Poilievre’s dangerous game

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

Posted 14 May

On the form, the similarities are striking: refusal to answer traditional media questions, 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 the back of a manager who can be hit hard; 3) to make the voters believe that this complex issue can be solved with a simple solution.

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

Pierre Poilievre, for his part, attacks inflation, “justification” for using the murderous formula he invented to make fun of the spendthrift prime minister. It pays 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 find it difficult to shop, drivers who see red when they go shopping. full at $ 2 a liter …

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

The solution he proposed this week, during a debate on Conservative Party leadership, is as simplistic as it is dangerous. Those who aspire to lead the country want to oust 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 were wrong. Not just the Bank of Canada.

They can’t be blamed for doing too much to prop up the global economy when the pandemic hit in 2020. It 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 recovered in 2021. They believed that high inflation would subside on its own, as disrupted global supply chains returned to normal due to of the pandemic.

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

But promising to fire the head of the Bank of Canada, Pierre Poilievre gets involved in what doesn’t concern him … as Donald Trump has done throughout his term.

“Who is our main enemy? Jay Powell or President Xi? he tweeted in 2019 to twist the Fed boss’s arm into cutting interest rates to stimulate the economy.

But this political interference is harmful. Inflation is lowest in countries where politicians have no influence over their central bank’s operations, 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, the replacement of the Governor of the Bank of Canada would not solve the problems with a wave of magic wand. Correcting a monetary policy mistake and bringing inflation back to normal is not without its side effects.

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

Today, central banks are playing on a 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 if interest rates continue to rise, it will not be easy to contain the rise in wages that is driving up the price of services, whether in catering, construction or elsewhere. The labor market will remain gripped by labor shortages fueled by the massive retirement of the last 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 way to avoid a recession, even if it is a very narrow one. So if we don’t want to end up in the chasm, now is not the time to cheat the central bankers, even if that sounds tempting to populists like Trump and Poilievre.

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