Just Watch Me

by John English

  Trudeau, fortunately, had two friends in Washington who promised that they would retaliate later. Ford and Kissinger kept their promise by inviting Canada to the successor summit scheduled for Puerto Rico in June 1976. Although the French persisted in trying to exclude Canada, Chancellor Helmut Schmidt and Kissinger refused to budge on Canada’s inclusion. As a social democrat, Schmidt wanted Trudeau to participate because of his own interest in North-South issues. In the end, Trudeau, MacEachen, and Energy Minister Donald Macdonald attended the June 27–28 summit, where Trudeau played a modest role in advancing discussion on the North-South issues. Head acted as Trudeau’s sherpa, making preparations for the meeting—yet one more rebuke to External Affairs.

  No formal summit resolution incorporated Canada. It simply became a member of the G7, which has sometimes acted as the world’s directoire, and Canada’s membership in this elite group (and later the G8) has transformed the role of the prime minister in international affairs. The annual gathering has provided the opportunity for regular meetings with the most powerful Western leaders, occasions where bilateral issues are discussed at the sidelines and where Canada participated in some of the major decisions of the last quarter of the twentieth century. Leaders matter, and so do their meetings. Giscard, knowing that he would now face Trudeau informally every year, moderated his hostility to Canada just at a moment when relations between Canada and France were of critical domestic importance. Moreover, historians have found that, after 1976, the Canadian files in American presidential papers were more complete and personal. Canada, very simply, became harder to ignore after it was admitted to the G7.39

  Valéry Giscard d’Estaing, Helmut Schmidt, and the Americans created the G7 to deal with international economic issues at the leaders’ level, but it soon strayed beyond its economic mandate. The Nixon shokku of 1971, which removed the dollar from the gold standard, and the oil crisis of 1973 had shattered many of the assumptions of the postwar era about the management of the economy. From the perspective of the twentieth century’s end, two prominent Canadian economists remarked on how decisive that change had proved to be. Tom Courchene claimed that “virtually all aspects of the environment that underpinned the 1950s and 1960s explosion of social programs in Canada evaporated in the decade or so following the initial oil price shock.” But Canada was not unique. Richard Harris pointed out that “productivity growth declined in virtually all industrial countries at about 1974, the same year as the first oil shock. This is also the date that most economists use to mark the beginning of the transition to the global economy and the decline in the rate of economic growth of the then-prominent industrial countries.”40

  The Canadian debate about what caused the crisis and what response the government should make mirrored discussions that occurred throughout the Western world. In some countries, government intervened to tackle the challenges of the new economic environment. In Canada, the decision to maintain a lower domestic price for oil, to establish a foreign investment review process, to develop a guaranteed annual income, and to maintain and even strengthen the social programs of the sixties, as the Trudeau government did in 1972 and 1973, reflected the views of many in the Prime Minister’s Office—ministers such as John Munro, Allan MacEachen, Jean Marchand, and Marc Lalonde, and in most cases, Trudeau himself. Others dissented, most notably John Turner, his deputy minister Simon Reisman, and most Finance officials, along with other economically conservative ministers such as James Richardson, Jean Chrétien, and Bob Andras. Businessman Alastair Gillespie was fiscally conservative but adamantly nationalist, while Don Macdonald was less conservative fiscally but, on the energy issue, strongly nationalist.

  The debate emerged around “stagflation” and the fundamental question of whether to deal with inflation or unemployment in an era where both were increasing rapidly. This troubling issue broke down the Keynesian postwar consensus and led to a major reassessment of what governments could do. Milton Friedman’s Chicago School presented the greatest challenge to the old ideas, and his monetarist acolytes were found at the highest level of government as well as in the academy. In 1974 the Nobel Prize in Economics was awarded to the social democratic Swede Gunnar Myrdal and the Austrian-British economist Friedrich von Hayek, author of The Road to Serfdom (1944), who had called for a “shift back from Keynesian macroeconomics and the world of the multiplier to microeconomics and the world of the firm, where wealth was actually generated.” This symbolized the profound debate about the role of the state and the operation of markets. If the sixties rang in what the economist John Kenneth Galbraith sympathetically called “the liberal hour,” the seventies brought first its twilight and then the beginnings of a conservative dawn.41

  Trudeau’s education was Keynesian, his economic instincts were eclectic, his politics were egalitarian, and for all his intelligence his vision in this new dawn was often blurred. Tough times lay ahead.

