Front Burner - Who wins, who loses in the fight against inflation

Episode Date: October 20, 2022

Most businesses and consumers expect a recession is on the horizon, according to a survey put out on Monday by the Bank of Canada. Next week, the central bank is expected to hike interest rates — again — to bring down inflation. But continuing to hike interest rates could actually help provoke that feared recession, leaving some wondering what the alternatives are. Jim Stanford is an economist and director of the progressive think-tank the Centre for Future Work. He's also the author of a new report that argues against the Bank of Canada's "one-sided" approach to inflation. Today on Front Burner, he tells Jayme Poisson why he thinks this potential recession is a choice that will hurt regular people, and offers other tactics to ease the sting of inflation.

In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through angel investment and industry connections. This is a CBC Podcast. Hello, I'm Jamie Poisson. The Bank of Canada has clearly signaled they're not done raising interest rates to bring down inflation, even as fears of a recession are growing,

leaving some to ask, can we wrangle inflation some other way? There are a lot of red flags out there suggesting the economy is becoming stretched and may soon start bursting at the seams. The vast majority, almost all Canadians, making changes, cutting back. Definitely like worried about like rent and groceries and everything going up, right? So it's definitely always in the back of our minds. It is a bit counterintuitive, but actually that is what the economy needs. Because by making borrowing more expensive, people are going to borrow less, spend less and save more.

And that's going to take some of the steam out of inflation. At any turning point in the economy, you traditionally see this kind of market volatility. So there's uncertainty with respect to the growth outlook. Will we have a recession? Will we not have a recession? My guest, Jim Stanford, has some ideas. He's an economist and the director of a progressive think tank called the Center for Future Work. And he's the author of a new report titled A Cure Worse Than the Disease

toward a more balanced understanding of inflation and what to do with it. We're going to discuss why he thinks this potential recession is a choice that's going to hurt a lot of regular people and what alternatives could be. Hey, Jim, thank you so much for coming on to FrontBurner. It's great to have you. Oh, my pleasure, Jamie. Thank you. So the Bank of Canada and its governor, Tiff Macklem, have really been trying to communicate to the public why they're raising interest rates to combat inflation. And maybe you could start by just telling me about what message they've been sending to the public on this front lately. Mr. Macklem and his colleagues at the bank have a view, I think it's a bit unjustified,

but they have a view that if Canadians have an expectation of lower inflation in the future, that in and of itself will bring about lower inflation in the future. And vice versa, if Canadians expect higher inflation in the future, then that will increase inflation and make it harder to bring it down. So they've been coming out all guns blazing with a very strong public communications message saying, we, the Bank of Canada, will get inflation back to our desired level, which is 2%, come hell or high water, basically, no matter what.

I do want to assure Canadians that we are going to keep inflation under control. We have the tools, we have the mandate, and we will be, we have been, and we will be adjusting our tools to bring inflation back to target. And they're doing this deliberately to try and convince Canadians that, yes, inflation is going to come back to 2%, and they think that will help bring it back to 2%. Personally, I'm dubious that just the expectations alone can achieve that victory. There are people out there who have expectations that inflation is going to be high, but that doesn't mean they can get wages to match. And the reason we're paying so much for gasoline isn't because we

expected gasoline prices to be high. It's because the oil companies are charging us that much and they have the power to charge that much. So I think that focus on expectations is a bit misplaced, but that is their narrative. Their narrative is we have to get inflation expectations down and we're going to warn Canadians that we're going to do this no matter what. That's a clear signal that they're willing to tolerate a recession, which seems to be coming, if it helps get inflation back to 2%. Though, fair for me to say they're also backing it up with actual actions, right? They keep hiking these rates. Yeah, we've had five big interest rate hikes so far. The overnight rate, which is what they control, has risen 13-fold since March. If you have variable mortgage rate on a home, it's tripled since March.

