Clay Stang
This article was originally published on August 25, 2010.
Some finance ministers travel with bodyguards, surround themselves with an entourage and inhale executive-class perks as freely as oxygen. It's the least they can ask, after all, as they save the world from economic doom.
The dean of the Group of Seven club of economic chiefs begs to differ.
When Jim Flaherty enters the charmless reception area of a federal office in Toronto, he's towing his own bag, with just a pair of young aides a step behind. Tucked under his right arm are two vuvuzelas, the one-note noisemakers that were the bane of the World Cup. They're a gift from South African Finance Minister Pravin Gordhan, whom Flaherty has just seen at the Group of 20 Summit over the weekend.
The barricades are still up today, Monday, putting Flaherty, like everyone else in downtown Toronto, behind schedule. Rather than sitting in a limo, he's hoofed it.
In this age of shameless political stagecraft, it's conceivable that Flaherty's aides put the suitcase handle in his hand and shoved the horns under his arm just before entering, lest a waiting reporter get the impression that higher office is getting to the minister's head.
Subterfuge seems a possibility only because Flaherty's middle-Canadian ordinariness, which seems genuine enough on the face of things, is a note hit so often that it's become a bit tinny. Likewise Flaherty's long campaign to distance himself from the reputation he earned as a front-bench minister in Ontario's Common Sense Revolution. Flaherty has been dismissed as the policy equivalent of those vuvuzelas: capable of only one loud note, the cut-my-taxes, law-and-order cry of the fervent right winger. And even though he's poised to join Paul Martin on a short list of finance ministers who have steered Canada out of a major economic mess, Flaherty still struggles to gain broad acceptance as a capable policy maker.
Is he the real deal? It's not too soon to think about Jim Flaherty's legacy. Jim Flaherty does, after all.
James Michael Flaherty lost in his first bid for office, competing for a seat in the Ontario legislature in 1990. But five years later, he marched into Queen's Park as a foot soldier in Mike Harris's Common Sense Revolution and, by 1997, was in cabinet.
"Tough and ideological," was how Canadian Lawyer described the Osgoode Hall graduate in late 2000, even though Flaherty, who was Ontario's attorney general at the time, told the publication that his politics weren't so easily labelled. "Maybe I am a populist-I don't know, it depends how you define that, but I relate to the people who elect me, or I try to." A year later, Flaherty was finance minister and a candidate to replace Harris as Tory leader and premier. "People think I have some grand political notion," he told the Toronto Star. "I'm not an ideological person."
Friends back him up on this, arguing that Conservative politics is simply the most comfortable fit for a man whose values are rooted firmly in his Irish middle-class upbringing in Montreal. His inspiration comes not from Ayn Rand or Milton Friedman-rather, he says, it comes from his mother, who ran a household of eight children on a limited budget.
But if Flaherty was a dyed-in-the-wool pragmatist from day one, he had a funny way of showing it. When he arrived at Queen's Park, he aligned himself with the Conservative party's "family values" caucus. Campaigning to replace Harris in 2002, Flaherty called Ernie Eves, the eventual winner, a "pale pink imitation" of Liberal leader Dalton McGuinty. Flaherty's leadership platform included promises to sell off public assets, ban teacher strikes and arrest people for being homeless.
Flaherty also had a tendency, which is still evident, to make a spectacle of himself. He now calls much of the reaction to the Harris agenda "hype." If that's true, then the hype surely was fuelled by TV images of the Attorney General taking a bucket and squeegee in hand to promote his government's crackdown on windshield washing by panhandlers. In 2000, Flaherty chose to represent the province himself at a high-profile constitutional challenge to Canada's child pornography laws. In choosing himself, Flaherty bypassed a stable of experts and put Ontario's arguments for upholding the law in the hands of a lawyer who had appeared at the Supreme Court only once before. According to various accounts, Flaherty's intervention didn't go particularly well.
These inglorious episodes still define Flaherty in some circles. "That's a bit odd, I find, over time," Flaherty says. "If someone actually looks at what I have been responsible for, there is some misunderstanding-because I really am pragmatic. I have become more pragmatic over the years as minister, actually."
