A self-inflicted recession and a pointless sacrifice to a mystical two per cent god

Posted on July 3, 2022 in Debates, Policy Context

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TheStar.com – Business/Opinion
July 2, 2022.   By Jim Stanford, Contributing Columnist

It’s not inflation, but the policy response to inflation, that is poised to derail a miraculous economic recovery, Jim Stanford writes.

Canada’s economy rebounded from the COVID-19 pandemic far faster than virtually any economist (myself included) would have dared predict.

By October 2021 — 18 months after the fastest, deepest contraction in Canada’s economic history — total employment had already regained its pre-COVID benchmark.

Unemployment is now the lowest (5.1 per cent) since Statistics Canada started collecting this data. Real GDP also fully regained its COVID losses by late 2021.

And the economy has kept charging forward ever since.

By any measure, this is a historic achievement — and a ringing validation of the extraordinary measures taken to protect the lives and livelihoods of Canadians during the pandemic.

But celebration of this remarkable rebound has been cut short, replaced by dark pessimism.

There are now growing signs the post-COVID comeback will be squandered, like a Game 7 collapse by the Maple Leafs — traded for a needless recession.

Most disappointing, the pain will be largely self-inflicted.

Accelerating inflation is blamed for the coming storm, but it isn’t the true culprit.

In reality, it’s not inflation, but the policy response to inflation, that is poised to derail the recovery.

After some initial hesitation, central bankers around the world (including in Canada) have rediscovered austere true religion. They are pledging to drag inflation back to target (in Canada, that’s two per cent), and reestablish their “credibility” with the financial community, no matter what.

The Bank of Canada’s Deputy Gov., Paul Beaudry, put it bluntly: “The bottom line is, we will get inflation back to two per cent, and we’ll do what’s necessary to get there.”

That signals a willingness to spark outright recession if needed to control inflation — even though the real and immediate costs of recession (from lost jobs to lost homes to lost lives) are far more severe than the consequences of current inflation.

This attitude evokes the U.S. major in Vietnam who was willing “to destroy the town to save it.”

Reducing inflation from its current rate (7.7 per cent in May) to two per cent is a reduction of almost six percentage points. In the past 70 years, no disinflation of that magnitude occurred without a major recession.

But because that magic two per cent target has been elevated above all other priorities, it seems we’re going to do it anyway.

This single-minded determination is shared by central bankers across the globe. They’re stuck in a 1970’s mindset in which unions and workers supposedly drove inflation ever-higher in an escalating spiral.

But that narrative has no relevance to the current situation. Statistics confirm labour costs did not cause today’s inflation.

To the contrary, slow growth in wages and unit labour costs has helped moderate prices; meanwhile, higher business profits account for the bulk of price increases.

Concerted worldwide monetary tightening is already shocking expectations and roiling markets.

Early signs of stress are visible in plunging asset prices, including equities, real estate, and riskier assets like cryptocurrencies and emerging market debt.

Consumer and investor confidence is crumbling, and that can inflict self-fulfilling damage on future growth.

If a recession occurs, its aftershocks (exacerbated by over-leveraged financiers, the still-unfinished pandemic and war in Ukraine) will be wide-ranging and unpredictable.

Apart from preparing for needlessly tough times ahead, this is also a time to reconsider our over-reliance on this one powerful sledgehammer — central bank interest rates — to manage the ups and downs of the entire labour market.

When unemployment was high, lasting ultralow interest rates lost their effectiveness, more often causing undesired effects (like a housing bubble) rather than real growth and job creation.

With unemployment low, we now face a devil’s choice between continued inflation and deliberate recession.

We need other strategies for motivating growth when needed, and slowing it when it’s not.

Other tools could be invoked right now to control inflation, such as strategic price controls, targeted taxes on corporations and high-income earners, and low-cost or free public services.

But the dominant orthodoxy demands monetary austerity, and nothing else.

The elevation of inflation control over all other economic and social priorities seems likely to snatch defeat from the jaws of our post-COVID economic victory.

Decades from now, historians will shake their heads, wondering why today’s leaders were willing to throw away a miraculous economic recovery in a pointless sacrifice to a mystical two per cent god.



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