  * In a 2006 interview, Margaret Trudeau recalled: “When Justin was born, I was told that if he was kidnapped, no ransom would be paid. I wanted to go out for a walk without the police and I was told no, I had to have the police with me. They taught me how to roll to the curb and hold onto my baby under my body and scream at the top of my lungs so they couldn’t easily pick me up and put me into a car.” And, she commented, “That was an extra small pressure on a new mom.” Interview with Anne Kingston, Maclean’s, May 19, 2006.

  * The McLuhan letter can be read as a warning about depending on rational expectations to understand the functioning of the economy. When he wrote, the discipline of economics was increasingly moving toward an emphasis on rationality, which led ineluctably to acceptance of the efficiency of the market and away from a role for government intervention. In a sense, McLuhan and, for that matter, Trudeau were unwilling to accept that there was no longer validity in John Maynard Keynes’ view that “animal spirits” caused volatility and irrational behaviour requiring state intervention. More recently, Nobel Laureate George Akerhof and prominent Yale economist Robert Schiller have restated Keynes’ argument in Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism (Princeton: Princeton University Press, 2009). They trace the movement away from psychology and the importance of “animal spirits” to the seventies and, in particular, the attack on intervention and regulation by economists of those times.

  * Except in private with his staff or with other leaders, Nixon was a poor conversationalist, but Margaret Trudeau felt obliged one evening to be a polite guest. Sitting between Secretary of State William Rogers and Nixon, Margaret told Rogers that she hesitated to initiate the usual dinnertime pleasantries with the president. Rogers immediately leaned over and said, “Hey, Dick. Mrs. Trudeau doesn’t know what to say to you.” Nixon gave her a baleful look and began a tedious story about how the pandas China had given him refused to mate. Having done his duty, he turned back to Pierre. When Rogers asked how she found Nixon, she replied: “Quite frankly, I’m still in awe. The only conversation that I have had with the president of the United States is on the sex life of pandas.” Margaret Trudeau, Beyond Reason (New York and London: Paddington Press, 1979), 157.

  * Laskin actually owed his appointment to Justice Minister Otto Lang and, indirectly, to Margaret Trudeau. The sudden resignation of Chief Justice Gérald Fauteux before Christmas 1973 meant that a replacement was needed immediately. Margaret was in the advanced stages of pregnancy, and Trudeau asked Lang to deal with the matter. Normally, the position would pass to the most senior justice—at that time, the conservative westerner Ronald Martland—and Trudeau apparently expected precedent to be followed. Lang, however, recommended Laskin, and Trudeau warmed to the idea quickly. Martland was bitterly disappointed and suggested that Laskin’s Jewishness was the reason for the appointment. This probably did influence Trudeau, who correctly believed that Jews had for too long been excluded from the bench, the boardroom, and the Cabinet. He appointed the first Jewish Cabinet ministers, the first Jewish Supreme Cou
rt judge, the first Jewish chief justice, the first Jewish principal secretary to the prime minister (Jack Austin), and the first Jewish deputy minister of external affairs—Allan Gotlieb—who later became the first Jewish ambassador to Washington. When a Jewish group met with Trudeau and thanked him for all he had done for the community, he expressed surprise. Once presented with the list, he responded, “I guess I did.” On the appointment of Laskin, see Philip Girard, Bora Laskin: Bringing Law to Life (Toronto: University of Toronto Press for the Osgoode Society, 2005). Martland made his charge in an interview with the Osgoode Society in 1985 (see Girard, 410–11). Lang has confirmed Girard’s account. The meeting with the Jewish group was described in a conversation with Berel Rodal, June 2008.

