Why Canada's Conservative Leader Pierre Poilievre is So Wrong on Canada's Economy & Inflation

The reason things aren't working is because we're operating on false economic premises and out-of-touch theories

This was a tweet by the Leader of the Conservative Party in Canada, Pierre Poilievre, about losses in the stock market that occurred on August 5, 2024.

The thing about Poilievre’s statement is that it’s not accurate. I am sure there are people who believe it, but it’s not backed up by history, facts or evidence. I know those aren’t supposed to matter anymore in politics, but actual policy decisions have direct impacts on people’s lives, that can be very beneficial, or devastating.

It’s a challenge to unpack statements like these, because there are so many false assumptions compressed into them, and when Poilievre talks about good times, inflation and oil prices, he’s got a lot more explaining to do.

It might have been good times for Pierre Poilievre, who is not just alt-right, but alternate-universe right. The real story of what is happening to Canada's economy is much more important.

Ideology aside, Poilievre's entire account of the economy is just blatantly wrong, on the facts and evidence.

First, Canada's economy has seen massive shocks in the last years, including oil price shocks.

In 2014, together with OPEC, Saudi Arabia they deliberately drove down oil prices under $50 a barrel. News articles from that year make it absolutely clear that is was a deliberate decision. They thought they could drive all of the shale producers out of business. In Canada's oil-producing provinces it was devastating.

“Between mid-2014 and early 2016, the global economy faced one of the largest oil price declines in modern history. The 70 percent price drop during that period was one of the three biggest declines since World War II, and the longest lasting since the supply-driven collapse of 1986.”

In Alberta, Saskatchewan and Newfoundland, a huge chunk of the economy was at stake, because so much of it depended on the price of oil staying high. That includes all the current business, jobs and public revenue that depended on high oil prices, but all the investment, current and future, that also depended on that high oil price.

From 2014, on, the folks in oil-producing provinces were crushed. The Bank of Canada dropped interest rates in order to try to get people to borrow to buy and invest more. In January 2015, the interest rate was dropped from 1% to 0.75% then 0.5%.

As of 2018,

“The contribution of oil and gas to gross domestic product has been cut nearly in half since 2014 – to 3.5 per cent of GDP from 6 per cent. The sector’s share of Canadian business investment, which was about 30 per cent in 2014, has shrunk to about 18 per cent today,”

This is entirely due to a global price war.

The thing about the Bank of Canada's strategy to boost the economy, is that really, it's that lower interest rates means people borrow for to put money into driving up real estate prices.

By 2019, the price of oil had not recovered, and because of that, neither did jobs or investment. This is a huge part of the whole story about Canada's economy that is ignored.

So, these were not “good times” - for many people, it was agony, and it went on for years, because the oil price war did, too. The misery was made worse because lots of people were offered debt to pay for stuff, and banks were willing to lend because everyone - everyone - kept talking about how the price of oil was going to keep going up. After the price of oil crashed, people were still trapped, by a burden of private debt. That is what accelerates and deepens recessions.

I am certain that this misery has directly contributed to radicalization and extremism.

Lots of people were at their wit’s end, and the solutions offered didn’t benefit them, because the ideology of supply-side or trickle-down economics means focusing on taking care of people who already have money, and giving them more, in the hope that they will spread it around, instead of government. This tends not to work.

While politicians make wild claims about the extreme positions of their opponents, the reality is that there is not that much difference in their actual economic policy. The basic economic operating system of the Bank of Canada and the finance departments is not Keynesian, it is based on very conservative ideas and models from the 1970s.

In March 2020, the pandemic hit. Many Canadians were already economically fragile going into that event. In Manitoba, over 50% were $200 a month from insolvency.

The declaration of the global pandemic created so much incertainty no one was willing to lend at all, because if you're a person or business who is worried they can't pay their bills, they won't lend out money.

Also in March 2020, global lending markets locked up. Central banks and governments stepped in to make sure that businesses and governments could still keep running.

That's what the Bank of Canada and other central banks are really supposed to do - make sure that the federal government can always fulfill its financial obligations, or step in during a financial collapse. That is the Bank of Canada's actual legal mandate.

Now, how they do that depends on the economic theory they have. For banks, this was treated as being “short on cash” or a “liquidity crunch.”

To address it, the Bank of Canada and Canada Mortgage and Housing Corporation (CMHC) provided Canada's banks with tens of billions in money, in exchange for some of the bank's assets, like bonds which hold people's mortgages. This is what "quantitative easing" or QE is.

During the pandemic, central banks around the world printed about $8-trillion.

What they actually do is create a bank account for the bank and create money there. (This was also done in Canada in 2008-09, when Canada's Banks received over $100-billion in assistance from CMHC, the Federal Reserve, and the Bank of Canada).

The argument for QE is that once interest rates have reached near zero, for central banks to stimulate the economy, they need to do QE.

One of the many problems with QE, however, is that it in trying to prop up the price of collapsing assets, it inflates the price of existing assets, like housing, and not investments in factories or in the "real economy."

