Understanding Canada’s austerity consensus

Michal Rozworksi is a Vancouver-based political economist who runs the website Political Eh-conomy. He recently published the article “Canada’s Austerity Consensus” at Jacobin Magazine.

Michal argues that since the 1990s, both the federal Liberals and Conservatives have carried forward the austerity agenda.

As Canadians prepare for a historic federal election that could see the Tories defeated and the NDP elected to power, Rankandfile.ca’s Doug Nesbitt spoke with Michal about Canada’s austerity consensus: what it is and how it happens.

RF: There seem to be two definitions for austerity. One is a set of government policies. And connected to that is a set of ideas or claims about what those policies will do. What would a basic definition of austerity be?

MR: I think that’s a great way of putting it. There’s sometimes a tension between the rhetoric and the actual policies.

In terms of policies, it’s basically cutting public expenditures and also cutting taxes. Austerity is often the response to a revenue crisis, which is either real or imagined. So the government, at whatever level, whether municipal, provincial or federal, doesn’t have the money to pay for X, Y or Z. So it’s cut back on this, cut back on that.

What that comes down to is having workers or the “99 percent” paying for a crisis they didn’t create. Someone has to pay for it and it comes out of what I’ve called the social wage: all these sorts of services provided by the government.

I think there’s an ideology that goes along with it. The ideology is generally one that’s focused on belt-tightening and on making the broad claim that things are unaffordable. It’s often also sold as a false analogy to households where if you don’t have enough money coming in for your family, you have to tighten your belt and have to cut back.

Austerity is tied to a lot of other ideas that are out there: that the economy has to be competitive, that we have to deregulate – all these sorts of things that have been around for a long time – but has become hegemonic since the 1980s.

RF: Your article focuses a lot on what the federal Liberals did in the 1990s. When people today compare Harper with, say, President Reagan or Prime Minister Thatcher in the 1980s, really what you’re saying is we should be comparing the Liberals in the 1990s to Reagan and Thatcher.

MR: There’s a definite shift with Mulroney in the 1980s in terms of cuts and ideology, but the really big cuts in public expenditures we start to see in the nineties. And it’s the same pattern as recent years. There was a deep recession that was deeper in Canada than in many other places in the Global North in the early 1990s. The deficit did go up, and with Mulroney’s experiments raising interest rates to achieve a goal of zero inflation, you have this sort of perfect storm of a recession magnified by these monetary policies. You had the Liberals step in and say “well, we have to get a handle on this. It’s time for belt tightening.”

In some ways the Liberals did mirror Reagan and Thatcher, but in another way it does mirror what was happening in the UK and US in the 1990s with Clinton and Blair who were also these centrist, friendly-veneer parties who were actually continuing what happened in the 1980s.

RF: Clinton gutted welfare in the 1990s just like Harris did in Ontario and Klein did in Alberta.

MR: Exactly. In the mid-90s, you have a sustained assault on welfare at the same time Harris is doing that in Ontario – partly as a result of Chretien and Martin cutting transfers to the provinces around that same time, and then cutting federal programs, like Employment Insurance, which, to some extent, is a welfare program as well.

The real concerted austerity program came in with the Liberals in the early nineties. In some ways they were pretty frank about it. In the article I have a quote from Paul Martin where he says for every dollar we spend, we’re going to cut five.

It’s a very clear encapsulation. It’s pretty incredible that he said that. This was in his first budget speech and it didn’t come as a surprise because of the ideological work that had been done earlier. It was a budget that people were ready to follow because of the lack of alternatives.

RF: When you’re talking about the social wage, there are direct programs like Employment Insurance, healthcare, education, and so on. But then there is privatization at the federal level. How does the social wage relate to privatization?

MR: The social wage is an economic term for a consumption package you’re getting in direct services from whatever level of government, in addition to the private consumption basket that you’re buying with your wage from work.

I think it’s important not just to focus on the cuts to services, but look at Air Canada, which was privatized and all the other privatizations happening in the nineties, and large sell-off of shares in crown corporations.

It’s important to link the social wage to a notion of power. That’s where privatization comes in.

Privatization is often linked with subcontracting, and lower levels of unionization. It’s linked in many ways to the state not having the assets that can generate revenues even in bad years when tax money is not coming in.

All these things give workers a sense that in addition to workplace power, you have the social wage and this whole package that is a backstop. It gives greater security, and a greater power that you’re able to advocate for in your daily life and when bargaining with employers. To the extent that that’s minimized through austerity, whatever layer of security there was from that evaporates.

I don’t want to glorify the state. The state is still this terrain of struggle and capital still definitely has a large impact on what the state does. But that’s the thing: the terrain of struggle within the state shifts when all these things happen.

RF: One of the dimensions to Liberal austerity is the free trade agreement with the United States and then NAFTA. The Liberals opposed free trade in 1988 and ran in 1993 on repealing it. How does free trade play into the beginning of austerity at the federal level?

MR: In many ways it was coincidental, but it is also another element that gives more credence to austerity ideas because it introduces an additional layer of competition into the economy.

Free trade combined with austerity was really instrumental in a radical reduction in the growth of unit labour costs in Canada, which is a general measure the OECD has for compensation costs. It’s a good measure because it’s not just wages. It includes benefits, and takes into account a broad measure of what workers are getting.

In manufacturing, and all across the economy, NAFTA was able to restrict wage growth and general labour compensation costs through out the nineties.

