The brand of turbo-charged capitalism that we call “neoliberalism” arrived in North America on a rising tide of inflation.
It was the 1970s, a time of worldwide political and economic turmoil. The crisis had many causes; higher inflation was one result. After oil prices quadrupled in late 1973, the inflation rate in Canada averaged 11% in 1974. After 1979, when oil prices doubled again, inflation soon shot past 12%. Across the border, U.S. truckers and angry citizens rioted over the cost of gasoline.
Into this chaos stepped Paul Volcker, chair of the U.S. Federal Reserve. Volcker had strong views on what was causing inflation, and he had the power to do something about it.
The problem, he believed, was wages. Given that wages and salaries made up “the dominant share of business costs,” he said, worker demands for pay increases to keep up with inflation actually fuelled more inflation, which fuelled higher wage demands, creating a “price/wage spiral.” The solution to stopping the spiral was simple: have a recession. Recessions mean job loss. Workers who fear job loss are less likely to demand wage hikes.
No wage hikes, no inflation. That was Volcker’s idea.
Engineering the recession was not hard. By April 1980, prime lending rates in the U.S. topped 20%, and Canada’s followed suit. At rates like that, virtually no one could borrow to invest or make new purchases. The resulting global recession pushed the unemployment rate in late-1982 to 10.8% in the U.S. and 13.1% in Canada, both record highs until 2020.
It was a high cost to pay. By stopping workers’ wages from keeping up to inflation, the recession essentially locked in wage losses. For a quarter-century after the “Volcker Shock,” both Canadian and U.S. workers saw average wages stagnate, even as their on-the-job productivity grew. Meanwhile, business profits, as a share of the economy, went up. Wealth was transferred from workers to employers—in a big way.
All of this ancient history wouldn’t matter except for one thing: for most central bankers today, Volcker’s method is their textbook. It’s the only way they can imagine to fight inflation. And that’s why Canadians may soon be staring down the barrel of a recession.
Central bankers are not the only players in this drama, of course. Politicians play a big role. So do corporate executives and business owners. For some of these players, inflation is not a problem at all; it’s an opportunity.
For politicians, inflation represents a different opportunity. Voters care a lot about the cost of living, and when costs are rising, they expect their elected officials to do something about it.
When prices start to rise, it’s natural for sellers whose input costs have gone up to try to pass those extra costs on to customers—that’s how they maintain their profit margins. But do their customers really know how much input costs have gone up? Probably not, and therein lies the opportunity. Businesses can increase prices, increase profits, and blame inflation. That is, in fact, what is happening in Canada right now (see David Macdonald’s “What’s driving inflation?” in this issue).
For politicians, inflation represents a different opportunity. Voters care a lot about the cost of living, and when costs are rising, they expect their elected officials to do something about it.
Based on what premiers and the federal government have done in 2022, politicians’ preferred option is to put cash in voters’ pockets. This is absolutely necessary for low-income individuals and families facing rising rent and food costs, just as it was necessary in 2020 when so many Canadians lost their jobs. That said, it matters how cash transfers are structured. When they are in the form of permanent cuts to taxes or fees (as enacted by the PC government in Ontario and proposed by the NDP opposition in Alberta), these transfers can mask permanent cuts to the revenues that pay for public services.
Lately, politicians who opposed the federal carbon tax before the recent rise in inflation have seized on a new argument against it, namely that “people are hurting.” The attack on federal climate strategy has thus taken on the appearance of a humanitarian rescue mission.
To premiers like Saskatchewan’s Scott Moe, Alberta’s Jason Kenney and Ontario’s Doug Ford, the fact that the carbon tax added just 2.2 cents a litre to gasoline prices this year—and that carbon tax rebates are on the way—is irrelevant. Those who oppose taxes in the first place are always happy to liquidate public revenues and give them away (to quote Ford, “the worst place you can give your money is to the government”). Inflation is just a handy excuse.
Opposition to taxes and government programs is not limited to provincial politicians. For would-be federal Conservative leader Pierre Poilievre, rising prices have opened up a new avenue for attacking activist government: “The cost of government is driving the cost of living; the more they spend, the more things cost,” he says.
This analysis ignores other causes of inflation, such as supply-chain disruptions, surging oil prices, corporate profiteering, climate change and war. But in Poilievre’s vocabulary, inflation is not the product of complex interactions among diverse forces on a global stage; it is an “inflation tax” imposed on Canadians by their own government, in league with its central bank.
Poilievre’s solution is to “get our spending under control” and “eliminate the inflationary taxes and deficits that are driving up the cost of living.” This is not a change for him: he has always called for lower spending, lower taxes and lower government deficits. Inflation has merely given him a way to link his preferred policy options, rhetorically at least, to people’s everyday lives.
If political frustration awaits Poilievre, it may be because federal Liberals are already heading in the direction he is calling for.
In June, Finance Minister Chrystia Freeland boosted certain payments to low-income Canadians, but she also spoke of holding back on spending to fight inflation: “I don’t want to make the Bank of Canada’s job harder than it already is,” she said. In so doing, she handed the inflation problem back to the Bank, whose tool of choice, as mentioned above, is to raise interest rates to choke off growth and very likely pitch the country into a recession.
If that happens, there will be serious consequences for the distribution of wealth in Canada.
A century ago, U.S. plutocrat Andrew Mellon said that “in a crisis, all assets return to their rightful owners.” What he meant is that in a recession, unemployed workers and shuttered businesses do not merely lose their savings, their homes and other assets; someone else gets them, usually at fire-sale prices.
Thus, the battle against inflation is not merely about taming the cost of living. For those with the power to wield it, inflation is a tool, a devil’s crowbar to pry wealth from the hands of those too vulnerable to hold on to it. With four big interest rate hikes this year, the Bank of Canada is already doing its part to provoke a recession—and begin the wealth transfer in earnest.
