FP Comment

William Watson: U.S. created Trudeau

Sep 30, 2011 – 10:29 PM ET | Last Updated: Sep 30, 2011 10:41 PM ET

‘Closing 49th Parallel’ says U.S. law held Canadians captive

John Kenneth Galbraith once wrote that to “The Scotch” of southwestern Ontario, among whom he grew up in the 1920s, Canadian identity was worth $5 a week. When the wage difference between Detroit and home reached that level, he observed, people simply picked up and moved south. They preferred being Canadian, but they didn’t prefer it that much. Galbraith himself left for good in the 1930s.

He didn’t say, but it was probably also true, that the possibility of losing a significant fraction of their constituents concentrated the minds of Canadian governments and disciplined any desire they might have had to diverge substantially from American levels of taxation, for, as the saying might go, “Over-tax them and they will go.”

During the 1920s, more than a million Canadians did permanently move south — this at a time when the country’s population was just nine million. The equivalent exodus today would be almost four million people. Imagine Manitoba, Saskatchewan, Nova Scotia, New Brunswick, Newfoundland, Prince Edward Island and all three territories being completely depopulated and returned to nature. Greenpeace would love it. And it would certainly get governments‘ attention — though, this being Canada, even if their populations had fallen to zero, could we really depend on the relevant provincial governments actually shutting down? They’d argue somebody had to govern the rocks and trees.

Fortunately, or unfortunately, depending on how you look at it, the option of picking up and moving to the United States no longer really exists for most Canadians. The first legal limits on entry to the United States came in the mid-1920s, though we were essentially exempted from them. But in 1965, the United States changed its immigration laws and did make Canadians part of a small annual quota for migrants from the western hemisphere. Turnabout was fair play: we had increased our restrictions on American immigration in 1962.

In Closing the 49th Parallel, a fascinating new paper in the academic journal Canadian Public Policy, the Canadian economists Stanley Winer of Carleton University and James Davies of the University of Western Ontario argue that the Americans’ decision to foreclose the possibility of an easy escape to the United States created a captive tax base for the Canadian politicians of the 1960s and 1970s and lowered the political cost to them from raising taxes and building up the Canadian welfare state. As the chart shows, there does seem to be a widening of the gap between Canadian and American non-military spending that hinges around 1965. In effect, though the American government didn’t create Pierre Elliiott Trudeau and his Just Society, its closing of the immigration door substantially enabled him. Richard Nixon, whose secret tapes reveal utter contempt for our philosopher prime minister, would have been appalled. On the other hand, he might have found it richly ironic that the Canadian nationalism and fiscal distinctiveness that Trudeau stood for had been made possible by a change in U.S. policy.

Much of the Davies-Winer paper is dedicated to trying to show that a statistically valid correlation does exist between the closing of the American immigration door and the subsequent rise of Canadian taxes and government spending. Because there are many, many influences on what determines a highly-aggregated statistic like “total government spending divided by GDP,” the effect’s influence isn’t always sharp and clear in the data. But they do demonstrate that after 1965 southward migration of Canadians fell noticeably while American and Canadian wage levels and rates of inequality began to seem less joined at the hip than before, which is exactly what you’d expect if the two labour markets had become less integrated than they had been in the days of easy mobility.

It’s strange in this age of supposedly overpowering and all-consuming globalization to think of a pair of markets of any kind — labour, capital, goods, whatever — becoming less integrated. But there you go: in 1965 it happened during peacetime between two highly developed economies with a long history of extensive integration. No matter how inevitable globalization might seem, we shouldn’t assume de-integration couldn’t happen again, especially under the provocation of a worldwide recession.

The spending and tax gap that did open up between Canada and the United States in the 1960s and 1970s closed somewhat during the 1990s. In part this may simply be a case of Canada having come to its senses: Government spending briefly hit 50% of GDP in the early 1990s and just about everybody but the far left of the NDP understood that unless tectonic change somehow floated us away from North America, that simply couldn’t last.

But Winer and Davis point to NAFTA’s re-liberalization of migration, at least for professionals, as having also contributed to the subsequent decline in the relative size of government here. The reopening of the safety valve to the United States, even on a partial and limited basis, contributed to the brain drain that became such a hot political issue here at the end of the 20th century and helped persuade the Chrétien government it needed to first do away with income surtaxes and then reduce the top marginal rate of income tax and raise the income at which it kicked in.

Being free to move where one wishes is a privilege to cherish in and of itself. Ask any of the tens of thousands of former Soviet citizens now living in Canada. But if it also disciplines your government, that’s just an added bonus. For all sorts of reasons, then, we should start talking with the Americans about moving our bilateral immigration policies back to where they once were.

Posted in: FP Comment  Tags: , , , , , ,

Comments

Learn more about the new Facebook comments or tell us what you think.

If you are commenting using a Facebook account your profile information (job/employer/location) may be displayed with your comment depending on your privacy settings. By leaving the 'Post to Facebook' box selected, your comment will be published to your Facebook profile in addition to Financialpost.com.

Junk Science Week

FP Comment’s annual Junk Science Week celebrates the scientists, NGOs, activists, politicians, journalists, media outlets, cranks and quacks who toil to advance the principles of junk science. Junk Science occurs when science is politicized and facts and risks are exaggerated, distorted and misrepresented.

Junk Science Week is over for 2011, but its exposés remain relevant.

Click here for June Science Week 2010, and the winners of 2010’s Rubber Duckies, our award to leaders in junk science.

Junk Science Week 2009, and Rubber Duckies 2009.

Letters to the editor

Letters to the editor, intended for publication in the print Financial Post, should be sent to fpletters@nationalpost.com.

We give preference to letters that refer to a particular article by headline, author and date. Send letters concerning articles in other sections of the National Post, including business articles that appear in the A section, to letters@nationalpost.com. Please include your name, home address and daytime telephone number. Copyright in letters and other materials sent to the publisher and accepted for publication remains with the author, but the publisher and its licensees may freely reproduce them in print, electronic and other forms.

No Pigou Club

The NoPigou Club aims to counter the ideas of the Pigou Club, an informal assembly of economists and pundits who support the idea of raising gasoline taxes. Arthur C. Pigou was an early 20th-century British economist, one of the fathers of welfare economics. We view the Pigou approach as just another form of central planning dressed up in free market terminology.

Powered by WordPress.com VIP