And there's more to come. They've indicated that there's more to come. So you're absolutely right. They and central banks in other countries. Now, Canada has been among the most aggressive in this. Canada and America are the two countries that have had the biggest interest rate increases from their central banks. Other central banks are also concerned about inflation and increasing interest rates, but much more modestly. And some central banks in Japan, for example, haven't increased

interest rates at all. So this isn't a universal thing. And I think it again, and I'm dubious as to why Canada thinks we have to be at the front of this race. I think we should probably be a bit more cautious. Tell me more about what you see is wrong with the bank's view of inflation here. Well, we all know that we've been through something absolutely unprecedented, the pandemic and the worldwide shutdown and the supply chain disruptions and the transportation disruptions, restrictions, and then an invasion of Ukraine and then a shock in energy prices. So, frankly, none of those things are written about in a textbook, especially the pandemic part. So, you know, I don't think that just taking out a textbook story about inflation being caused by too much purchasing power, unemployment too low, shortage of workers, wages rising, that's the kind of standard story in the textbooks. And it's based

on what happened in the 1970s. Well, take a look at people's pants. We're not wearing flares. This isn't the 1970s. Well, flares are coming back, I will say. Okay, well, maybe that was the wrong analogy, Jamie. At any rate, this is not the 1970s, and this is a very different kind of inflation with different causes and different consequences, and I suggest different remedies. But we still have Mr. Macklem saying the labor market is overheated. There's a shortage of laborers. We have to cool down the labor market. That is code for we are going to increase the rate of unemployment and throw people out of their jobs. And in their judgment, that's the solution to inflation, even though the evidence is clear. This inflation did not come from the

labor market. This inflation came from global supply chains and the disruptions from the pandemic and the energy price shock. So I think that this kind of rote reapplication of a policy narrative and a policy recipe that was designed after the 1970s is inappropriate, given the unique circumstances we face after the pandemic. I really believe there's a better way to try to solve this problem of post-pandemic inflation. And you know, you talked about how this is different from the 1970s. Like what was happening in the 1970s that makes it different from today? And I guess is what all of these guys are so scared about, right? It's like a nightmare they have. I think of it as a kind of a boomer nightmare, okay, for somebody who went to university in the 1980s like I did, and they look back and they learned about how bad this so-called wage price spiral was in the 1970s and

how it took tough medicine, including dramatic increases in interest rates and two recessions, one in the early 1980s and one in the early 1990s, to get inflation down from first from 10% to 5% and then from 5% to 2%. And now we're trying to bring it down from 7% to 2%. So I can assure you, the history says there's going to be a recession and it's going to be painful. Now that recipe from the 1970s, 80s was based on a time when wages were growing rapidly, real wages were growing. That means, Jamie, that wages were growing faster than prices. If your wage goes up, say, 7% and prices went up 5%, well, inflation has occurred, but you're still better off. That's an increase in your real wage. It's also a time when unions were very strong, when we had a lot of strikes in Canada, and when workers actually were increasing their share of the overall pie, of the total share of our GDP that went to workers was growing. This is the exact opposite of what we see today. We saw wages that were growing very modestly. They have not remotely kept up with inflation.

very modestly. They have not remotely kept up with inflation, real wages, the purchasing power that workers get has fallen already by about 5%. And there's more to come. And workers share of the GDP is shrinking, not growing. So this idea that Mr. Macklem stated that the labour market is overheated, and that's the problem does not fit the facts. This is not this is the exact opposite of the situation that led to that recipe book that the Bank of Canada is trying to reimpose once again. But doesn't everyone keep talking about how the labour market is really tight right now? Well, there are a lot of job vacancies. That's certainly the case. And frankly, I don't see that as a bad thing. You know, I think when people are looking for a job, the idea that you

don't have to take the first job that you can possibly get, because otherwise you're not going to be able to pay your bills, that you can actually pick a job that's appropriate, that's appealing, that uses your skills. I think that's a positive thing, not a negative thing. And even in this tighter labor market, we have not seen the surge in wages that some have feared. You know, there has been an uptick in wages this year. They're now growing at about 4% to 5%, whereas recently they were growing at 3% to 4%. That isn't drama, and that is absolutely not the cause of the run-up in overall inflation that we've seen. Even if the Bank of Canada is not exactly addressing all the root causes of inflation, like you're arguing by raising interest rates, mightn't it still work to bring inflation down

