I recently overheard a conversation in which a couple of young professionals fretted about their economic plight. They commiserated about their job prospects, about the difficulty finding housing, about the soaring cost of everything.
“We’re living in the worst economy ever,” one concluded.
I bit my tongue. Hard. I think I tasted blood.
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This isn’t the worst economy ever. Not even close. Unemployment is at historic lows. Inflation has come way down in the past year. The economy has proven remarkably resilient, and has continued to grow, even in the face of sharply increased interest rates and nagging worries that we could slip into a recession.
Everything isn’t great. But it could be much, much worse.
Yet this conversation is not some isolated view. A recent poll of nearly 2,500 Canadians by Abacus Data reveals that our national economic perceptions are clouded by a fog of ignorance, misconception and hyperbole, at a moment when understanding could hardly be more important.
Let’s discuss a few of the lowlights:
BELIEF: 59 per cent either believe that the federal government tells the Bank of Canada where to set interest rates (36 per cent), sets interest rates itself (six per cent), or they don’t know how interest rates are set.
REALITY: The Bank of Canada sets interest rates entirely independently from the government’s opinion, and has done so for many decades. The government appoints a governor of the bank every seven years, and renews its agreement on the bank’s mandate every five years. (For the past three decades, that mandate has been to achieve a two-per-cent inflation target.) After that, the decisions to change interest rates in pursuit of that target – including all 10 rate increases since March, 2022 – lie entirely with Bank of Canada Governor Tiff Macklem and his deputy governors.
BELIEF: 59 per cent believe that higher interest rates are definitely or probably not necessary to reduce inflation (44 per cent), or don’t know (15 per cent).
REALITY: Higher interest rates are the primary policy tool to slow inflation. They have proven effective as an inflation control, both in the relatively short and long run, since the 1990s, not just in Canada but around the world. You can debate the degree to which they helped reduce Canada’s inflation rate from more than eight per cent to less than three per cent in the space of 12 months, but you’d be a fool to think they weren’t integral to the solution.
BELIEF: 87 per cent believe Canada’s inflation rate is either higher than other similar countries (52 per cent) or about the same (35 per cent).
REALITY: At the time the survey was taken, Canada’s inflation figure was 2.8 per cent – the lowest in the Group of Seven, and lower than all but five countries in the 38-member Organization for Economic Co-operation and Development.
BELIEF: Among the biggest causes of Canada’s inflation are the federal carbon tax and government spending.
REALITY: Bank of Canada research indicates that while both are factors in our current inflation, they are not dominant ones. The bank has calculated that the carbon tax has increased the inflation rate by a mere 0.15 percentage point. The data also suggest that government spending, at current levels, is roughly neutral – it’s neither exacerbating inflation pressures nor easing them.
The inflation we have been experiencing isn’t about government deficits, or carbon taxes, or corporate greed (another favourite scapegoat among those polled). It’s about an economy that became overheated in the recovery from the COVID-19 pandemic, with consumers’ demand soaring far ahead of producers’ capacity to supply them. That imbalance pushes up prices. The purpose of raising interest rates is to slow demand, in order to reduce those price pressures.
The poll findings are deeply discouraging. It’s not just that some Canadians are egregiously misinformed, or willfully obtuse, about what’s happening in the economic world affecting their everyday lives. It’s that people who actually understand the very basics are in a considerable minority.
It’s enough to make anyone who has spent the past couple of years communicating and discussing these issues – economists, central bankers, newspaper columnists – look for a good, solid wall to bang their heads on for a while. I mean, why are we bothering?
Certainly, the political rhetoric around many of these issues has muddied the waters. With every shift in the economic data and every move in interest rates, there’s an opposition party laying blame where it doesn’t belong, or the government taking credit that it doesn’t deserve.
But maybe what we’re seeing in these poll results is evidence of just how troublesome persistent inflation can be for the perceptions and decision-making of economic participants. Inflation scares and confuses people, in ways unlike any other economic force. It has a way of messing with their thinking, distorting their views, altering their choices. And that can spill all over the economy.
“What we’ve learned from history is that the economy just does not work well when inflation expectations become unmoored,” Mr. Macklem said in March, 2022, when the bank launched its rate hikes.
Are these poll results a manifestation of an unmooring? Maybe. But it’s clear that Canadians don’t understand the economic forces that feel most threatening to them. That ignorance makes these forces even more dangerous.
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