon says.
Instead, Ideological Bull tries to prove that increases in federal spending “driven by petroleum related subsidies” didn’t force up wages.
“This is, of course, true,” McMahon says. “Petroleum-related subsidies didn’t kick in until the last quarter of 1973. Our wages skyrocketed against the national average between 1969 and 1974. By the time of the oil crisis, they had nearly stabilized at a higher uncompetitive level. All you need to do is look at the calendar to understand this.
“It would have been nice if they had at least gotten the time period right.”
Ideological Bull also claims the increase in transfers to the region was entirely driven by petroleum subsidies. “This is simply wrong. As I say in my talk today, you can look at virtually any spending category. You’ll see that the burst of spending and wealth transfers began years before the oil crisis. Spending increases were driven by policy changes, not petroleum subsidies or some counter-cyclical mechanism.”
Equalization was broadened in both 1967 and 1972; DREE was established in 1969; regionally extended UI benefits were introduced in 1971; and other formulas were made more generous over the period. This is reflected in raw numbers in spending categories, as McMahon discusses in his speech.
To make the spending and the wealth transfers go away, the authors of Ideological Bull argue that any number of spending programs should be excluded because they “are national” in nature. “I examine the transfer of wealth/money to the region – the difference between federal spending and revenues in Atlantic Canada. To arbitrarily exclude spending programs would be like me saying ‘Oh, let’s drop income tax on the revenue side because it’s a national program.’ It’s just absurd.”
Although many studies have examined the Atlantic economy as a whole and although most region programs were directed at the region as a whole, Ideological Bull attacks Gift Horse for adopting this approach. “Any macro economy – whether national, provincial or regional – contains any number of sub-economies and, as I note in Gift Horse, the Atlantic region is no exception. I suggest more detailed research would be appropriate and I believe we’ll see that in future months.”
McMahon expressed regret it has taken him so long to respond fully to Ideological Bull, but noted that AIMS had trouble obtaining a copy of the book after it was published and didn’t know for sure what it said.
Don Cayo, the president of AIMS, said other research groups are already undertaking further investigation of McMahon’s work, including one that is doing some serious number-crunching on the arguments.
“We can’t wait for the results of this work,” Cayo said. “Fred’s book is a clarion call for further research to be done, and we think that’s vital.”