Jack M. Mintz: 'Modern supply-side economics' is same old, same old

Not just a gabfest for the hoity-toity, the annual Davos conference is also an opportunity for the plebs to hear what’s on the elite’s minds. The latest blast comes from Janet Yellen’s remarks on “modern supply side economics” at last week’s “Virtual Davos Agenda” meetings.

Altering course from the inflationary demand-side policies that motivated its March 2021 COVID package, the Biden administration is now engaged in “modern supply-side economics,” with its infrastructure program and stalled “Build Back Better” plans paid for with higher taxes and deficits. According to Yellen, the approach “prioritizes labor supply, human capital, public infrastructure, R&D, and investments in a sustainable environment.” This contrasts with the supposedly failed approach of “old supply-side economics,” which “seeks to expand the economy’s potential output, but through aggressive deregulation paired with tax cuts designed to promote private capital investment.”

In fact, there is little that is “modern” here. On the contrary, “modern supply-side economics” is based on the very old notion that growth comes from government intervention rather than a dynamic private sector. Yellen’s view is consistent with leftish thinking that markets fail to achieve the best use of resources, with winners taking all and leaving others behind. The opposite view is that feather-bedded bureaucracies and politicians focused on the short term sign on to a host of spending programs and growth-killing taxes and regulations. If markets sometimes fail, so, clearly, do governments.

Canadian economic history illustrates these points well. Before 1966, as Canada successfully fought two world wars and built up physical and social infrastructure stretching across a vast territory, governments took up no more than 30 per cent of the economy’s resources. After that, heavy-handed public intervention became the order of the day, especially after the 1970s oil shocks. Federal and provincial governments, growing to almost 45 per cent of the economy by 1984, liberalized social assistance and unemployment insurance, boosted business subsidies, and introduced regional development programs and supply management in agriculture — all of it consistent with “modern supply side economics.” Wielding price and wage controls, foreign investment restrictions, higher taxes and the National Energy Program’s central planning approach to oil and gas, over-sized bureaucracies sought to “fine-tune” economic growth. The inflation, perpetual deficits, slower growth and even rising economic inequality that resulted led voters to reject a failing federal government.

It took the Mulroney government, elected in 1984, to begin unravelling government spending using “old supply side economics.” Air Canada and CN Rail were privatized (but not CBC, unfortunately). Corporate, personal and sales tax reform led to lower tax rates and a tax structure that intruded less in boardroom decisions. The Canada-U.S. free trade agreement was signed, the NEP disbanded and foreign investment restrictions relaxed.

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With the Mulroney government, despite its good work, having failed to cut spending sufficiently, in the early 1990s Canada faced a deepening fiscal crisis. The governments of the day, including Jean Chrétien’s federal Liberals, reduced the size of the public sector with deregulation (of airports, for example) and reforms to social assistance, business subsidies and unemployment insurance. Canada reversed earlier personal tax hikes and reduced corporate taxes to improve the investment climate. After 1999, per capita economic growth picked up. Investment in Canada even outpaced U.S. investment — in part because of a commodity boom, one Ottawa supported rather than discouraged, as it has done more recently.

This “old supply-side economics” paradigm was shaken by the 2008 financial crisis, the result of lax financial regulation in the United States and Europe. Though Canada largely escaped financial distress, deregulation became a dirty word as Western governments had to stabilize financial markets by bailing out stricken banks. At the same time, growing Chinese imports and new technologies were displacing jobs in the North American heartland. In the face of growing concerns over inequality — which in Canada was more or less unchanged after 2000 —Canadian governments began to raise personal tax rates, especially after Justin Trudeau’s election in 2015.

The pandemic, which was an even more massive shock than the 1970s oil shocks, did not cause a major recession — thanks both to an aggressive policy response and a private sector that quickly developed the technology that allowed many people to work and help school their children from home, as well as the vaccines that are saving the day.

Don’t be surprised to hear leftish Minister of Finance Chrystia Freeland espouse “modern supply-side economics” in her next budget. She has already reached for the modern supply-side sky, arguing that the federal childcare program is the most important growth policy since Canada-U.S. free trade. In fact, her gargantuan 2021 budget was littered with inflationary new spending on child benefits, income supplements, green energy and housing subsidies, and an even bigger federal bureaucracy, despite its already having grown by a quarter in the past six years. We should all weep.

And worse is yet to come, with as much as $100 billion of new spending still expected in the next federal budget. What the budget probably won’t feature, however, are deregulation and tax policies to boost the private sector and begin paring back the public sector so that it no longer makes up almost half the Canadian economy — as it also did in the early 1980s, before “old supply-side economics” cut it down to size and got economic growth back to rates that consistently raised Canadians’ standard of living.