Marty Morantz did it first, and then Pierre Poilievre.
My apologies, Marty.
Marty knew it because he was a student of Milton Friedman, and he figured out that if you print more money and produce fewer goods, you're going to have higher rates of inflation.
Thank you, Marty, for your service to Canada. My apologies for the omission.
I'd like to read another article by Mr. Cross.
Philip Cross wrote this on July 12, 2023. It's entitled “Hey, Canadians! Does anyone remember what economic growth can do?” His subtitle is “What we desperately need is a cultural environment in which entrepreneurship and innovation thrive”.
Here's what he writes:
Anaemic economic growth has become so routine in Canada since 2014 that it is worth recapitulating the benefits of sustained high growth. Over the centuries, economic growth has powered vast improvements in measures of well-being, such as life expectancy, health, housing quality, leisure time, food intake, energy security, political freedom and democracy. Today faster economic growth would help Canada meet the challenges of the huge debt incurred during the COVID pandemic, a growing population and an aging society. Even the leader of Britain’s Labour Party, Keir Starmer, acknowledges that “economic growth is the absolute foundational stone for everything.”
The British Labour Party is, I guess, the equivalent of our Liberal Party, more or less. It says that “economic growth is the absolute foundational stone for everything.” Actually, many Liberals have said the same thing, including Bill Morneau, who has been, since he left the Liberal government, outspoken about the government's failure to focus on economic growth and, certainly, to produce any economic growth. John Manley, a former Liberal finance minister, has said the same. David Dodge has made similar comments about the critical importance of economic growth. Working Canadians are facing a perfect storm of high interest rates, inflation and a rising cost of living, creating mass amounts of financial stress.
It goes on:
Russia's invasion of Ukraine is a reminder that money is needed to finance a nation's defence and survival in war. Napoleon famously said that three things were needed to fight a war: “The first is money. The second is money. And the third is money.” The history of central banking reflects the importance of finance to waging war. The Bank of England was founded to assist Britain's government to finance war with Napoleon's predecessor, Louis XIV, while the first two attempts at creating a central bank in the United States were made to help deal with the country's war debts.
Almost two and a half centuries after Adam Smith kicked things off, the question of what drives economic growth continues to preoccupy the best minds in economics. The benefits of sustained economic growth are so enormous that, in the words of macroeconomist Robert Lucas, who died recently, “the consequences for human welfare involved in questions like these are simply staggering. Once one starts to think about them, it is hard to think of anything else.” It has become the norm for winners of the Nobel prize for economics (as Lucas was) to then write a book about the sources of long-term economic growth. Most emphasize the role of innovation in a competitive marketplace.
The importance of economic growth is underscored by what happens in its absence. In the words of the British economist Paul Collier, “growth is not a cure-all, but lack of growth is a kill-all.” The Great Depression of the 1930s helped spawn the dictators who provoked the Second World War. Slow growth after 2008 fuelled the growth of populist movements in several countries, leading to Brexit and the election of Donald Trump. As former Bank of England governor Mervyn King concluded, “put simply, our societies are not geared for a world of very low growth.”
Even so, it’s easy to forget that sustained economic growth is a new phenomenon. The libertarian economist Steven Landsburg concisely summarized the long arc of economic development: “Modern humans first emerged about 100,000 years ago. For the next 99,800 years or so, nothing happened.... Then—just a couple of hundred years ago—people started getting richer. And richer and richer still.”
Because it is so new to human experience economists at first struggled to adapt to the emergence of sustained economic growth. As recently as the early 19th century, they focused, as Smith had, on explaining the different levels of national wealth, rather than income growth, because they assumed the level would not change much. Until recently, there was not even a word for productivity growth; the Concise Oxford Dictionary did not have an entry for productivity until 1951.
Economic growth needs to be sustained over decades, not just a few years. Growth over long periods means relatively small changes in growth rates compound to produce radically different results—which is why Albert Einstein correctly called compound growth “the eighth wonder of the world.” It follows that a nations’s growth is best examined over long periods, not the quarters or even years that dominate economic commentary and political debate.
The scary part for the Canadian economy is not the last seven quarters of negative GDP per capita growth; the scary part is the trajectory we are on. Our GDP per capita has basically been flat. It's grown by about 4% over the last 10 years. While the snapshot—and, certainly, the pain Canadians are feeling right now at food banks—is extremely difficult and merits discussion, the part that keeps me up at night, candidly, is the trajectory we're on.