Without free trade we would not have seen that to such an extent. First, because the free trade agreements did bring a new level of competition, and second because the additional leverage it gave employers to say “watch out, you’re next” whether it was exaggerated or not. And it’s not just competition from Mexico. It’s also the United States.

RF: There’s the common claim that the early belt-tightening in the Chretien years laid the basis for an expanding economy in the later nineties and early 2000s. You dispute that. What is wrong about that perspective?

MR: That’s the claim that’s often made about “expansionary austerity” – a term used by the IMF (International Monetary Fund) and a lot of other people to describe Canada in the 1990s. You have this belt-tightening that theoretically should be associated with a contracting economy because there’s one source of spending going through the economy that’s being cut off. But what you see is economic expansion.

Basically, there are two things that are going on coming out of the recession of the early nineties and lasting through the decade. The first is you have a big expansion in the US economy and that’s Canada’s biggest trading partner and it’s always historically served Canada well. And it was definitely pulling the Canadian economy along at that time, too.

The second thing is the government’s two economic policy levers. First, it has the fiscal policies of spending and taxation. Second, it has monetary policy that is carried out by independent central banks, which is to do with the interest rate, and the amount of credit that’s in the economy.

At the same time as fiscal policy is being tightened and you have austerity, you also have a monetary policy with interest rates fall by half in the mid-1990s. This makes investment and loans less expensive, encouraging economic activity.

At the same time, you also had Canada’s exchange rate falling. The Canadian dollar was falling which made our exports cheaper, which meant we were even better able to take advantage of this US boom, which further pulled the economy along.

And also with the depreciating exchange rate, it not only makes exports cheaper but it makes imports more expensive. It hits workers that way. Things we are buying are more expensive and it is basically an economy-wide wage cut, which is another hit to workers.

And the last thing is, the Liberals take power just as Canada is exiting a recession and as we’re in an upswing.

RF: You also talk about the housing boom in Canada. How is the housing boom helped by the government and what’s the connection to the austerity consensus?

MR: There are two aspects. On the one side, the Canada Mortgage and Housing Corporation makes the rules for housing more flexible. Alfonso Gagliano, who was the federal Minister of Housing in the nineties, said the government would no longer be in the business of social housing. You have the federal government stopping the supply of generally cheaper housing that keeps prices and rents down because it’s an additional supply base.

Rather than pay for social housing, you have tax breaks around mortgages, and policies that encourage private housing. And the fact that interest rates are going down at the same time, you have mortgages getting cheaper as well.

You have no government supply of housing, easier credit, tax credits, and all these things together contribute to a start of a housing boom where there is definitely demand for more private housing. That kept going. And unlike the US, we see in Canada this boom continue almost unfazed through the last crisis in 2008.

RF: You also talk about an emergence of workers with homes and workers without homes. What is the significance of this division?

MR: On the one hand you suddenly you have a group of people finding it harder and harder to enter the housing market trying to buy private houses because of government cuts to social housing. And on the other hand you have people who have houses and suddenly have this expensive asset.

It changes things by what Thatcher called “the ownership society.” It changes mentalities. It makes people more easily swayed by austerity and by right-wing rhetoric, in part because they have an interest in it. Because even if the social wage is going down and things are being cut back, I have this private anchor now in my home.

It creates that division within the working class.

RF: One idea behind making mortgages easily available to workers in the US during the 1930s and 1940s was that people with mortgages won’t go on strike.

MR: Exactly. Because you might be even more scared of your bank and your employer because your employer can throw you out of your job and your bank can throw out out of your house. Pick your poison.

RF: We were told that tightening our belts would return us to prosperity in a few years. It’s been 22 years since the Liberals were elected in 1993. We are stuck in a condition of permanent austerity. What does that actually say about the austerity agenda?

MR: The more you tighten and cut, the less resilient people are, and the harder it is to push back because even if you’re doing okay at the moment, you have smaller cushions. Or with your house as a cushion, your bank is holding the purse strings on that one. Or you’ve paid off your house, but your lifestyle is based off your housing value and you don’t want to have anything that would reduce the value of the house, because you don’t have other things to rely on.

It has been effective to a large extent in becoming a consensus, especially across the political sphere.

The good part is that it’s something people are resigned to, rather than something they firmly believe in and not something they’ll battle to the death for. That’s where there’s an entry to challenge it. And there’s also the entry point of how long can you wait for things to get better? Wages keep stagnating, and cuts are continuing and the only thing growing is the private housing market. But you look around and it’s not easier.

RF: In the article you conclude that we should be depersonalizing our politics and returning to political economy. What do you mean by that?

MR: It’s a response to putting Stephen Harper at the centre of oppositional politics in Canada and where getting rid of Stephen Harper is a goal in itself. Clearly that’s an important goal. He’s not just a symbol. But just focusing on that means there’s a danger of making Harper a stand-in for dangerous things happening. Being against Harper isn’t the same as being against austerity.

In some campaigns we have the risk of forgetting that. It obscures the fact that it hasn’t just been nine years under Harper – it’s been twenty odd years.

Getting back to political economy is about understanding the structures and changes in the economy, not just the politics. And it is not just focusing on politics but looking back at what’s actually happened to the economy. It’s not just how the rich have become richer, but how they’ve got more power and how this reverberates through everything.

It’s not just the political elite. It’s the whole economic elite that have definitely had a good time for the last 20-25 years.