  * External Affairs Minister Allan MacEachen told his department to treat Kissinger like a minor head of state, especially in media coverage. Unfortunately, he got his wish. A head table microphone was not turned off during the liqueurs, and it recorded Kissinger’s view that his recent boss, Richard Nixon, was an “odd, artificial, and unpleasant man,” though one of the better presidents. One of the worst, he averred, was John Kennedy, whose first two years were disastrous and who died having achieved nothing “substantial.” An outraged Tricia Nixon wrote to protest. Kissinger mixed up the daughters and called Julie Nixon to apologize, which he did with some grace. It appears the Kennedys received no apology. National Security Archives, The Kissinger State Department, Telcons, Document 8, Telcon with Secretary of Agriculture Earl Butz, Oct. 16, 1975, and Documents 9a and 9b, Telcons with Julie and Tricia Nixon, Nov. 1 and 4, 1975. There is an account of Kissinger’s overheard remarks in the New York Times, Oct. 17, 1975. These documents can be viewed electronically at http://www.gwu.edu/∼nsarchiv/NSAEBB/NSAEBB135/index.htm.

  CHAPTER TEN

  WRONG TURNS

  In Ottawa the Finance Department and John Turner were unhappy about the 1974 budget that had triggered the election and the continuing battle with Marc Lalonde and John Munro about a guaranteed annual income, but the minority position of the Liberals had offered a strong justification for this approach. After the election, however, Trudeau immediately agreed that the nationalist and interventionist policies, such as the proposed foreign investment review agency and the creation of Petro-Canada, would continue, and this collective decision of Cabinet troubled Finance and its minister even more. Turner had hoped that after the election, Finance would again have its way, as in the early Trudeau years. At that time Trudeau and Turner were both believers in the importance of the welfare state. However, Turner now began to fear that Trudeau, in response to the economic crises of the seventies and the rise of monetarism in the making of public policy, had come under the influence of John Kenneth Galbraith—in particular the ideas he expressed in Economics and the Public Purpose. Essentially “socialist” in approach, this book responded directly to conservative economists Friedrich von Hayek and Milton Friedman by arguing that the state must respond through positive action, including government ownership, to promote public values and goals. Trudeau saw Galbraith often in these times, and the Harvard professor later recalled Trudeau’s insatiable curiosity when they met at New York dinner parties and debated what the crises of the seventies meant for the traditional economics education they shared.1 Turner was particularly alarmed when the Trudeaus and the Turners met accidentally on a Caribbean vacation and he found the prime minister engrossed in Galbraith’s book on the beach.

  But Trudeau heard other voices too, and he continued to establish “countervailing” forces within both his office and the Cabinet. The majority opinion supported Galbraith’s earlier views about the need for balance between labour and business in postwar American capitalism. Albert Breton probably had the most influence. In the 1960s he had opposed nationalizing Hydro-Québec because it would benefit special interests for the most part, and this view now formed part of Trudeau’s own arguments against nationalism. Breton also stated that the policies Finance and the Bank of Canada had followed in Trudeau’s first years in office had created higher levels of unemployment in 1972. Accordingly, in a memorandum he wrote to Trudeau—“Do Markets Work?”—he criticized Galbraith’s latest theories: “I personally think that as an economist and social analyst he is a lightweight and deserves very little attention.” Trudeau had no good answers himself to the economic problems that exploded in 1975, and he found Breton a fresh, yet trusted, voice.2