by raising interest rates because you're just taking steam out of the economy. Oh, I think you're quite right. I think if you actually got Mr. Macklem in a room with no microphones around and said, do you honestly think wages have caused this? And I think he would say no. In fact, initially, the bank emphasized all of those COVID-related disruptions in explaining why inflation was taking up. It's in recent months that they've really changed their narrative, I think, to try and justify the painful medicine that they're dishing out to Canadians. Because the reality is higher interest rates will do nothing for global supply chains. In fact, they'll probably make things a little bit worse because they discourage

investment in new capacity and infrastructure by businesses. They'll do nothing for the price of gasoline based on events in Ukraine. What they will do, though, is basically throw a giant bucket of ice water over the entire economy. And we're already seeing the signs of that. We've seen a dramatic slowdown in employment growth. We've seen a dramatic slowdown in GDP growth. And this is just the beginning. Even if the bank didn't increase interest rates any further, we would see more of that and likely the beginning of a recession in the months ahead. And that will bring down inflation. You know, I don't dispute that for a minute.

So if your only concern was inflation, bring about a recession. Heck, make it a depression. There was no inflation in the depression in the 1930s. In fact, prices were falling. So if your only concern is getting inflation down, then sure. But of course, that shouldn't be the only concern. And it isn't the bank's only mandate. Just last year, the Bank of Canada and the federal government made an agreement on a

new framework for their policies that says the bank must also pursue maximum sustainable employment. That's the phrase. Further, the government and the bank agreed that because well-anchored inflation expectations are critical to achieving both price stability and maximum sustainable employment, the primary objective of monetary policy is to maintain low and stable inflation over time. But wouldn't they argue that this level of employment isn't sustainable? They don't like this level. I know you like this level, but they don't like

this level. That is the problem with that wording in the framework is it's too loosey-goosey. So you can interpret it however you want. And that's exactly what the bank will say. They will say the job vacancies are too high. Employers complain they can't find the workers they need. And even though wages haven't taken off, we still don't think this is right. So we're going to cool everything off. And I think that's biased. First of all, you know, you've seen over and over again, you see the Bank of Canada warning about wage hikes. They say nothing about profits.

Absolutely nothing. If you look at the latest monetary policy report, for example, which is their official statement on what's happening in the economy, they mentioned the term wage price spiral 13 times. I went through and counted it all. They didn't mention the word profits once, not once. And there is no doubt empirically that profits have grown during this inflationary upsurge. And that is part of the rise in prices. The profit margins have gotten wider and that is built into what we pay. But the bank's narrative is still focused so much on that traditional storyline that Canadians have too much money to spend.

So we have to cool off the labour market and give them less money to spend. And that will solve the problem. And that's the narrative and that's what they're sticking to. Okay, but inflation is also really painful for working people. So we can't ignore that, right? No, we cannot. I would not for a minute say inflation isn't such a big problem, just ignore it. Yeah, and these numbers are not great, right? Like they just came out on Wednesday and inflation is down from 7% to 6.9%, which feels like no one should be having a party here. So if you think raising rates isn't the tool to bring down inflation, what is that? Yeah, that's a very tough question. And I've got some answers to it, but I can't claim that it's the magic recipe.

I do think that we have to have a broader discussion in Canada. First of all, I would say the bank has to be more cautious and balanced in what they're doing. Remember that their only mandate is not just to bring down inflation and they shouldn't throw Canadians out of jobs in order to solve the problem, which is what is happening right this minute. Secondly, there's other ways that we could use interest rates to try and cool off the least productive sort of froth in the economy. I'm thinking particularly of, say, the housing market, which we had a huge housing bubble when we had interest rates very low. And that is definitely part of the inflation that we're seeing. Ironically, overall high interest rates actually make that harder. Inflation in housing has gone up, not down, since the bank started increasing interest rates because the cost of housing, even though property prices are falling,

the cost of housing has gone up and the cost of rents has really gone up. The mortgages are so expensive, right? Absolutely. Yeah. So the bank is actually increasing the inflation rate in the immediate term with those actions. And what I think we could do is use things like prudential mortgage requirements and CMHC rules on mortgage insurance and other ways to cool off the property bubble without having to hammer the whole economy with higher interest rates. Sorry, just translate that for me. Right. Prudential mortgage requirements means what sort of down payment and what sort of stress

tests do you have to go through and how do you make sure that you can actually afford a house at the inflated price that you can actually afford a house at the inflated price that you're willing to pay for it? And if we'd had those in, I think, stronger measure, then we wouldn't have had the big run-up in housing prices that we had. And since we're on the issue of housing, can we talk about rents as well? So we talked about how the cost of housing, how it's so high right now, it's actually driving rents up.

