Pierre Poilievre is wrong about inflation
Pierre Poilievre is wrong about inflation
As economists' understanding of inflation as an outcome of social conflict is becoming more widespread, the Leader of the Opposition's answers to it are stuck in the 70's.
I could spend my days deconstructing the ways that PP is wrong about how the economy works. Or as theoretical physicist Wolfgang Pauli reportedly said “That is not only not right; it is not even wrong”. But I haven’t - partly to protect my own mental health, and partly because I haven’t been sure that it’s most effective way to counter his ‘not even wrong’-ness. He is very good at constructing headline messages that are easy to repeat, sound defensible to the angry and disenfranchised, and are based entirely on a hierarchy of sketchy logic that takes a lot of explaining to unravel.
In politics, if you’re explaining, you’re losing. So if you sound confident, and are unconcerned about logical fallacies and internal inconsistencies, you must be winning.
I dunno. I’m starting to see some inconsistencies that might be worth trying to explain. While I understand the appeal of some of Pierre’s rhetoric about elites, and I think people *should be* angry about how Canada’s economy is functioning, it turns out his proposed fixes are just more of the same-old, same-old: tax cuts and trickle down economics. And quite of lot of his messaging has been based on trying to take advantage of specific moments that rapidly shifted out from under him (like his stance on bitcoin as a hedge against inflation).
So I’m going to take a stab at it.
Fiscal Sanity
On the last House of Commons ‘sitting day’ before the end of the year, PP addressed the conservative caucus and said the conservative answer to inflation is “fiscal sanity”, meaning imposing legal limits on government spending.
This fits with his messaging around ‘Just-inflation’, summarized nicely by Katrina Miller in a Toronto Star op-ed:
His rationale goes something like this: average folks are paying too much in taxes, which gives the government too much revenue, which it spends irresponsibly, which then drives up inflation. It’s a tidy story, but totally false.
What I find interesting about this is that it leans on the idea of social conflict as the source of inflation, it’s just that in his story the conflict is between us regular folks and the government. At the same time, he uses Friedman’s analysis of inflation being a monetary phenomenon - framing the resolution to the conflict as a simple matter of shrinking government spending. It’s a confused hybrid of two very different economic theories, which is what makes it ‘not even wrong’.
There’s no question that there exists conflict between taxpayers and governments - how much tax should be collected, who should pay it, what should it be used for - but most of the distributional conflict is between different groups of people, not between people and the government.
And if were seriously concerned about government actions increasing the money supply, he would focus on the size of government borrowing, not spending financed by tax revenue.
But it makes very little sense to bang on about government creating ‘inflationary gaps’ at this point - as of October 2022, two measures of money were in negative growth territory. (Definitions and more data can be found at the Bank of Canada). Neither growth rate has been in negative territory since 1995.
The nature of economic conflict has shifted
Besides being pro-wealthy and anti-worker, another big reason that the answers of the 1970’s are wrong is that economic power dynamics have shifted considerably. In the 1970’s and 80’s, inflation was at least partially an outcome of conflict between workers, consumers, and firms (as macroeconomist Olivier Blanchard recently said on twitter). But the landscape has shifted.
The libertarian conservative economists that Pierre Poilievre is cribbing from won the policy battle in the 80’s (more or less in different countries, but still) - busting unions, cutting taxes, shrinking public ownership and investment in infrastructure and services, off-shoring manufacturing to ‘low-cost’ countries, enforcing a rules-that-benefit-multinational-corporations based economic order through international trade deals. These policies concentrated power in the hands of those Poilievre largely ignores - oligarchs.
James K. Galbraith (responding to the debate the Blanchard sparked) thinks that in our current economic order, the conflict is primarily *between* oligarchs. Galbraith’s whole piece is great, but I loved this paragraph in particular.
countries like ours (the US, UK, Canada) are now run by gangs of oligarchs, rooted in finance, technology, energy, aerospace, the military, big Pharma, insurance, real estate. Their struggles are mainly with each other. Labor as such has little-to-no leverage; it subsists on social minima, a strong currency, cheap energy, and (it must be said) the Schumpeterian gains from radical improvements in (mostly imported) consumer goods. For this reason, pressures for inflation are driven by resource costs, first and foremost, and after that by speculative competition between the various monopolists. As Josh Bivens has documented, the big recent gains are in profits.
It’s an oligarch’s world, we only live here. - James K. Galbraith, Monetary Policy Institute Blog
Adam Tooze, a British historian shares a similar insight on his Substack:
But the “struggle” in question is between different groups of producers over the size of their mark-ups and how much they can pass through to their customers and ultimately households as final consumers, another group that Blanchard does not mention.
None of this is to say that we can’t, or shouldn’t fight back. We can and should. It just means we don’t currently have the economic power to make a dent in inflation - either as workers or consumers.
In terms of pulling apart Poilievre’s flawed arguments, I think it’s useful to point out that it’s absurd to talk about inflation or the cost of living crisis while ignoring the role of those who set the prices. We don’t have a ‘free’ market with healthy competition, and the exact policies that he’s proposing have made that worse, not better.
Carbon taxes and inflation
Poilievre also likes to blame the carbon tax for inflationary pressures. Carbon taxes are a great scapegoat for higher energy costs, but it’s not hard to dig down and see that higher costs are also coming from higher commodity prices and changes in mark-ups from both refiners and retailers. Natural Resources Canada provides estimates of cost components for gasoline, diesel, fuel oil and propane on their website (but be warned, it’s VERY slow).
The other reason that the carbon tax isn’t the villain in our story about inflation is that most households get more back from the carbon tax rebate than they pay in higher carbon taxes. In fairness, this hasn’t been well-advertised. When the rebate first moved from being included in our personal income tax calculations to a quarterly deposit this summer, different banks labeled it differently. The federal government had to ask banks to label it “Climate Action Incentive” so that people knew what it was.
The Parliamentary Budget Office has modeled the distributional impacts of the carbon levy and the rebate, and lower income households are net beneficiaries of the scheme while only higher income households have to pay more than they get back. (Negative values here are the amount that household get back from the levy, positive ones are the amount households pay into it).
(Why have a carbon tax then? Because it makes carbon-y things relatively more expensive up front, and provides an incentive for households to switch to lower carbon alternatives - like using heat pumps instead of home heating oil. It’s not enough on its own, that’s why there are also lots of government incentives to buy and install heat pumps.)
Whose side are you on?
So how do we unravel Pierre’s inconsistencies on economic matters? I think it’s the same as it ever was - take a look at what he’s proposing and see who benefits. Getting rid of the carbon tax benefits higher income households and businesses who sell oil and gas. Imposing legal limits on government spending only benefits those who want government to be smaller.
And now that we have the evidence from 30-odd years of trying, we can definitively say that trickle-down economics does not work. It’s how we got into our current mess. We’re going to need to try something different to get out.