There is some support for this view. "I don't view him as partisan, I don't view him as an ideologue," says Christopher Ragan, a McGill University professor who completed an 18-month stint as a visiting economist at Finance in July. "Many people view him that way and it's a hangover from Queen's Park. He was probably more ideological than he is now. Through necessity or desire, he has risen above it."
Flaherty, who's now 60, certainly has his biases, but they might be best described as revealing an old-school emphasis on personal responsibility rather than the almost religious faith in the markets and antipathy to the state that mark the modern Canadian Conservative. Flaherty campaigned for Pierre Trudeau in 1968, but says Trudeau's disregard for the burden his massive spending programs would put on future generations drove him to the Conservatives. Self-discipline and hard work are his core values, rooted in his own experience.
Flaherty delivered papers as a boy, using the money to buy his first pair of decent skates. The investment paid off because Flaherty, a diminutive centre on the team at Jesuit-run Loyola High School, caught the attention of a scout from Princeton University. "He was great in the corners," recalls L. Ian MacDonald, who was the team's equipment manager (and later a speechwriter for Brian Mulroney). "You didn't get between Jim and the net." Flaherty ended up with an Ivy League scholarship, albeit one that required him to keep up his grades and take a part-time job at the university. Flaherty bussed tables and graduated (in sociology) cum laude. He paid for his law degree at Toronto's Osgoode Hall by driving a taxi, and was called to the Ontario bar in 1975.
Flaherty told the Empire Club in 2002 that he learned a lot at Princeton and Osgoode, but that he sometimes thinks he learned more playing hockey, bussing tables and behind the wheel of a cab. That sentiment hasn't left him. Some parents send their teenaged children on vacations abroad to understand the world. Flaherty is pushing his sons to experience life the same way he did.
"I'm trying to get my sons, who have summer jobs, thank God, to appreciate that you have to go out and make your own way and earn money and do some jobs that are menial," says Flaherty, who, with Christine Elliott (his successor as MPP for Whitby), has triplet 19-year-olds. "There's nothing wrong with that. Any job is a good job as long as you are getting paid for it and you aren't stealing from anybody."
There's a joke shared among the chattering class that the only economist in Canada who thought cutting the GST was a good idea is Stephen Harper.
If Jim Flaherty ever is granted admittance to the Canadian pantheon of finance ministers, it won't be on the basis of his first couple of years in the job. The greatest policy makers rise above partisan politics and bring their constituents around to wisest choices. In getting behind Stephen Harper's election promise to cut the goods and services tax, from 7% to 6% and finally 5%, Flaherty failed that test. By robbing the treasury to provide a populist sop, the decision put politics ahead of economics and created the impression that the Member of Parliament from Whitby-Oshawa, master of suburbia that he might be, was out of his league as steward of a $1.3-trillion economy.
Then, in 2006, Flaherty's killing of income trusts wiped out more than $20 billion in stock market value overnight. Although the move was probably necessary to preserve tax revenues, it released a tsunami of vituperation from a business community that was none too happy to have the punch bowl taken away just as the party was getting started. "He is the most criticized finance minister for years and years," Bill Holland, CEO of what was then CI Financial Income Fund, summarized in 2007.
Then, more spectacularly than many of his peers, Flaherty failed to see the recession coming. In the spring of 2008, he was boasting that Canada would avoid a deficit, not just that year but every year as long as he was in charge. "Our budget is balanced and I assure you it will remain balanced," Flaherty told a New York audience that April. Even at the end of November, more than two months after the collapse of Lehman Brothers, he presented an economic statement that forecast a balanced budget. The claim was so ludicrous that it nearly brought down the government.
