Thank you, Mr. Chair and members.
Here are my disclosures. First, I do not belong to or donate money to any political party, or allow lawn signs during federal, provincial or municipal elections.
Second, I was mortgage manager of the fourth-largest BMO branch in Canada—the Ottawa main office, now the Sir John A. Macdonald reception centre for Parliament Hill—during the late seventies and early eighties, when inflation peaked at 14% and interest rates peaked at 20%.
Third, I am a tenured professor paid by Carleton, not by business or NGOs, as I do not consult or lobby.
Fourth, immediately after the collapse of the Berlin Wall in 1989, through to 2020, I taught over 100 times in former centrally planned economies across central and eastern Europe, and later multiple times in Cuba, China and Iran, where governments frequently set prices and production quotas. I witnessed the massive systemic shortages of food and consumer goods across each of these economies in the early to mid-nineties.
Everyone in Canada today is understandably concerned with increasing interest rates and with inflationary prices, especially for food and housing. There is a tendency to blame the firms at the end of what Harvard strategy professor Michael Porter accurately calls the “value chain” system, not the profit maximization chain claimed by some MPs.
Restated, these critics focus on the symptoms of inflation rather than examining not only the totality of the value chain system of the two million corporations in Canada—per StatsCan—but what David Dodge, David Rosenberg and others call the economic fundamentals. Fundamentals include Canada's dramatic decline in productivity and our terrible decline in business capital investment.
However, before going further with this issue, I want to discuss inflation briefly, because it's central to everything we're going to be talking about, I think.
Inflation in the late sixties did indeed originate in the U.S., due to President Johnson's war in Vietnam and the war on poverty. This led to massive spending increases, but there was a simultaneous refusal in the American government to raise taxes or increase interest rates to cool down the economy.
However, when inflation crossed the border into Canada, it was exacerbated by very large Canadian government deficits and a refusal, initially, by the Bank of Canada to raise interest rates. I lived through this. Inflation went from 4% to 5% to 8% to 10%, peaking at 14%, causing the greatest harm to lowest-income people in Canada.
It was only when Governor Bouey of the Bank of Canada and Chairman Volcker of the Federal Reserve decided to attack the out-of-control inflation with enormous increases in interest rates that peaked around 20% that they finally killed inflation, while our fiscal profligacy was only finally addressed by the courageous decisions of Prime Minister Chrétien and Minister of Finance Martin in 1995 to eliminate the out-of-control fiscal deficits.
These monetary and fiscal policies produced very low inflation and very strong income growth for everyone for a third of a century. It's now very clear that we have forgotten those lessons and that it's time to go back to school.
Today, rising inflation has indeed been caused by the lockdowns and supply chain interruptions, but it has been exacerbated by massive, excessive monetary and fiscal stimulus, and rates were far too low for far too long. Please read Mohamed El-Erian's op-eds in the Financial Times. He's now the head of Cambridge University.
Some argue that interest rate increases cause inflation. These critics fail to understand the arithmetic of monetary policy. Interest rate increases subtract or take money out of the bank account of every last one of us and businesses, leaving less money to buy stuff.
Some argue that grocery store executives are greedy and profit-gouging. This is notwithstanding that for my entire adult lifetime studying this industry, any person who conducts interindustry comparative analysis knows that grocery retailing has notoriously low net profit margins, empirically validated by StatsCan and the audited financials.
I'm urging parliamentarians to return to an examination of the economic fundamentals of Canada by examining low productivity and protectionist policies in certain industries, such as airlines, telecom and agriculture, that exclude foreign competitors and drive up prices to much higher levels.
Examine competition policy that currently allows industry consolidation for a handful of oligopolistic firms when there is a clear consensus in economic research that concentrated or oligopolistic industries are less competitive and charge higher prices than fragmented industries with many firms.
I strongly urge parliamentarians to examine the role of government policies, including taxes that increase the cost of doing business. See the recent C.D. Howe study on how multiple government taxes increase average housing costs by up to a third.
You must undertake a fundamental review of the remarkable number of barriers in industry after industry that restrict entry by new firms, restrict competitiveness, or, through taxation, force prices to be increased.
In closing, it is timely to recall Pogo’s very wise words: “We have met the enemy and [it] is us”, or more precisely—no offence intended—it is you, the elected officials who have approved these extensive multiple barriers time after time, in bill after bill, year after year.
Thank you.