This column by Armine Yalnizyan was originally published by the Toronto Star on Thursday April 21, 2022. Armine is a Contributing Columnist to Toronto Star Business featured bi-weekly.
How do you solve a problem like inflation?
There are plenty of armchair economists who think the federal government and the Bank of Canada are not doing enough, as the Consumer Price Index keeps accelerating to new generational highs, hitting 6.7 per cent for the first time since 1991.
But what should they do?
For insight and context, I turned not to the similar levels of inflation, but to similar surges in inflationary pressures.
This bout of inflation is not like what happened in the 1990s, but in both the early 1970s and the late 1940s there were similar epoch-making events as today’s price-propelling impacts of a global pandemic and Russia’s brutal invasion of Ukraine.
In October 1973, OPEC’s first oil price shock rocked the global economy, triggering a wave of inflation that changed the world’s focus on energy, sparking both more oil production and more rapid development of hydroelectric and nuclear sources of energy.
In the late 1940s, the shift from a war-based economy to a civilian-based economy also unleashed massive inflation due to shortages in materials, equipment and labour.
In both periods, housing was a pressing social and economic problem, as boomers aged out of their parents’ homes and veterans returned from war, gravitating to big cities rather than the smaller towns from which they came.
The federal budgets of 1947 and 1974 both acknowledged global events were shaping the moment, but did not dwell on what they could not control. They did what they could to ease the impact, in both cases focusing on the most vulnerable, and on directly strengthening the foundations for growth.
In 1947, though the budget cut both revenues and expenditures as “demobilization and reconversion” continued, the federal government accounted for a quarter of GDP.
Outlays for veterans’ benefits fell fast as unemployment plummeted to 2.6 per cent, funds for veteran training and old age pensions rose, while outlays for housing increased dramatically.
In just one year the federal government approved 43,460 dwelling units. Capital expenditures were increased fivefold from the previous year, with dredging the St. Lawrence Seaway and increasing civilian airports being two big-ticket items.
Tax cuts were hefty, but focused on the poorest income brackets, while wartime excess profit taxes on corporations were not removed because companies of the day were competing more to increase market share than reduce prices.
The 1974 budget dealt with the first oil price shock by also focusing on what the feds could do to fight inflation: a) increase energy supply (oil, hydroelectric and nuclear energy production), food supply (farm credit ballooned to almost $12 billion in today’s dollars) and housing stock; b) constrain basic consumer prices (holding oil prices to 55 per cent of global monopoly prices; providing subsidies for bread and milk; cutting taxes and tariffs on clothing; and scrutinizing “profiteering” through the Food Prices Review Board); and c) fully indexing old age pensions and family allowances.
Housing was a problem then, too, but the 1974 budget notes that there were already a record 269,000 housing starts in 1973, “well in excess of the rate of family formation.”
Interestingly, food inflation took a bigger bite out of family budgets at the time than housing (some readers will remember the phrase “you’re eating me out of house and home”), so food prices were the biggest affordability challenge, politically.
The 2022 budget, in comparison, plays like a 1990s remix.
Though it leads by addressing affordability concerns and housing pressures, its main message was one of returning to fiscal guardrails, focusing on deficit and debt reductions, with a retro side-dish of expenditure review (code for keeping a lid on expenditures).
There were 244,450 housing starts last year, and a plan to increase these by 100,000 new homes over the next five years. That’s roughly the same build rate as in 1974, for a population that is 70 per cent bigger than in 1974.
Campaign promises to increase corporate taxation during a period of skyrocketing profits were cut in half. Instead, corporations were invited to make money through two new growth funds, modelled on existing growth funds that have yet to produce results, sucking up the lion’s share of new federal initiatives at $15 billion over five years.
In a modern twist on the old hits, Chapter 4 addressed the era of labour shortages by promising a strategy focused on “Creating Good Middle Class Jobs.”
However, less than one in four dollars of the roughly $5 billion that will flow over the next five years will actually reach Canadian workers. Most of that money goes to giving skilled tradesmen a “mobility” tax credit to move to where the jobs are, or helping foreign workers getting their credentials recognized.
Regarding shortages of nurses and personal care workers due to burnout and abysmal working conditions, or the exodus of early childhood educators because of terrible wages: crickets.
Who do they think provides the care in the part of the economy that fuels 12.6 per cent of GDP and 21 per cent of all jobs? Elves?
In fact, most of the budget’s allocation of funds for “good middle class jobs” goes to employers’ concerns about labour shortages by increasing the flow of temporary foreign workers.
Look, this federal government has been more progressive than any in my adult lifetime, reducing child poverty, increasing access to early learning and child care, minimizing economic catastrophe during a pandemic, and readying to deliver on long-overdue dental and pharmacare programs.
And this won’t be their last budget.
But this lapse into retro 1990s thinking was a disappointment, particularly because of what they’ve already accomplished.
The focus on boosting innovation and investment is a waste of time and money. Since the 1990s, evidence shows governments don’t know how to goose productivity or growth.
But we know governments maximize potential when they invest in the foundations for everyone (affordable and accessible high-quality health, education, housing and communication, as a bare minimum).
Business isn’t a partner in establishing the basics. That’s government’s job. It should stop getting distracted and do its job of providing our economy a solid foundation for the next inevitable big threat.