Yet of all these missteps, it's the GST cut that still rankles Flaherty's critics the most, because it gets at a deep philosophical difference. There's a joke shared among the chattering class that the only economist in Canada who thought cutting the GST was a good idea is Stephen Harper. "The GST [cut]clearly was a mistake," says Douglas Peters, the former Toronto-Dominion Bank chief economist who was junior finance minister in Jean Chrétien's Liberal government, which infamously reneged on its promise to abolish the tax. "That was a typically conservative measure to ensure anyone who follows won't have money to spend. Someone some day is going to have to raise that tax or we're never going to have a balanced budget."
It's too simple to dismiss Peters's criticism as partisan. Before Ragan's Finance appointment, he called the GST reduction a "stupid policy." Provided you accept the need to raise money to run the government, consumption taxes are generally considered the best way to do it because they distort behaviour the least. If a government is prepared to sacrifice revenue, economists such as Peters and Ragan tend to argue that income and corporate taxes should be the target.
Equally offensive to economists is the Conservative government's penchant for smallish tax credits for everything from tool boxes to hockey registration. As with the GST, purists say there is a better way: Lower income taxes and let consumers spend the extra money where they want. These boutique measures also complicate an already complicated tax code, wasting resources that could otherwise stoke economic growth. Flaherty's first budget in 2006 was loaded with such baubles. "It was the kind of thing that gives policy a bad name," says William Watson, a conservative commentator and a colleague of Ragan's in McGill's economics department. "He got taken to task by the policy class for throwing those trinkets onto a Christmas tree-type budget."
Flaherty is unrepentant about the GST cut. Over the G20 weekend, he says, he had a spirited debate with his British counterpart over the issue of consumption taxes. George Osborne, a Conservative, had just laid out plans to raise Britain's version of the GST as part of the new government's program to narrow a massive budget deficit. "I know the argument about consumption taxes," says Flaherty. But what economists fail to take into account, he says, is the psychological value in cutting a highly visible levy. "There is something else that goes on too, and that is, middle-class people don't believe that governments reduce their taxes," Flaherty says. "But if you do it on a consumption tax, people see it. That, in part, restores faith in government. Taxes don't always go up, they can go down, and they see it every time they buy something."
That sounds like a rationalization. But it did make Ragan see the GST cut in a different light. "One of the things I learned in Ottawa is it's not just about economies and it's not just about economic efficiency," says Ragan. "Those people may not understand economic efficiency, but maybe I don't understand politics."
Whitby, Ontario, seems like a long way from Washington, especially when you are sitting in the Treasury Department's gilded Cash Room with finance ministers and central bankers from the U.S., Japan and the European Union. And it's Friday, Oct. 10, 2008. And you hear that some major international banks might not open on Monday.
Flaherty has recounted this moment on many occasions over the past year, describing it as a turning point in the financial crisis. He and his counterparts from the G7 countries realized the global economy had become bigger than they could control. Ministers and central bankers ripped up the pre-arranged text intended to summarize their meeting and rewrote it in the room, pledging to back any systemically important financial institution.
Most of the world's top economic officials were in Washington for meetings of the International Monetary Fund and World Bank. The G7 got endorsement of its plan from China, Brazil and other big emerging market economies by taking it to the G20, then a secondary forum. And that November, the leaders of the G20 met for the first time and planned fiscal stimulus equal to at least 2% of gross domestic product. In September, 2009, in Pittsburgh, the G20 officially replaced the G7 as the pre-eminent body for global economic co-operation, and the member leaders laid out a plan to overhaul financial regulations by the end of this year.
This amounts to the biggest reordering of the global economy since the International Monetary Fund, World Bank and World Trade Organization were established after the Second World War. In the middle of all this was Flaherty, whose turn it was to hold the G7 presidency in 2010. Given the rise of the G20, he could have let the G7 tradition drop. Instead, he ordered Canada Goose parkas for Federal Reserve chairman Ben Bernanke, European Central Bank president Jean-Claude Trichet, U.S. Treasury Secretary Timothy Geithner and the rest of his counterparts in the group, and hauled them up to Iqaluit for a meeting in February.
From the frigid outside looking in, the ensuing gathering was more photo opportunity than frank policy discussion. The closing press conference was perfunctory, with Flaherty mostly blocking any of his fellow ministers from engaging with the international financial press. But behind the scenes at this confab and others, Flaherty was building his reputation as a minister of substance.
