They mess up, you pay.
Back last month, Bank of Canada Governor Tiff Macklem told the Canadian Federation of Independent Business that high inflation was going to be a problem for a while – a few months at least – but the country’s small businesses could do their part to bring inflation down by not negotiating wage hikes into contracts for their employees.
Nice theory, I suppose, but it was Macklem’s and the bank’s theories that got Canada into an upward inflation spiral in the first place. So, I’m not sure I want to hear any of Macklem’s theories about how to break inflation’s back.
Holding wages down should help bring inflation under control, whereas giving workers pay raises would give them more money to chase goods and services with, theoretically driving up prices.
Higher wages will also drive up inflation if businesses then pass the costs of those pay increases on to their customers in the form of higher prices.
But it’s really easy for a central banker to tell small business owners what to do. He isn’t competing for scarce workers or trying to entice labourers to come back to work after the federal government paid them handsome subsidies to stay off work during the pandemic.
In the real world, living up to Macklem’s theoretical advice would be tough – and something Macklem himself doesn’t have to follow.
Indeed, Macklem’s advice to entrepreneurs came just one day after the Bank of Canada itself raised the prime lending rate by a full percentage point.
Do as I say, not as I do.
In the short term, such a large increase is inflationary. The bank increases the cost of borrowing money – a cost that businesses then pass on to consumers in much the same way Macklem was cautioning entrepreneurs not to pass on wage increases.
In the long term, raising interest rates should cool off the economy by discouraging businesses and consumers from borrowing money, but that pain also falls on entrepreneurs and consumers rather than on bank governors.
Raising the cost of borrowing increases the risk of expanding a business and also increases the risk of layoffs. Your small business might suffer or you might lose your job because of Macklem’s actions, but central bankers still go to cushy offices in expensive cars, take vacations in the sun, buy new houses and dine out at taxpayer expense.
Indeed, despite not meeting their inflation targets of two per cent for more than a year, the Bank of Canada (whose bonus structure is supposed to be based on hitting those targets) gave raises to over 1,800 employees in 2021 and bonuses to more than 1,600.
Talk about not heeding his own advice.
Of course, Canada’s central bank is not alone in its inflation-fighting folly. Most central banks in North America and Europe didn’t do enough during the pandemic to keep inflationary forces in check.
Because most central banks, including the BOC, have fallen under the spell of MMT (Modern Monetary Theory), most allowed their domestic governments to wreak havoc on government finances, currencies, growth and unemployment – on the absurd assumption that if this were done only temporarily it would have little effect on inflation.
Wrong.
Since the Trudeau government spent more per capita on pandemic subsidies than any other Western government – and the Bank of Canada printed them all the extra money they needed – it could be argued that Macklem and his institution were the MMT-iest central bank in the world.
Now that that has caused the worst inflation in four decades, Tiff Macklem wants Canadian entrepreneurs, workers and consumers to bear the brunt of the pain the bank’s theories have caused.
He thinks you should accept a lower standard of living to cover for the bank’s mistakes.
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