Poilievre’s dangerous game

Pierre Poilievre is playing with fire by following the handbook of the perfect populist written by Donald Trump for his 2016 election.

Posted at 5:00 am

Formally, the similarities are striking: refusing to answer traditional media questions, using shocking formulas with bulldozer delicacy…

And basically the rhetoric is the same: 1) identify a problem that enrages the populace; 2) blaming a manager who can be hit hard; 3) Make voters believe that there is a simple solution to this complex problem.

Donald Trump, he focused on the rust belt, this “rust belt” that Detroit is a part of that has been eroded away by the erosion of manufacturing jobs. He lashed out at China and Mexico, promising to tear up free trade deals to bring jobs back to American soil. Easy ! Not really. Because many of those jobs had disappeared because of technological advances, not because of foreign competition.

For his part, Pierre Poilievre is attacking inflation, “justinflation” to use the murderous formula he invented to mock the prodigal Prime Minister. It’s paying off politically, as the spectacular rise in consumer prices is hurting all Canadians: young people who can no longer afford a house, the disadvantaged who have trouble buying groceries, motorists who see red gas at $2 a liter…

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

The solution he proposed during a Conservative Party leadership debate this week is as simple as it is dangerous. Whoever aspires to run the country wants to sack Bank of Canada Governor Tiff Macklem and replace him “with a new governor who would restore low-inflation policies.”

If it just could be that easy!

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

They cannot be blamed for doing too much to support the global economy when the 2020 pandemic hit. 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 picked up steam in 2021.

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

But by pledging to sack the head of the Bank of Canada, Pierre Poilievre is meddling in things that are none of his business… just as Donald Trump has done throughout his tenure.

“Who is our main enemy? Jay Powell or President Xi? he wrote on Twitter in 2019 to get the Fed chair to cut rates to stimulate the economy.

But this political interference is harmful. Inflation is lower in countries where politicians have no control over central bank operations, a Harvard University study shows1.

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

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

In the early 1980s, Fed Chairman Paul Volcker was forced to take drastic action to stem the price explosion by raising the central bank’s interest rate to 20%. This equine medicine made it possible to reduce 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 walking a tightrope trying to contain inflation without destroying the economy. For now, the Bank of Canada’s policy rate (1%) remains well below inflation (6.7%). We step on the accelerator again instead of braking.

Even if interest rates continue to rise, it will not be easy to stem the rise in wages that drive up the price of services, whether in restaurants, construction or elsewhere. The labor market continues to be gripped by labor shortages, fueled by the massive retirement of the youngest baby boomers.

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

Others still believe there is a way to avoid a recession, even if it’s a very narrow one. So if we don’t want to end up in the ditch, now is not the time to rush central banks, even if that sounds tempting to populists like Trump and Poilievre.

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