"His international reputation is very strong," says Gordon Nixon, CEO of Royal Bank of Canada, who was impressed by how easily Flaherty handled himself when G20 finance ministers met with business leaders on the sidelines of the June summit. "He is held in very, very high regard by his counterparts."
Flaherty is now the longest-serving finance minister in the G7 and the third-longest serving in the G20. Sometimes Flaherty seems as surprised by this as anyone. Speaking after Bank of Canada head Mark Carney and his French counterpart at a conference in Montreal in June, Flaherty joked that after more than four years of listening to central bankers debate monetary policy and economic theory, he was finally starting to understand them.
Flaherty, who wrote a textbook on insurance law, got to that point through determined research. "He's a quick study," says Dan Miles, a former director of communications for Flaherty. "He reads everything." Brian Lee Crowley, who preceded Ragan in the visiting economist post at Finance, recalls a minister who sought out the opinions of the country's brightest business leaders and academics. Flaherty would listen to his advisers, ask questions and take lots of notes. "He's intellectually vigorous," says Crowley. "He's not a lazy man."
One measure of Flaherty's growing cachet is that Euromoney magazine named him finance minister of the year in 2009. In 2010, Flaherty will be remembered for his vocal opposition to a European and American push to win G20 backing for a global bank levy. Canada's opposition appeared simple enough: a right-wing government standing against another tax scheme from those big spenders down south and in Europe. Less appreciated was how Flaherty, by rallying emerging markets such as China and India to his side, showed how Canada could use the G20 to carve out a niche for itself in global affairs independent of the U.S.
"They appreciate the fact that Canada, as a Western country, was prepared to stand up and be different," Flaherty says of the Asian powers. "We shouldn't be seen as subservient to any of the other Western countries. I think there was some intimation of that from time to time. It's gone. This disagreement about the bank tax is probably healthy, even in that sense, in that we took a different position and stuck with it."
Flaherty's stand against the global bank tax put him squarely on the same side as Canada's financial institutions, unfamiliar territory for him. While no politician wants to be seen as an ally of the bankers, Flaherty had hitherto appeared to go out of his way to rough up Bay Street's financial titans, tangling with them over issues such as ATM user fees and selling insurance on their websites. These scraps take on a look of being about more than policy disagreements because Flaherty wears his anti-elitism like a badge of honour, or carries it like a chip on his shoulder, depending on how you look at it.
"I actually care a lot about what happens to middle-class people because I didn't grow up in Rosedale," Flaherty says. "I am mindful of where I come from and who I should be worrying about out there. I really don't need to be worrying about most of the people working on Bay Street and their personal lives. They will be okay, thanks. But I need to worry systemically-and then really about middle-class Canada."
This is the theme Flaherty warms to. "I don't view myself as part of the elite and I don't want to be. I listen to people who are part of that stratum of society. But the people who actually matter are the people who are getting up every day and going to work, with both people working in the family, and they just want to get their kids through university and have a decent life and aren't looking to get hugely rich, but are decent taxpaying people."
Flaherty's posture is a bit strange given the finance minister is something of an advocate for the privileged classes in the same way the natural resources minister is an advocate for miners or the agriculture minister for farmers. It's the finance minister, after all, who gets the automatic invite to the annual World Economic Forum in Davos, Switzerland, where the global financial movers and shakers converge to make a virtue of their elite stature.
Although he acknowledges the relationship has had its moments, Flaherty insists he's not out to get the banks and never has been. "Sometimes individual bank CEOs have disagreed with me about things fairly strongly, but overall I think the relationship is good," Flaherty says. "They know, at least some of them acknowledge, that in the fall of 2008 that we were there for them-and we were there for them even though we were in the middle of an election campaign, which was very difficult to deal with."
