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Lecture

lecture_5 notes 2012.doc

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Department
Administrative Studies
Course Code
ADMS 1010
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all

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Business in the Canadian Context ADMS1010 – Summer 2012 – Troy Young Lecture 5 – The Government in the Economy – June 7 2012 Rise of Keynesianism - The Great Depression brings previously unheard of economic despair to Canada and the Western World - Due to our reliance on exports, agriculture and manufacturing, the Great Depression hurt Canada more than most other countries. - The Great Depression changed the view of state intervention into the economy. - Ultimately, it was decided that the marketplace could not correct itself. - It was up to government intervention to kick-start the economic recovery. - John Maynard Keynes’ theories become prevalent in Canada starting in World War II. - The government needed to take an activist role in the economy by increasing spending and reducing tax rates. - Creating Crown Corporations and growing the size of government was just one way to achieve this. - We recall that the rise of the public service was created out of the demands of easing the Great Depression. - Increases in business regulation. - Increases in social welfare services. - The idea that government could solve every problem from unemployment to socialized medicine. - The electorate voted in political parties who promised more government services. Decline of Keynesianism - Keynes’ theories continued to dominate until the 1970’s, when other external and internal pressures made it impossible for government to intervene o i.e. increased cost for oil; high unemployment, high inflation - Unfortunately, it was paid for with borrowed money. - The impact of the recessions of the 1970’s and 80’s left governments broke. - Governments turned from expenditure to inflation and budgetary control. - Rise of Neo-Conservatism. The Return of Keynesianism - With our current economic crisis, there has been a return to Keynesian economics. - Governments are now going into debt to try to stimulate spending. - The Ontario government predicts an $18 billion deficit over the next two years; the Federal government predicts $34 billion over the same time period. An Era of Nationalization and Canadianization - Nationalization is the act of taking assets into state ownership - Occurs when government purchases an existing company or creates a new one - Done to enable the government to manage the economy better in terms of long- term development and medium-term stability - Give a recent example of where this is happening in the world? - The creation of crown corporations in the 1960’s and 1970’s, plus the ever expanding role of government after World War 2 helped kick start this era of Nationalization (Canadianization) Critics of Nationalization - Claimed that government measures distorted market values and resulted in inappropriate compensation. - The impact of the recessions of the 1970’s and 80’s left governments broke. - Governments turned from expenditure to inflation and budgetary control. - Rise of Neo-Conservatism Neo-Conservation - Neo-Conservatism takes hold of western nations, starting with the election of Margaret Thatcher in Britain and followed by the elections of Ronald Reagan in the US and Brian Mulroney in Canada. - Privatization, slimming down of the civil service, competitive treaties like NAFTA becomes the norm. - Mike Harris’ “Common Sense Revolution” is a prime example of Neo- Conservative ideals. The Neo-Conservative Movement - The welfare state is important but no longer affordable. Causes structural problems in the economy. - The public sector is too large and too expensive. Reductions are needed. - Too much red tape and regulation. - Privatize crown corporations. - Need to cut taxes and balance the books. The Welfare State - Term first coined during World War II - Becomes very prominent in Canada in the 1960’s - Has three main provisions: o Minimum income o Protection from economic insecurity due to sickness, old age or unemployment o A variety of social services - While important, it is costly. o Deficits grew as government became involved in more aspects of people’s lives. o Government grew; every new program needs workers to administer it. o Governments became almost broke. Government in the Economy - The 60’s and 70’s saw the creation of many Crown Corporations that competed directly with other private corporations. - Governments intervened heavily in the economy. - Deficit spending was common in the late 70’s and early 80’s as governments tried to spend their way to prosperity. - The Federal Government ran budget deficits every year from 1975 until 1995. - With the various stimulus packages, governments are once again trying to spend their way into prosperity, and the return of budget deficits. Two Approaches to Running the Economy - One camp favors government intervention believing politicians and bureaucrats can orchestrate the economy from above. o Ideology: Democratic Socialism, John Maynard Keynes - The other camp argues for tax cuts and a reduction of government’s role in the running of citizens lives. o This they argue is the only way to achieve productivity o Ideology: Neo-Conservatism, Liberalism, Adam Smith Growth of Government - Canada’s well-developed welfare state has contributed to the creation of a large public service - Areas in which governments employ people: o Education o Health Care o Protection (i.e. police, fire and military) o Administration of programs How did the Canadian Government Grow? - Most of the increased spending between 1965 to 1975 occurred in the form of transfer payments to individuals through higher unemployment insurance, family allowance and old age security payment. - Creation of new departments to administer new initiatives. - Significant growth of crown corporations and regulatory boards. - Increased specialization and professionalism of the public service to deal with greater complexity of problems. Crown Corporations - A common target of government for privatization is crown corporations - A crown corporation is any enterprise that is substantially owned by the government - It is an institution brought into existence by government to serve a public function - It may function in many ways like a private company - The theory behind a Crown Corporation is that it is more efficient than a government department because it is arm’s length from the government, allowing it to be run like a business - Have the following characteristics: o A majority of the ownership must be vested in government o Management of its affairs must be relatively independent from government o Its primary role must be to provide goods or services to the private sector, not to the government o The prices its sets for these goods and services must reflect the costs of providing them Why does Government Create Crown Corporations? - As nation building tool in the promotion of transportation, communication and resource developme
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