Dalton McGuinty laments that the Great Recession stunted his plans to expand Ontario public services

Former Ontario Premier Dalton McGuinty (pictured above) recently released his autobiography, Making a Difference. Despite its brevity, barely reaching 200 pages, the book provides valuable insights into how his government assessed the role of the private and public sectors in generating economic growth.

This series of blog posts provides a review of McGuinty’s new book, with a focus on what it tells us about the economic worldview of Ontario’s 24th premier. This post deals with the autobiography’s treatment of the “Great Recession” and its aftermath.

Part 2: The recession and its aftermath

What does Dalton McGuinty recall about 2009?

First, that he ushered in the Green Energy Act, which for McGuinty is notable because of its noble intentions and not its harmful impact on electricity prices, public finances and scandal in the premier’s office.

Second, the Ontario government introduced the Harmonized Sales Tax, mostly because the recession so bankrupted Ontario that the government could no longer refuse the offer of billions of dollars from the so-called parsimonious Harper government to cover the costs of conversion. The devastating 2008-2009 recession gets one page, with no reference to how Canada’s banking system, based in Toronto, was uniquely able to escape the insolvency that stalked banking systems around the world. Instead, McGuinty complains that neither bank executives nor economists were able to tell him how severe the recession would be, as if events are graded by their predictability and not their importance. From a state planner’s viewpoint, the unknowable course of market outcomes is inherently menacing, and requires more dollops of state intervention to provide stability and predictability. However, the expansion of the state brakes the growth of the private sector, removing the major impulse for innovation and productivity growth in our society, resulting in a vicious circle of stagnating incomes, lower government revenues and rising budget deficits.

It was completely to be expected that Ontario would experience at least one recession during McGuinty’s 10 years in power. Ontario experienced recessions in the early 1980s, and the early 1990s and narrowly averted one during the meltdown in its high-tech sector in 2001. Anyone with even limited knowledge of economics would know that it’s highly unlikely Ontario would go a decade without experiencing a recession. McGuinty displays no awareness that Ontario’s economy is inherently cyclical because of its reliance on exports of manufactured goods (especially autos) to the U.S., and therefore government should not borrow heavily outside of recessions but keep its powder dry for when it will be needed during the inevitable economic slumps.

The impact of recessions on Ontario are generally predictable, with an average drop of about five per cent in total output and an increase of about five points in the unemployment rate. And yet McGuinty was completely unprepared for the inevitable recession in 2008-2009, which actually was slightly less severe than the contractions in the early 1980s and 1990s. He is resentful that the recession interfered with his carefully constructed plans to expand public services because it pushed the deficit to a level where restraint became obligatory.

When the budget deficit became unsustainably large, the government was forced to adopt some measure of fiscal restraint. There is more than a little naivety about McGuinty’s confidence in the motives of the public servants. When the government turned to public servants for wage restraint, McGuinty was shocked by the lack of cooperation from the public sector unions. He was especially disappointed in the teacher’s union, after he had substantially boosted teacher salaries over the course of his tenure. The teachers’ unions resisted any idea of restraint to help the government balance its books coming out of the recession.

Instead, the unions proposed to raise the ratio of students-to-teachers or shut down full-day kindergarten in order to preserve their own pay. Apparently in his discussions about public service over the years, McGuinty had never heard of "public-choice theory” that individuals and groups within the public sector pursue their own self-interest as actively as private-sector actors.

In his autobiography, McGuinty discusses how his first act as premier was to break his election promise and raise taxes. He blames the deficit he inherited from the Eves government for having to boost taxes. Imagine how the successors to the current Liberal administration are going to feel, as they will have to downsize public-sector program spending, pay and benefits for years to get Ontario’s fiscal house back in order. The McGuinty government’s legacy of high deficits and weak growth will be a much darker cloud for the next government to inherit than the comparatively sunny circumstances McGuinty inherited in 2003.

To his credit, Premier McGuinty understood a couple of things his successor Kathleen Wynne does not. He resisted a carbon tax unless major competitors such as Michigan and Ohio adopted one, for fear of penalizing plants in Ontario. However, McGuinty was not capable of sustaining this insight into the importance of being competitive for the cost of electricity more generally. Ontario’s power costs have become the most expensive in North America largely because of the flawed adoption of renewable energy sources in 2009 (and which was no more effective at creating jobs than President Obama’s embrace of renewables in the same year).

For more of Philip Cross’ blog series review of Dalton McGuinty’s autobiography, see Part 1 and Part 3.