If there was serious animosity between Flaherty and the banks, it appears to have dissipated. Nixon says the idea of a standoff always was exaggerated and that he and his counterparts at the other big banks understand Flaherty is a politician who has to juggle competing demands. In fact, Flaherty has made it a habit to assemble the bank CEOs for regular meetings, giving them more access than they had to his Liberal predecessors.
"I've seen first-hand how Jim has grown, especially on the international front," says Rick Waugh, chief executive officer of Bank of Nova Scotia. "He certainly has grown in terms of his understanding of the issues. He understands those policy issues, he is strong enough that he can hold his own, and he does."
Almost since Flaherty got the Finance job, there have been rumours that the Prime Minister was poised to replace him. But after 4 1/2 years in Ottawa, Flaherty is entering the ranks of the longest-serving of Canada's 46 finance ministers, and he has tabled more budgets in a minority government than any other. And the second half of his track record looks decidedly more legacy-worthy than the first.
Miles, who has known Flaherty since he went to work for him in 2001, says his former boss is indeed concerned about legacy-not because he is looking for a place in history, but because it would represent a job well done. "Legacy comes with accomplishments," says Miles. "He is very attuned to that."
It counts that Flaherty coaxed British Columbia and Ontario to take the politically fraught step of aligning their sales tax regimes with Ottawa's, a long-standing goal of the Finance Department that eluded Martin, John Manley and Ralph Goodale. And it may count that Flaherty is tantalizingly close to establishing a national securities regulator. The financial crisis exposed Canada's web of 13 provincial and territorial authorities as a systemic weakness because there was no one person to whom Flaherty, Carney and banking superintendent Julie Dickson could turn to consult when things really got bad.
Many of Flaherty's predecessors have talked about the need for a single regulator, in part to improve Canada's dodgy record on prosecuting securities fraud, only to chicken out when faced with provincial opposition over jurisdiction. Like that determined, undersized forward at Loyola that helped his school win a city championship, Flaherty set his sights on the goal and has defied all attempts to knock him off the puck. "It's been an impressive, persistent approach to an important piece of policy," says Harold MacKay, a Regina lawyer who led a study of the issue for Manley. "It's not evident there is a single vote to be had by championing it."
But what counts most of all in the end is the handling of the recession. Flaherty's 2009 stimulus program was the opposite of conservative-rather, it was a textbook demonstration of how Keynesian economics can still be effective.
Unlike the Obama administration, which used a significant amount of its stimulus program to buoy state budgets, Flaherty plowed most of his money into enhancing unemployment benefits and construction projects. It wasn't fancy, but it worked. In June, Canadian employers created more than 93,000 jobs, the second-most in any month on record. The biggest monthly total-109,000-was registered two months earlier, in April. Heading into the summer, virtually all the jobs lost during the recession had been replaced. Canada's economy, according to the IMF, was poised to expand 3.6% in 2010, faster than any other country in the G7.
Flaherty was hardly alone in rescuing the Canadian economy, but he deserves his share of the credit. Scotiabank's Waugh compares him to the general manager of a sports team. "He's steered the ship," says Wesley Sheridan, the Liberal Finance Minister of PEI. "It's pretty easy to say that this was on autopilot. It wasn't."
As good as Flaherty looks now, he looked ridiculous on the eve of the crisis. On Nov. 27, 2008, Flaherty released an update that predicted Canada would avoid a budget deficit in defiance of virtually every private forecaster. That he had the flexibility of mind to recover and change course augurs well for his record-and specifically for his claim that he is no hidebound ideologue.
"When he came out with that economic statement, I thought he was trying to beat out Michael Wilson as Canada's worst finance minister ever," says Peters, recalling the man his government blamed, if only rhetorically, for the drastic spending cuts they were forced to implement after taking power in 1993. In PEI, Sheridan was equally stunned. He was planning a stimulus plan and, based on his discussions with Flaherty, was under the impression that Ottawa was set to do the same.
