A Tricky Problem of Stagflation - Assignment Example

A Tricky Problem of Stagflation According to Hinshaw, stagflation is when unemployment and high inflation are present at the same time. This is a tricky problem because, “[t]hat problem, as Gottfried Haberler pointed out, confronts those in power with an exasperating dilemma: efforts to unemployment are likely to increase inflation, and efforts to reduce inflation are likely to increase unemployment” (Hinshaw2). Many economists in Canada at the time believed in the Keynesian school of thought that, “Keynes’s General Theory revolutionized the way economists think about economics. It was pathbreaking in several ways, in particular because it introduced the notion of aggregate demand as the sum of consumption, investment, and government spending; and because it showed (or purported to show) that full employment could be maintained only with the help of government spending (Library of Economics and Liberty 2008.) By 1965, there was a backlash against Keynesian economic thought. “In 1965 Scott Gordon declared that, in Canada, throughout the 1940’s and 1950’s ‘Keynesian statements were confined to the abstract planes of discourse; they were not connected with actual policy’” (Neill 180). However, Gordon did not take into account that Keynesian economics assumed a closed, and mature economic system, and the Canadian economic climate at the time was open and small (Neill 173) Gordon was not alone, however, many economists shared his views, and this was the downturn of the popularity of Keynesian economics. NAFTA, or the North American Free Trade Agreement, opened up trade between Canada, the United States, and Mexico. Because of NAFTA, there are no longer any tariffs or trade restrictions between these countries. There is no question that the United States is economically the strongest of these nations, however, there are benefits to all of the countries involved. “Both Mexico and Canada see NAFTA as a way of securing access to the U.S. market and the trade benefits cannot be of the greatest significance for the United States, the United States looks at Canada and Mexico in terms of industrial and commercial location as much as trade” (Hoebing, Weintraub, and Baer 108). Those who oppose NAFTA argue that NAFTA should have environmental standards and minimum wages. This is because of the shift of work moving to Mexico from the United States, there is less environmental regulations in Mexico, and workers can be paid less than they can in the United States. The quiet revolution took place in the 1960’s in a spirit of Quebec nationalism. According to Jocelyn Maclure, the quiet revolution, “[i]n its strictest sense, it refers to the period from 1960 to 1966, when the principal reforms of Jean Lesage’s Liberal government were implemented. At this time, most of the education, health, and social responsibilities previously held by the Catholic Church were transferred to the government” (164-165). In 1965, the Caisse de depot et placement du Quebec was created. This was an offshoot of the quiet revolution. The Caisse de depot et placement du Quebec was created to help fund public projects in Quebec and provide a place for the people of Quebec to be able to borrow and invest. “On October 28, 1980, the Federal Government introduced its National Energy Program (NEP)” (Fraser Institute xi). According to the Fraser Institute, Canadians in the early 1980’s were heavy users of energy, due to both lifestyle choices, and due to being positioned in a cold climate (4-5). The National Energy Program shipped oil to the eastern part of Canada, where most of Canada’s industry lies, from the western parts of Canada. This also happened to be during the time of worldwide high gas prices because of the OPEC cartels in the Middle East. The NEP caused oil prices to be low so it could become more affordable to eastern Canada. This was at the expense of the western provinces, especially Alberta. There was a worldwide recession in the 1980’s which was even more deeply felt in Alberta, where 86% of the nation’s oil was produced (“Energy Policy”). Since there was such a disparity between what oil producers should be getting for their oil and what consumers were paying in addition to the recession, bankruptcy increased dramatically. As a result, “Alberta cut back its oil production and withheld approval of 2 large tar-sand and heavy-oil projects…” (“Energy Policy”). The conflict between Alberta and the Canadian government was resolved when the government allowed them to change their prices to become more in step with world rates (“Energy Policy”). The National Energy Program ended when oil prices dropped in the mid 1980’s (“Energy Policy”). “The Auto Pact [of 1965] provided for duty-free passage of new automobiles and original equipment parts, subject to certain conditions” (Wonnacott 6). Canada had much stricter rules for accepting U.S. made automobiles and automobile parts than did the U.S. accepting Canadian-made parts. Many manufacturers felt that Canadian businesses were getting rebates to export their products and a lawsuit was filed for countervailing by a Wisconsin radiator company (Wonnacott 5). “Faced with the prospect of a U.S. countervailing duty and Canadian retaliation, the two governments initiated hurried negotiations that ended in the Auto Pact of 1965 (Wonnacott 6). The auto pact of 1965 was an intermediate stepping stone toward free trade that was to come in 2001. “Created as a ‘free trade’ alternative to national policies, the 1965 Automotive Products Trade Agreement met its death at the hands of the WTO in 2001, which declared that the pact violated international trade rules—and was not enough like free trade” (Anastakis 183). Read More