It is also an absolutely colossal intervention in the economy by central banks, which really are, despite people's claims, independent. When people complain about central banks, it's not they they are working with politicians, but that their economics is much more like theology with calculus. And the ideology of central banks is not left, or centre, or liberal.

It is based on the work of heroes of the conservative movement, economists like Milton Friedman and Robert Lucas, whose work has informed conservative economic policy around the world since the 1970s. And despite being supposed very economically conservative, these policies are used to justify colossal interventions in the economy.

As the great Canadian economist and central banker William White has written, every time central banks have tried to fix the problem, they've made it worse.

The government absolutely has a role in making sure that markets are operating properly through legal and regulatory oversight.

The problem has been the way that central banks have intervened, because the way they are doing it is by propping up or inflating the value of existing assets and investments. That's because they have their analysis wrong.

It is *not* a liquidity crisis, where banks are caught in a pinch. It’s not a “bank run,” because people aren't pulling money out - the people who borrowed are not paying in. It's an "insolvency crisis".

This is what Canada and other developed nations, like the UK and the US are facing, right now.

It is the private market and economy that is in crisis.

At the start of the pandemic, the Canadian government basically floated the Canadian economy. They had to borrow and it meant a lot of Canadians could keep paying their bills, which also meant that Canadian businesses would keep getting revenue, all while giving money to provinces to run health care systems.

It should be self-evident that replacing lost revenue or income is not inflationary.

When a business loses revenue, or a person loses income, and you put them back to where they were, they have no more money to spend than they did before. That is not inflationary.

This brings us to what did cause inflation.

One was related to the Bank of Canada (and other central banks’) decision to “stimulate” the economy with lower interest rates.

This led to more and bigger loans, and, as provinces allowed for evictions during the pandemic, a real estate buying spree.

That is what has created Canada's housing crisis and real estate mania - money, not just supply and demand.

This is what central banks have been doing for many years, because goosing the real estate and stock market has been the way to give the economy a quick pick-me-up - getting people to borrow more.

This flood of new mortgages and debt doesn’t tend to fuel “grassroots” economic benefits of new investments in productive businesses. It fuels real estate bidding wars on existing property, and the debt itself acts like a tent-pole, keeping the prices high. It has fuelled the housing crisis, as well as mergers, acquisitions and consolidations, which tend to result in layoffs for “efficiency”, not new job creation.

So one major cause of Canada’s problems has been the way central banks try to help the economy.

The other is the price of oil and gas, and how it has contributed to inflation.

In 2022 and 2023, oil prices soared and oil profits were at record levels.

In Canada and the U.S., the price of oil and gas drove about a quarter of all inflation.

The price of oil went to nearly $2 a litre making a direct and major contribution to the cost of living and inflation for anything that needed oil or gas.

This inflation has been blamed on government spending or on the carbon tax - except that oil profits, which increased by tens of billions of dollars in Canada (many, many multiples of the carbon tax) and hundreds of billions in the U.S.

The reason for the soaring price of oil was that the price war ended because US oil companies started colluding with OPEC, - Saudi Arabia, China, and Russia. The Federal Trade Commission in the U.S. discovered this collusion. Companies shared production information with each other in order to keep prices high, and if anyone broke ranks and produced more, they would be disciplined for it.

So a huge chunk of inflation in Canada was actually from oil price collusion in the U.S. Not only did Canadians all have to pay more, because of the collusion, the profits went to shareholders and bondholders, not into new jobs or investment for the people who lost them in Saskatchewan and Alberta.

That's really important, not just as a matter of economic fact, but because inflation is actually being caused by the oil industry, who support Pierre Poilievre, as Poilievre blames the fiscal policies of the federal government.

Lots of Canadians are in distress, and it's not because government has been helping them too much.

When the private sector is failing, it doesn't improve the situation to dismantle the public sector, or just let it collapse. What is required is a sustained plan to strengthen the private sector, and address the systemic problems that are making it so unstable.

Oil price shocks, the pandemic, and central bank interventions like QE and interest rate manipulation all delivered disruptive shocks to our economy.

The fundamentally conservative central bank response has not helped.

This is why we need a “New Deal” because that is what is required to help people adjust and recover from these crises and from the central bank's policy mistakes.

That's why we had a New Deal back in the 1930s. There’s an old saying that every safety regulation is written in blood. Well, most laws and regulations are written after the fact, because of a disaster that happened, and financial disasters are a disaster too.

The left didn't like FDR’s interventions, because there still was too much private sector, the right didn't like it because there was too much government.

What is required is the creation of new value, and that comes with investment. The private sector needs it and so does the public sector. Poilievre’s diagnosis and prescription are both wrong for what’s ailing the economy.

Even if we disagree on solutions, we should be able to agree on what’s wrong with the economy, and one of the problems is that fuel inflation was caused by oil price fixing, not by the government.

New Deals are supposed to be just that - a new bargain, that’s been negotiated. The goal should be greater stability and less personal debt, and a commitment to investing in productive business. We need to change tack, for every reason including social unrest.

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