That economic statement, which included a move to eliminate federal subsidies for political parties, sparked a political crisis that forced Harper to prorogue Parliament to head off manoeuvres by the Liberals, the New Democratic Party and the Bloc Québécois to form a coalition. Flaherty admits that this was a low point for the Harper government. But he suggests that it was also a time of reflection that resulted in a more serious approach to governing. "We had to make a big U-turn at the end of 2008 and the beginning of 2009 in the 2009 budget," he says. "I'm proud of the fact that we did it and the Prime Minister went along with it."
Flaherty's orders were to present a budget as quickly as possible, which he did, on Jan. 27, the earliest in Canadian history. Flaherty insists that not he, nor anyone else, fully comprehended at the time how bad the economy had deteriorated. He says his epiphany came during a private pre-budget consultation in Saskatoon in mid-December. The assembled group consisted primarily of businesspeople. Flaherty says the fear in the room was visceral. "I was convinced that we had to act in a big way and decisively," Flaherty says. "That meant running a deficit. At first the conversations were, 'Oh, we will run a deficit of $15 or $20 billion.' Then it became $25 or $30. After Saskatoon, I was thinking more. We ended up more than $50 billion in deficit."
Flaherty is one of the few ministers allowed to argue with Harper, a strict micromanager. The way he applied that leverage suggests Flaherty deserves credit for the stimulus program the same way Martin is credited with wiping out the deficit in the 1990s. Just as Martin had to persuade Jean Chrétien to diminish social programs, Flaherty had to overcome Harper's fierce fiscal conservatism to get a green light to record the biggest deficit in Canadian history.
"Yes," Flaherty says simply when I ask him if Harper had to be persuaded to go with a bigger stimulus program. "I mean, he expects me to justify what I'm recommending, so I do, and I'm not shy. You have to be able to do the job and be credible. I have to believe in what I'm doing."
When it comes to evaluating talent, politics is like baseball: There's a bias toward the home-run hitter. So it is when you mention Flaherty in the same breath as the revered Martin. McGill's Watson, no Liberal, says Flaherty has yet to match Martin's feat of not just eliminating the deficit, but convincing voters to accept the pain. And as adroit as Flaherty has become at playing G20 politics, it was Martin who created the group.
The income-trust decision was brave, but because the problem of the drain on Ottawa's coffers was still largely theoretical, all that can be measured is the money lost by investors. Among Flaherty's favourite accomplishments is his decision to allow spouses to split their incomes for tax purposes, something he says he had to bully his officials at Finance into accepting. He also set up a tax-sheltered account for people with disabilities and tax-free savings accounts, which are meant to incentivize Canadians to save by giving them a way to avoid some capital gains taxes. These are the political equivalent of singles and doubles.
Flaherty's handling of the recession could turn out to be a home run, but that remains a half-finished job. He will have to pay the bill before he gets full credit. Also, the fact the government implemented it with a gun to its head raises questions about whether the Tories really believe guiding an economy is more complicated than cutting taxes and paying off debt. "He's been right on a number of occasions, yet he has the extreme conservative background that pokes its head out," says Peters. "I'm not sure we know where he stands. I have difficulty saying he is all bad or all good."
But Flaherty has at least earned the right to be considered as someone other than the guy with the squeegee and pail in his hands. Big deficits, championing Liberal initiatives, centralizing government power, chumming with Communist China-this isn't the stuff of a right-wing revolution. In fact, because of his influence with Harper, Flaherty's old critics on the left should be happy he is where he is, says Sheridan. For evidence, the PEI Finance Minister points to another Flaherty single-base hit: the 2007 Working Income Tax Benefit. It was a small tweak to the tax code that seeks to make low-paying jobs more rewarding than welfare by providing poorer individuals with cash back-as much as $925 a year, thanks to a boost under the stimulus program.
Believe your eyes, dear Canadians, that is a Tory Finance Minister handing out money to poor people. It was also a Liberal measure that Paul Martin failed to get off the ground as PM.
"He's brought forth some social pieces that don't always fit with the Conservative ideal," Sheridan says of Flaherty. "His strength around the cabinet table has paid off for Canada. He does have that social conscience. I appreciate that he looks outside the mantra of what the Conservative government usually stands for."