BUSINESS FRONT

It is past astonishing that anyone with even a cursory understanding of economics was surprised that, in the wake of the shutdown due to the COVID-19 over-reaction, the North American economies would experience stagflation.

Yet this seems to have been the case. This past June 1, US Treasury Secretary Janet Yellen admitted the following: “I was wrong about the path that inflation would take.” She was referring to a comment she made only one year earlier that inflation posed a “small risk.” When you listen to Yellen speak, you understand immediately that she’s about as sharp as a bowling ball. But this kind of (I struggle for the right word) naivete/ignorance/stupidity is almost past belief.

Imagine the following. There is a small country with $100 million worth of money outstanding. It produces 100 million units a year and all are purchased and used. Because I’m particularly gifted at mathematics, I can conclude that the price of the average unit must be $1 (if you need a calculator to confirm my numbers, take a moment and do the arithmetic). Then the economy shuts down due to a healthcare panic. Production falls to 75 million units a year. In response, the Central Bank and government flood the economy with liquidity, and now there is $150 million in circulation. Isn’t it utterly logical that the average price would rise to $2 per unit?

Of course. But for whatever reason, the Janet Yellens and Joe Bidens and Tiff Macklems and Justin Trudeaus of the world seemed surprised. And the reaction to inflation has been consistent on both sides of the 49th parallel: Let’s jack-up interest rates!

On March 1, the bank rate in Canada was .25 per cent, or 25 basis points. It tripled the next day. As I write this column in mid-November, it stands at 3.75 per cent and the consensus is that there will be another hike in December (more about that later). Meanwhile in the US, the 30-year fixed mortgage rate started the year under 3.5 per cent and now it is north of 7 per cent.

Yes, one way to fight inflation is by raising interest rates. This was the path followed by Paul Volcker in the early 1980s when inflation raged. And for those old enough to remember (which unfortunately includes me), the result was a severe recession. I have argued in this column previously that North America has already gone through a de facto recession due to inflation. Fortunately, it has not been reflected in the employment market. At least, not yet.

That said, there has been a series of high-profile layoffs announced by tech companies recently. Twitter is cutting its workforce in half. Amazon has announced that it will cut 3 per cent of its white-collar workers. Meta (previously Facebook) recently laid off 11,000 people, 13 per cent of its employment pool. I can see this rippling through the entire economy.

However, there is a better way to battle inflation and that is through controlling government spending. In the years before the pandemic, the US deficit climbed each year under the Trump presidency and stood at $984 billion in 2019. It exploded to $3.13 trillion in 2020. Then $2.77 trillion in 2021 and it is projected to be approximately $1.0 trillion this fiscal year. There’s been a similar pattern in Canada but it’s more egregious given the mendacity of our current Prime Minister. In the 2015 election, he committed to a budget surplus in 2019. If you recall that was preCOVID-19. Let’s take a look at the actual record. The deficit was $39.4 billion in 2019 and if we had anything close to a functioning democracy, an immediate resignation would have been required. But that’s a whole other column.

Then the pandemic hit. Canada’s deficit peaked at $314 billion in fiscal year 2020/2021 and was brought down to $95.4 billion the next year. It is projected to be $12.9 billion this year which in all fairness is quite an impressive reduction. But I wouldn’t be surprised if the deficit increases in the future in no small part because of the higher interest rates required to finance the huge amount of outstanding debt.

This gets me to the ultimate point of this column. We should be fighting inflation through balancing budgets and ultimately running surpluses which would allow us to gradually pay down what we owe. I know this would be politically unpopular. It would require a combination of tax increases and spending cuts. But it’s required. We acted as if COVID-19 was a crisis and whether it really was or not is water under the bridge. Looking forward, we should be cutting spending, raising taxes, and cutting interest rates rather than raising them, positioning ourselves towards a future of real economic growth and prosperity. SP

Toronto-based Michael Hlinka is a tenured professor at George Brown College. He hosts a weekly podcast about wagering on professional football. His website is www. michaelhlinka.com