as much as they did other Western societies. Over and above that, we had special factors in Canada that exacerbated these trends. For example, we had the largest baby boom in the Western world, undermining our faith in the economy to provide work for all who wanted it, just as we saw the rise of a new breed of aggressive separatist nationalism in Quebec, which unleashed a torrent of spending designed to bind Quebeckers to the federal state.14
Laurier’s belief in the rugged individualism of Canadians, and the freedom, within the rule of law, that made that individualism the source of great prosperity and social progress, seemed overtaken by events. The new zeitgeist called for an expansive state, great new social programs, and vast extension of state employment and state enterprise. Against all this Laurier had warned, and those warnings increasingly fell on deaf ears.
Government took an ever-increasing place in the economy and the lives of Canadians. Government was growing everywhere in the industrialized world, of course, but in few places like it did in Canada.15 Armies of workers were drawn into public sector work in the federal, provincial, and municipal governments while the tax burden rose, public finances deteriorated, and the national debt took off. The expansion of welfare state programs drew tens of thousands into dependence as the value of benefits rose handsomely in real terms.
By the mid-nineties, over 12 per cent of the population of the country’s largest and wealthiest province, Ontario, was on provincial social assistance. In next-door Quebec, one-fifth of the population was on some kind of public benefit, such as welfare or unemployment insurance.16 Public employment rose in Ottawa, and those increases were mirrored in the provinces.17
The share of the national economy directed by government rose from about 28 per cent in 1960 to a peak of 53 per cent in 1992.18 As we document more fully in later chapters recounting Canada’s fiscal challenges, we didn’t have a single balanced national budget between 1974 and 1998.19 Taxes, and especially deficits, rose inexorably.
By contrast, America was a paragon of economic virtue, even though it too indulged in some expansion of the state. Over the same period, 1960 to 1996, the share of the national economy devoted to government also grew, and from the same starting point. But where they upped their spending by six percentage points, to 34 per cent of GDP, we nearly doubled ours.20 Their national debt grew, but it went from being a little higher than ours to somewhat less—despite Vietnam, the Great Society, and the same percentage of national income spent on tax-financed health care as in Canada.21
Protectionism became something of a vogue as we threw up barriers to foreign investment and foreign cultural products like music, television, and magazines.22 Unemployment became a national preoccupation, and after having kept even with US unemployment rates for decades, we began a long-term divergence of our rates that saw a larger share of Canadians than Americans consistently out of work.23
We slammed the door on immigration in many of the years of these lost decades, sometimes admitting as few as 71,000 people (1961)—a far cry from the 282,164 admitted at the postwar peak in 1957.24 Taxes became uncompetitive compared to the US,25 and we obsessed about brain drains to the south. Our standard of living in 1960—almost identical to the Americans’—slowed its growth, creating a gap that, by 1992, had reached about 22 per cent as a result of poor productivity growth, high taxes, and high deficits that crowded out private sector investment.26
The foreign investment controls introduced during this period merit a little further attention for the absolute reversal of policy they signal. The 1972 Foreign Investment Review Act, the product of a minority Parliament where Pierre Trudeau’s Liberals were dependent on a virulently economically nationalist NDP for their survival, was a radical departure for Canada. As political scientist John Fayerweather noted in 1974:
There have been virtually no general restrictions or even government administrative processes to impede new investors. Until the mid-fifties, the general tenor of Canadian attitudes was to encourage maximum inflows of foreign capital.27
Indeed we saw how the Laurier years had been ones of massive flows of capital into Canada. These flows were dwarfed by the St. Laurent years. The fifties saw the largest inflow of American capital in Canadian history up to that date.28 For noted Canadian historian Michael Bliss, this phenomenon is easily explained: “American investors poured money into what was perceived as a friendly neighbouring nation, culturally indistinguishable from the U.S., rich in raw materials waiting to be processed to enrich the continental economy.”29 Clearly, the postwar relationship between the Canadian government and American investors was reciprocal—government was eager to attract huge levels of investment, and investors were equally as eager to invest in Canada.
This was regarded as a virtuous circle in the early postwar years, just as it had been regarded by Laurier and all the political leaders in between: “Until the mid-1950s, there was virtual unanimity in Canada that foreign direct investment created a net benefit for Canada.”30 In the seventies a modish economic nationalism made us skittish about foreign capital and investment, even though there was little evidence that we were any more reliant on that capital than we had been previously, and even less evidence that our traditional openness to foreign investment had been anything but beneficial, on balance, for Canada.
The actual degree to which foreign investment was obstructed is the subject of some controversy. Not many deals were actually blocked. On the other hand, the review process was long and cumbersome, and the simple fact of its existence created the kind of potentially costly uncertainty that business shies away from. Economist Harry Johnson passionately argued the line that Laurier, a proud Canadian nationalist, would have taken when he said in 1977 that “Canadian nationalism as it has developed in recent years has been diverting Canada into a narrow and garbage-cluttered cul-de-sac.”31
In other words, we abandoned almost every tenet of Laurier’s plan, and we paid a heavy price.
Still reeling from reciprocity’s defeat in 1911, the political class shied away from any suggestion of broaching a broad-based trade agreement with the United States, but we were still mindful of the dangers to the Canadian economy posed by the possibility of American unilateralism, such as Richard Nixon’s aggressive action against foreign trade. His 1971 New Economic Policy put paid to the notion that Canada could escape being the target of unilateral US trade action because of some ill-defined “special relationship,” thanks to which we nice Canadians could always resort to special pleading to be excused from a protectionist spanking really intended for nasty foreigners across the seas. Nixon had Canada squarely in his sights. Canada had enjoyed a long-term trade surplus with the US, and Nixon most emphatically decided to include us in his surprise protectionist program. An across-the-board 10 per cent tariff was slapped on Canadian imports. Ottawa was shocked. Washington didn’t care.32
With a comprehensive agreement off the table, Canada was thrown back on three strategies. One, which predated the shock administered by Nixonomics, was to negotiate more modest sectoral agreements with the US, such as the Auto Pact signed by Lester Pearson and Lyndon Johnson in 1965, which essentially created managed trade between our two countries in auto production and assembly.33
In 1959, following the cancellation of the Canadian Avro Arrow fighter plane project, we worked out a Defence Production Sharing Agreement. This seemed a sensible alternative to the Arrow’s go-it-alone approach when we couldn’t supply a market on the scale needed to produce complete defence systems at a competitive price; specialization for Canadian producers within a common continental defence equipment industry seemed a more efficient option, giving Canada a better bang for its buck. Gaining access to the US market by essentially being treated as domestic US suppliers paid off handsomely. In its first year alone, the agreement generated about $200 million in new revenues for Canadian suppliers
