Curiously, the main economic problem facing Canada is not inflation. It’s the recession.
Specifically, the most serious danger comes from the possibility of the government inadvertently sinking the economy, as part of its efforts to control rising prices.
This is not conventional wisdom, which instead argues that affordability is the number one issue facing Canadians.
And while it’s true that affordability is an issue, it’s not true that it deserves the top spot among concerns.
That honor goes to the recession. In other words, it is much worse to be unemployed than to pay a little more for food and gasoline.
Yet we are risking recession anyway – as part of an effort to deal with affordability. The Bank of Canada raised interest rates to fight inflation. This has made it more difficult for companies hoping to increase production. Ultimately, the effect will be to increase unemployment.
Meanwhile, groceries and gas keep getting more expensive.
We’ve seen this movie before, notably in the 1980s, when interest rates were in the double digit range and the economy was under attack from what was then called “stagflation.”
At that time, the banks aggravated the problem by charging penalizing interest rates. A five-year mortgage could cost 21%.
You might think we had learned from this disastrous period in our financial history.
But we haven’t learned anything and now seem ready to make all the same old mistakes again.
Finance Minister Chrystia Freeland seems to understand the nature of the problem, but she has no solution.
If it lets the Bank of Canada do its job, it risks tipping the economy into recession. Yet if it waters down these actions, for example by increasing public spending for the poor, it risks undoing the central bank’s entire anti-inflation agenda.
Because unemployment is treated as the main remedy for inflation. This is still the sad reality of orthodox economics.
Theoretically, the government could impose price controls on basic necessities. He toyed with this idea in the 1980s. But price controls (and ultimately wage controls) are difficult to implement and could be politically toxic.
Still, that’s the game: try to reduce price levels overall by tightening interest rates, or try to reduce specific costs by controlling prices.
One risks recession. Other risks continued inflation. Overall, continued inflation is the best bet. We can continue to exist if the price of bread increases by five cents.
But without jobs, we cannot exist for long.
In short, the battle for affordability should look like this:
- Lower the costs. If it costs too much to fill your gas tank, fill it less. If meat is too expensive, eat more vegetables.
- Call them price gouging. There is no good reason for the price of food and sundries to increase to current levels. Governments have a responsibility to keep prices in line. They should use it.
- Don’t raise interest rates. It’s the easiest way to fight inflation, but it’s the most expensive. The message to the Bank of Canada should be crystal clear: unless you have compelling reasons, don’t play with interest rates.