  The Canadian economy began to falter badly in the second half of 1974, and its problems persisted throughout 1975. Unemployment rose to 7.1 percent of the labour force (from 5.4 percent in 1974), the highest since the 1960–61 recession, while inflation reached 9.7 percent, the third-highest level in Canadian history (though this was an improvement on the 13.8 percent rate of 1974). Labour productivity declined for the second year in a row, and a record was set with approximately ten million days lost due to labour disruption. The federal public service, which had gained the right to strike largely through the influence of Marchand, Trudeau, and Pelletier a decade earlier, began the year with a series of rotating strikes and a demand for a 42.5 percent wage increase over one year. Dockworkers, steelworkers, and especially workers in Quebec, where preparations for the 1976 Olympics had created an overheated construction sector, made similar demands, and some did so violently. Voluntary restraint, epitomized by the Food Prices Review Board under the impressive Beryl Plumptre, was clearly inadequate to meet these challenges. Plumptre attacked supply marketing in agriculture, which she claimed made prices for agricultural goods high through restriction of production and control of supply. Eugene Whelan, the agriculture minister, flamboyantly countered that attacks on the marketing methods he had created did not help the government’s reputation in rural areas.* Economists of all stripes pointed to these marketing arrangements as interference with free markets, which contributed to spiralling food prices—a major cause of inflation. When Whelan suggested in Cabinet in April 1975 that farmers be exempted from the proposed voluntary restraints, Trudeau replied archly that even highly subsidized sectors must participate.3

  Long debates on economic policy took place in Cabinet in advance of the June 23, 1975, budget. On May 22 Turner warned his fellow ministers that Canada faced a “surge of wages and the sagging of profits” over the next year. Moreover, Canada’s export surplus was vanishing quickly because, in 1974, labour costs had risen 11.9 percent in Canada compared to only 6.9 percent in the United States, with the result that the dollar had fallen from $1.028 to 97.2 cents since the election of July 1974. Turner presented four options: severe monetary and fiscal restraints; mandatory wage and price controls; confiscatory taxes on wages and salaries, combined with excess profit taxes on business and professional income and a surcharge on investment income; and a neutral “holding” budget with some restraints, continued discussions with labour and business, and alterations in some programs. Bryce Mackasey, who had returned to the Cabinet, questioned Turner’s statistics comparing American and Canadian labour costs, but Jean Chrétien, now at the Treasury Board and an economic conservative, was a strong advocate of restraint.

  These same patterns prevailed in discussions on June 19, when Turner said that further study convinced him there were only two options: the neutral budget or mandatory controls. Despite the 1974 election pledge to oppose wage and price controls, there was some support for them now. However, the Cabinet and Turner opted for the “neutral budget”—one that created reductions in unemployment insurance and in the federal part of provincial shared-cost programs for medicare and hospitals. The budget also called for reduced growth in the public service, from 4.1 percent to 3.1 percent, with the added provision that public-sector wage increases should not surpass those in the private sector. Turner argued against higher taxes because profits were dropping, and he provided some plans to deal with the specific problems of youth and regional unemployment. But the minister of finance was squeezed. The soaring costs of the energy subsidy would have to be reduced, a move that would rais
e prices for consumers. This change, combined with the medicare and unemployment reductions, worried the Cabinet’s progressive wing. At the end of this inconclusive meeting and with a divided Cabinet, Trudeau said that he would discuss ways of achieving more “balance” in the June 23 budget.4

  Cabinet meetings had been tense for several months, as the differing opinions among the ministers hardened into simmering anger. In the early winter of 1975, the proposed guaranteed annual income died a slow, painful death, a victim of economic pressures and obstruction from Finance. Simon Reisman, the conservative deputy minister of finance, held to his conviction that the social spending binge of the sixties, what he considered to be the irresponsibility of Mackasey’s unemployment plans, and the nationalist and NDP programs of the minority government period were behind the current inflation and economic troubles. He particularly disliked Michael Pitfield, the new clerk of the Privy Council, who was personally close to Trudeau and immune to Reisman’s abrasive pressure. He also resented Turner’s involvement in the process for voluntary restraints, consulting, as he had, with business, labour, and the provinces. Reisman saw the promotion of restraints as delaying what really had to be done—strong cuts in expenditures, government cutbacks, and taxation changes to increase revenues. Equally galling were Turner’s frequent absences as he went about his prestigious work as the head of the International Monetary Fund committee that was recycling oil funds. Still, Turner was essential: a strong minister who could stand up to Trudeau. Before long, rumours began to spread that Turner might leave Canadian politics to become president of the World Bank. The rumours caused Bay Street to tremble and Reisman to fret.5