18.9 C
Toronto
Sunday, May 19, 2024

Subscribe

How Obsolete Economic Thinking is Strangling Economic Recovery: Part 2

This post is the second of a two part analysis documenting the failings of current economic thinking as evidenced by the policies of central banks like the Bank of Canada. Part one can be found here.

What Approach Makes the Most Sense?

Economic orthodoxy upholds that when consumers and businesses have more money, as they did as a result of the pandemic related support spending, they buy more. This forms the foundation of both economic growth and the claims of fostering upward mobility among households.

But with widespread breakdowns and inefficiencies in the goods producing and distribution system, supply stalled and a different more destructive dynamic takes hold. Scarcity and supply-chain problems lead to bottlenecks and slowdowns as well as creating windows within which market dominant firms can engage in price gouging to take advantage of the situation leading to further slowdowns, inefficiencies and some product hoarding as people fear that prices will continue to escalate out of control. 

It can also result in a roller coaster ride on futures markets as speculators bid up the price of future goods. Inflation then becomes a self-fulfilling prophecy. Clearly, punishing workers and households who are trapped in and exploited by this spiral is not the solution. It’s a cynical attempt to blame the victim.

The Bank of Canada cannot directly take money away from people or redistribute income but they can do it by making it more expensive to borrow money and by rewarding owners of financial assets and rentier capitalists. This fuels economic inefficiency, more financialization of the human needs economy and a worsening of income inequality. It does nothing to help support communities and foster the successful transition to a sustainable economy.  

The Bank of Canada expects high interest rates to remain in place until the Spring of 2024. This is bad news for Canadians struggling to make ends meet and with growing debt servicing levels on their credit cards.  Even many middle-income households, particularly those with children at home, or facing mortgage renewals, will need to rely increasingly on credit as their living expenses soar. While inflation reduces the value of their outstanding debt to banks, higher interest rates will transfer that benefit back to the financial sector while offering nothing to them.

Canada’s major banks, energy companies and food giants are raking in record profits due to a combination of supple bottlenecks and higher interest rates. A gas station sign in front of a wall mural as gas prices surpass $2.00 a litre in Montreal.  Ryan Remiorz / THE CANADIAN PRESS

Equally bad news is the rapid escalation of rents now gripping the rental housing market. As credit for purchasing a house or condominium has become more difficult to qualify for and attain, the supply of affordable rental units has become a scarce and highly competitive commodity. It has reached levels unaffordable even for median income earners.

The Bank of Canada lacks the tools to make the right investments in creating a healthier and more prosperous Canada. Governments do, yet so far aren’t inclined to offer much help. Mark Carney, the former governor of the Bank of Carney advises fiscal discipline and avoiding putting cash into the pockets of Canadians as this would undermine the central banks policy to slow economic growth, encourage consumer spending while increasing  their debt load. Unfortunately, such enthusiasm for this outdated monetarist orthodoxy, will lead to greater poverty and social insecurity, more precarious jobs, less stable housing and a less cohesive and more unequal society.

There are, however, many ways, governments can support maintaining living standards. The provinces, for their part, could introduce, stronger rent controls and non-eviction measures for outstanding rents for a period of 12 to 24 months.

The bulk of the support measures must come from the federal government. These can take several forms including the following five initiatives:

  • Introduce the long overdue reform measures to improve Employment Insurance
  • Remove the GST from heating bills
  • Increase the Canada Workers Benefit and provide payments monthly           
  • Retraining people for work in a green energy and low carbon economy
  • Create a one-time excess profits tax, and a monitoring process to investigate price gouging in key sectors such as energy and food for a period of 18 – 24 months       

In addition to these initiatives, the federal government could reverse a generation of neglect in maintaining and protecting the supply of existing affordable housing by launching two significant new programs:

  • Establish a federal mortgage program through CMHC to provide 5 year mortgages to first time home buyers and to those renewing their mortgages at 3.79% (particularly assisting younger homeowners) 
  • Create new regulations related to Real Estate Investment Trusts (REIT) that would make low cost mortgage financing available to local governments and non-profits at 3.49% to purchase and retain the affordability of rental housing units, and
  • A plan to phase out mortgage guarantees for private sector REIT initiatives that reduce the supply of affordable rental units through a sunset provision to take effect within three years  

Conclusion

The philosopher George Santayana once ominously warned that those who forget the past will repeat it. The Bank of Canada is well aware of the hardship the rise of interest rates caused Canadians in previous bouts of inflation yet, they insist that it has proven to be the most effective way to control it. Its effectiveness, however, lies in massively increasing unemployment, by as much as 850,000 according to economist David Macdonald, from the reducing workers’ bargaining power and depressing the overall standard of living in the country.

The governor of our Central Bank is aware that his repeated cycles of higher and higher interest rates cause pain but will not abandoned them. Inflation has already dropped for three straight months and stabilized, nonetheless the Bank is expected to raise interest rates for the seventh time this year. This is unnecessary and cruel.

What we expect from the Bank is a more balanced monetary strategy coupled with targeted government initiatives aimed at supporting household living standards and small businesses. If we act now, we can still ensure a soft landing. We can also re-establish the foundation for future prosperity that the stimulus spending during Covid had already set in motion.     

This is not the time for the federal and provincial governments to be penny pinching. They are sitting on unexpected revenue gains as the result of the earnings of hard- working Canadians and have the capacity to support new initiatives instead of looking for $9 billion in savings in the federal budget as Finance Minister Chrystia Freeland announced.

What Canadians need is the protection of their livelihood through policies focused on initiatives to support the incomes of households most impacted by inflation, including strengthening EI benefits. In addition, an excess profits tax on key sectors that have benefited enormously from inflation at the expenses of consumers should be introduced.

This new tax revenue should be directed toward job creating green initiatives at the community level including a skills training component. It should also help to fund the new federal housing programs through CMHC outlined above.

It is time to stop the unnecessary bloodletting and shift efforts toward policies that reduce income inequality, strengthen communities and lead to a healthier and an environmentally sustainable Canada.

Subscribe
Notify of
guest

0 Comments
Inline Feedbacks
View all comments

Latest Articles

0
Would love your thoughts, please comment.x
()
x