Poilievre’s Dangerous Game

Pierre Poilievre plays with fire by following the manual of the perfect populist written by Donald Trump for his election in 2016.

On the form, the similarities are striking: refusal to answer questions from the traditional media, use of shocking formulas with the delicacy of a bulldozer…

And basically, the rhetoric is the same: 1) identify a problem that infuriates the population; 2) blaming someone in charge who can be hit hard; 3) make voters believe that this complex issue can be solved with a simple solution.

Donald Trump, he was focusing on the Rust Belt, this “rust belt” of which Detroit is a part, eaten away by the erosion of manufacturing jobs. He hit on China and Mexico and promised to tear up free trade agreements to bring jobs back to American soil. Easy ! Not really. Because many of those jobs had disappeared because of technological advances, not foreign competition.

Pierre Poilievre, for his part, attacks inflation, “Justinflation” to use the murderous formula he invented to make fun of the spendthrift Prime Minister. It pays off politically, because the spectacular rise in consumer prices is hurting all Canadians: young people who can no longer afford to buy a house, the less fortunate who have trouble buying groceries, drivers who see red when filling up at $2 a litre…

Pierre Poilievre has identified the culprit: the Bank of Canada, a crucial institution whose credibility he has been undermining for weeks, even calling it “financially illiterate”.

The solution he proposed this week, during a Conservative Party leadership debate, is as simplistic as it is dangerous. The one who aspires to lead the country wants to kick out the governor of the Bank of Canada, Tiff Macklem, and replace him “with a new governor, who would restore a policy of low inflation”.

If only it were that easy!

On one point, Pierre Poilievre is right. Central banks have got it wrong. Not just the Bank of Canada.

They can’t be blamed for doing too much to support the global economy when the pandemic hit in 2020. That would be like yelling at the firefighters for using too much water to put out the fire of the century.

But central banks can be blamed for taking too long to turn off the tap as the economy revved up in 2021. They believed high inflation would come down on its own, as disrupted global supply chains returned to normal. by the pandemic.

Error ! Instead, the invasion of Ukraine has added fuel to the fire.

But by promising to dismiss the head of the Bank of Canada, Pierre Poilievre is getting involved in what does not concern him… as Donald Trump did throughout his mandate.

“Who is our main enemy? Jay Powell or President Xi? he wrote on Twitter in 2019, to twist the arm of the Fed boss into cutting interest rates to stimulate the economy.

But this political interference is harmful. Inflation is lower in countries where politicians have no influence over the operations of their central bank, as found in a Harvard University study1.

By attacking the credibility of the Bank of Canada, Pierre Poilievre is undermining an institution that has managed to control inflation for 30 years, providing stability and wealth to the entire population.

In any case, replacing the Governor of the Bank of Canada would not solve the problems with a wave of a magic wand. Correcting a monetary policy error and bringing inflation back to normal is not without side effects.

At the beginning of the 1980s, the chairman of the Fed, Paul Volcker, had to take drastic measures to curb the escalation of prices, by raising the key rate of the central bank to 20%. This medicine of horse made it possible to lower inflation which had peaked at 13.5% in 1981 down to 3% two years later. But what followed was a very painful recession.

Today, central banks are playing tightrope by trying to curb inflation without killing the economy. For now, the Bank of Canada’s key rate (1%) remains well below inflation (6.7%). We press the accelerator again, instead of applying the brakes.

Even by continuing to raise interest rates, it will not be easy to contain the rise in wages which is driving up the price of services, whether in restaurants, in construction or elsewhere. The job market will remain gripped by the labor shortage fueled by the massive retirement of the latest baby boomers.

Some economists will tell you that the only way to curb wage growth is to cause a recession. And it won’t be fun at all.

Others still believe that there is a road to avoid recession, even if it is very narrow. So if we don’t want to end up in the ravine, now is not the time to hustle the central bankers, even if that sounds appealing to populists like Trump and Poilievre.

Leave a Comment