And I believe it's in part because a lot of people who might have been thinking about buying can no longer afford. So now they're in the rental pool. And also because mortgages are higher, maybe those costs are being on pass to renters. So how might you deal with this soaring cost of rent? And we've talked about rent control on the show before. Yeah, absolutely. It is absolutely an option in British Columbia, where I live, the provincial government has put in place a cap of 2% on rent increases this year,

precisely to try and cut off some of that inflationary side effect of the higher interest rates. As you point out, higher interest rates mean fewer people can buy, therefore more are renting. Plus, there's a whole surge in renting as a result of the end of the pandemic. Think about, say, students, for example, who couldn't go to university, but they studied online. Now they can go to university. So there was a huge surge in rents in that sphere of the rental market this year. So this is a good example, I think, Rents, of one way that governments have an important role to play. It's not just the Bank of Canada that controls inflation. We have a government with all kinds of policy levers,

and one of them is direct price controls in certain areas of the economy. And Rents is a good example. I think there's more scope to look at price regulation in different strategic areas of the economy, including particularly energy. All right, so that's housing, which I know we could literally talk about for the rest of this podcast. But what else do you think could be done to help ease the pain of inflation that isn't rising interest rates? Some of the things government can do would be to address the kind of the choke points, if you like, in the economy where inflation has busted out over the

last year and a bit. We see that particularly in energy, we see it in housing, we see it in infrastructure and supply chains. So these are things that government could address. Now, they're not going to fix it overnight. This is not a quick fix. But I think we need more construction and expansion of affordable non-market housing, things like housing co-ops, social housing, community housing trusts. There's been a bit of a return of interest in that area, but I think we need a lot more. That would help to reduce housing inflation in the long run. On the energy side, if we were rolling out renewable energy much faster as we need to for climate reasons, but we would also be insulating ourselves against these gyrations in the world oil futures market that have driven up so many energy prices.

So I think doubling down on the rollout of renewable energy in terms of infrastructure supply chains, we have had congestion at our ports and our railways. We've had obviously damage from the floods and other problems in the supply chain. Those are things that government could help to address. Now, again, that's not a quick fix. Yeah, I mean, it feels like very long-term solutions to quite an immediate problem. Right. Then in terms of the immediate problem, I think some of what we have to do is recognize the unique post-pandemic nature of the initial spurs to higher inflation and recognize that some of those are going to get fixed. We're already seeing the signs of stabilization of most

of the global transportation links and supply chain issues. Not all of them. You know, we've still got problems in semiconductors, for example, because half of China is still under lockdown. And agricultural prices globally are falling. costs, shipping costs was a huge factor in the initial surge of prices and shipping costs have fallen dramatically in the last six months. So some of those things are just going to have to take time as the world economy adjusts to this unprecedented shock. And I don't know why we should be surprised by that. So in that regard, we should focus also on protecting Canadians, at least those who need the most help, against the effects of this inflation until it abates,

and have a little bit of patience in the meantime. Rami, you're essentially saying that you think the Bank of Canada should chill. I think the Bank of Canada should chill. They should not increase interest rates this month or any other time before the end of the year. They should see what's happening in the real economy. I suspect when we get the data for the third quarter of the year, this is the July to September period, we won't find out until November. There's a bit of a lag.

