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The economic policy of the Liberal government under Prime Minister Pierre Trudeau ticked a couple of degrees to the right after the federal election in 1974. Between the years 1965 and 1969, the unemployment rate in Canada averaged 3.9% The average rate increased to 5.4% between 1970 and 1974, and then to 7.3% between 1975 and 1979. In both of the latter periods, the unemployment rate was at least 3% higher than that in most developed nations.
The Trudeau government began to listen to the 'monetarist' prescriptions for the problem of inflation from economists like Milton Friedman. The 'monetarists' called for shrinking the money supply in order to constrict the drivers of inflation. They also proposed ending the sort of state interventionism that characterized the post-war years. The private sector would take up the functions formerly performed by the state. Such policies, it was admitted, would drive up unemployment rates, but only over the short term. Freeing up capital would produce higher and more stable rates of economic growth, and so, over the long term, employment rates would improve as well. (The monetarists admitted that their policies would permanently increase economic inequality.)
Monetarism fell under the much wider 'neo-conservative' umbrella. It's essential claims were that the welfare state created complacent individuals who had little incentive to be entrepreneurial, or even to work. More market discipline, including a little more unemployment, would increase labour efficiency.
Through the post-war boom years from 1945-1975, Keynesians had the upper hand. They could point out how the state had effectively spent its way out of the Depression and created the necessary conditions for stable economic growth. However, steady inflationary pressures, fueled by the steady round of capital-labour negotiations, undermined the expansionary economy. This build up of tension coincided with the Liberal government souring toward further rounds of federal investment, and, perhaps more importantly, the Arab-Israeli Yom Kippur War (1973), which provoked the Arab members of the OPEC nations to drive up petroleum prices. The rate of inflation in Canada passed the 10% mark. The federal government post larger and larger deficits: roughly $500 million in 1974, $3.8 billion in 1975, and $10.9 billion in 1978, while federal spending only rose 0.2% over the same period of time. Monetarists continued to argue that high government spending was to blame.
The Trudeau government's single-minded focus on inflation did not lead to a complete Liberal embrace of neo-conservatism, though it did dethrone the Keynesian paradigm. The government had pursued talks with the provinces about implementing a guaranteed annual income (GIA) as a way of dealing with poverty in the early 1970s. There had even been an agreement in principle in 1975 on a two-tiered GIA program. However, the province of Ontario balked, inflation rose, and the federal government shelved the project. A child tax credit for low-income parents instead was added in 1979, one of the few accomplishments for poverty action groups in the 1970s. The net effect of Liberal policy was to reduce the responsibility of the federal government for the well-being of Canadians.
Poor economic performance hurt the Liberals in the 1979 election. They were replaced by the minority Conservative government of Joe Clark, who immediately made plans to sell Petro-Canada, implement tax-credits for home-owners, and download a federal subsidy for Alberta oil production directly onto users. This would bring Canadian oil prices, which had been kept artificially low, in line with international prices. It would also put more money in the hands of Alberta oil companies, who had long chaffed under policies that favored Ontario and Quebec. After it tabled its budget, the Conservative government quickly lost the confidence of the House of Commons. Pierre Trudeau, who had briefly stepped down as the Liberal party leader, swept back into power in 1980.