Why Can’t The U.S. Learn From Canada’s Past Mistakes?

Debates raging in the U.S. and Europe about debts, deficits, and uncontrollable spending were raging a few decades ago in Canada too. The blunt assessments of members of Parliament and ministers at the time might sound eerily familiar to those watching today's budget debates unfold; specifically the lack of any due diligence and loss of accountability in the political capital.

Paul Dick, Parliament member for 23 years, as well as Minister of Supply and Services during 1989-93, acknowledged at the time that:

"The government doesn't cost its programs the way a company costs. It does not have a costing system. It really is just a cash receipt and cash disbursement system dressed up to look like a full accrual system. I got the managing partners of each of the six major accounting firms in Ottawa area to come and sit on a committee and five out of six said that they could not understand the government's accounting systems or the government books and they could not read them. ... Accounting's a kind of dry subject to try and make it sexy, but it runs every company and every organization. They all have to do a little balance sheet and an income statement and show where their expenditures are. Except I've never seen an income statement and expenditures in the government of Canada. I've never seen a balance sheet in the government of Canada. There aren't any."

Until the early 1960s, Canadian MPs actually understood government budgets and cared. The auditor general's report was 80 (!) pages long and simple.  The Minister of Finance and the President of the Treasury were the guardians of public money.

The erosion of their role began in the 1960s with the rise of Keynesian-trained planners to senior policy positions who created tax-supported program spending. As Deputy Minister of Supplly and Services Alan Ross recalls:

"The currency of the day, as far as the major bureaucrats were concerned, was ideas and new programs ...  Any idea was a good idea.  And any program was a good program. And it was an exciting time for being a politician because you were building new programs, you were building bridges, you were building monuments ... And the philosophy was - I'm going to be promoted. I'm going to have more people reporting to me...and the whole idea of accounting for your resources, demonstrating your cost management skills, seemed redundant. The people who were in power considered those kind of discussions about program costs to be what they called the "book-keeper mentality," and real managers didn't bother themselves with that kind of nonsense. We were interested in strategic thinking and those kind of things."

By the first year of the Pierre Trudeau administration in 1969, this spend-more, deficits-are-always-good philosophy had captured the imaginations of Ottawa, the federal bureaucracy, and most economists, not only in Canada, but throughout the Western world.

Initially, though, the "problem" with Trudeau's ambitions for Canada was that large-scale spending for all the new programs required scrupulous vetting by the parliament prior to approval. So the House of Commons changed the rules.

Prior to Trudeau, the House discussed spending estimates. Now "there was no time" and deliberations moved outside the House to "standing" committees. It was stipulated then that if these committees did not vote on spending measures by June 15, they automatically passed. Paul Dick, then Parliament member, recalls that once this rule passed, "people started arguing and discussing policy at the standing committees, but they didn't discuss the finances of a department anymore. And we lost public scrutiny of parliament... Nobody was taking a look at what was happening with the dollars and cents."

In this general breakdown of legislative discipline, the change of rules was accompanied by the circumvention of the Office of Controller General.  Max Henderson, the Controller General during 1960-73, when the big-spending theory was translated into budgetary reality, tried to expose the folly. Trudeau cabinet's reaction in 1970 was to introduce a bill in the House of Commons cutting staff salaries in the Auditor General's office and freezing its size.

There was sufficient uproar across Canada at the time suh that Trudeau was forced to withdraw the bill late in the year. Following Henderson's 1973 retirement, though, the measure was revived and passed into legislation.  In an interview before his death, Henderson observed: "They curtailed the fellow in that office so he would behave himself. That was a tragedy...I hate to brag, but I prophesied what was going to happen. The depreciated dollar, the incredible size of the national debt, and the terrifically high taxes that would sap the incentive of our people."

And they did.  It has been taking time to repair some of the damage and it is far from being repaired.

The United States today is in a situation not dissimilar than Canada at the time, though it has a reserve currency which mitigates the adjustment. It appears though that  just as people have a hard time learning from the mistakes of others, so do governments and voters.  Only crises, it appears, teach lessons.  For Canada, the magic of compounding of high interest rates and devaluation eventually brought back some sense. And so they also will to the political class in the United States...

-Article by Reuven Brenner

Read full article: Forbes, May 19, 2011