We're kind of looking in the rearview mirror. But when we get that data, I think we'll see real signs of economic weakness and perhaps evidence that the recession has already started. We should also see what happens in the rest of the world. I see no point why Canada, a small, open, international trading country, should be the leader in the battle to bring down global inflation. That just isn't going to happen. So we should, in a way, allow the rest of the world to catch up as well in order to evaluate what's happening in the economy and what is the next course. But again, I think the Bank of Canada's infatuation with convincing Canadians that no matter what, inflation is going to come down to

2%. This is this focus on expectations that we talked about. This is going to make them very reluctant to change course at all. So I expect them to keep going at it hammer and tong even after we end up in a recession. I'm going to go. Powering Canada's entrepreneurs through angel investment and industry connections. Hi, it's Ramit Sethi here. You may have seen my money show on Netflix. I've been talking about money for 20 years. I've talked to millions of people and I have some startling numbers to share with you. Did you know that of the people I speak to, 50% of them do not know their own household income? That's not a typo.

50%. That's because money is confusing. In my new book and podcast, Money for Couples, I help you and your partner create a financial vision together. To listen to this podcast, just search for Money for Couples. What about the argument that we might get to the other side of this and it's going to be really painful, but afterwards in the long term, we'll all be better off. Well, it's that kind of short-term pain for long-term gain argument. And again, this is part of the bank's talking points.

If you want to see them sort of distilled down to the blunt message, read their Twitter feeds and their other social media. You know, the bank is really out there pushing this message. And in, you know, 140 characters on Twitter, it has to be short and blunt. And they say, yes, inflation is going to come down. And that will benefit all Canadians because all Canadians are hurt by inflation. And this is absolute nonsense. by inflation. And this is absolute nonsense. It is absolutely hiding the fact that there's some Canadians who have never had it better, who have profited immensely from the run-up in prices that we're paying. And we've got profits higher as a share of GDP than they've ever been in our history.

So this idea that we're all in this together and we'll all just go through a bit of pain now and in the end we'll all be better off, nonsense. We've seen a decline in real wages and there's more to come. We've seen a decline in workers' share of the overall economic pie and there's more to come. And when we get to that nirvana point on the other side, when inflation is back to 2% and everyone expects it to be back to 2%, that is not going to suddenly change. The bank's not going to snap their fingers and say, okay, now you can all have wage increases to make up for the wages that you lost, the real wage purchasing power that you lost. We're going to give it all back to you now, not remotely, because they'll be as intent on keeping wages growing at a slow pace

and intent on keeping inflation expectations locked at 2% as they are now. So they are asking, they are asking Canadians who work for a living to accept a permanent reduction in their real standard of living and a permanent shift in the overall economic pie from workers to the businesses that workers work for. First and foremost, the energy companies and the housing developers and the supermarket chains who've done so well from this current inflation. But the business community across the board has profited from this moment of crisis and uncertainty. And the bank is saying, in effect, that's going to be locked in. There's no way in their model that workers will then, at the end of a couple of years of pain, be allowed to have wages that increase way faster than inflation. No way is that going to happen. So there's no long-term gain for the short-term pain here.

Okay. Wow, Jim. I hate to be the dismal scientist. They say economics is the dismal science, and we certainly live up to it these days. Yeah, we really ended on a super downer there. But I do want to thank you very much for coming on and giving this perspective. It was interesting to listen to you. And I'm really glad that we had this conversation. And I hope I think we're going to be continuing to have it as the months go on. Thank you for having me, Jamie. Thank you. So before we go today, I want to leave you with some recent related comments from Canada's Finance Minister, Krisha Freeland. On Wednesday at an auto industry conference in Windsor, Ontario, she warned that tougher economic times are coming.

Our economy will slow as the central bank continues to step in to tackle inflation. There will be people whose mortgage payments will rise. Business will no longer be booming in the same way it has been since we left our homes after the COVID lockdowns and went back out into the world. Our unemployment rate will no longer be at its record low. That's going to be the case in Canada. That will be the case in the United States. And that will be the case in economies big and small around the world. There are still some difficult days ahead for Canada's economy

and for the economies of all of our friends and allies around the world. To say otherwise would be misleading. Anyone who claims they could prevent the challenges ahead is just wrong. But Canada is ready and we will be ready. Our social safety net will be there, Our social safety net will be there, including the employment insurance and pensions that Canadians have been contributing to for their whole working lives. That's all for today. I'm Jamie Poisson. Thanks so much for listening. Talk to you tomorrow. For more CBC Podcasts, go to cbc.ca slash podcasts.