Those 10 years of flat economic growth will have devastating consequences. The damage, in some respects, has already been done, because as Mr. Cross writes, and as Mr. Einstein commented years ago, compound interest is one of the most powerful forces in the universe. This stalling of the economy for a decade will have significant consequences for decades to continue.
If you're in a hole, the first thing you need to do is stop digging. Sometimes, the question will be.... Liberals will say we have all these great initiatives that are going to help Canadians, and that might be believable in a vacuum, but we now have a hundred years of measuring the economic results of socialist policies, and every single time—and I do mean every single time—they have failed. They produce low economic growth, reducing the prosperity of Canadians and reducing the prosperity of citizens around the world—most notably the most vulnerable in our society. They produce high rates of inflation, which is another thief of wealth and, once again, affects the most vulnerable the most.
We then have the fact that this government has been in power for nine years. We have seen its economic growth rate and we've seen the performance of a lost decade. This isn't just me as a Conservative, or conservative economists, talking about this; this is people across the political spectrum. Former Liberal finance minister Bill Morneau, I believe, has written a book on this, talking about the importance of economic growth and the impact it is going to have on our economy. John Manley, a former Liberal finance minister, has also come out and said the economy is unfortunately not producing economic growth. We're even hearing that from David Dodge, a former governor of the Bank of Canada.
What would be interesting would be to ask Mark Carney, a former governor of both the Bank of Canada and the Bank of England, who is organizing to be the next Liberal leader. It would be interesting to hear his comments with respect to this budget, particularly with respect to growth and productivity. He certainly will be weighing in at press conferences and in other forums. They talked about that a little bit in the Senate. I would have some, I think, very legitimate and sincere questions for Mr. Carney, given his pedigree and what he's organizing to do, which is to become the next leader of the Liberal Party and, presumably, Prime Minister of Canada. I would like to ask him about his feelings on economic growth. Unfortunately, it's an absolute no go for the Liberals to have Mr. Carney here and ask him some of these very important questions.
I'll continue reading:
Some concrete examples demonstrate the importance of even seemingly small changes in growth over long periods. If U.S. growth had been one percentage point less per year after 1870, today U.S. GDP would be lower than Mexico's. Even over shorter periods, different growth rates result in much different outcomes. If U.S. growth between 1952 and 2000 had been two per cent instead of the 3.5 per cent it was, per capita U.S. income in 2000 would have been $23,000 at the turn of the millennium instead of $50,000.
That's amazing. Business investments and exports have been declining in Canada since 2015, with the former down 17.6% in volume.
The article goes on:
Canada's recent growth slump has accompanied a shift in policy focus to relentless short-term stimulus and an emphasis on the distribution, not creation, of income. The reality is that redistribution is not an effective way to help low-income people. It subtracts from the growth that benefits poorer people most. As Robert Lucas put it: “of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is the focus on questions of distribution.... The potential for improving the lives of poor people by finding different ways of distributing current production is nothing compared to the apparently limitless potential of increasing production.”
Policies aimed at redistributing incomes or stabilizing the economy in the short term do not sustain growth, they lower it. What we desperately need is a cultural environment in which entrepreneurship and innovation thrive. Unfortunately, our culture has deteriorated to the point where, as Paul Wells recently pointed out, “in Canada, if you run a successful business, you are made to feel you have done something wrong.”
When Mr. Cross was at committee, I asked him specifically what was the number one issue plaguing the Canadian economy. Mr. Cross is a former head statistician and a highly technical guy, so I was expecting a technical response, but his number one issue was actually the environment in which we are bringing up our new entrepreneurs.
He finishes off with this:
Sustained economic growth will not resume in this country so long as such sentiments prevail.
That's certainly a damning article by Mr. Cross with respect to productivity and the future of the economy.
That's the part that really worries me. We can talk about the way in which this government has in the past gone after business owners, whether that be the changes to passive income within small business corporations or various other tax changes along the way. Of course, the technical and monetary aspects of that have a punitive financial impact, but I'm more concerned, to be honest, about the sentiment that creates. We hear this “eat the rich” rhetoric. It is not a bad thing to be successful. It is not a bad thing to be prosperous. It is not a bad thing to start a business and be successful and create jobs and increase prosperity.
Unfortunately, we hear from all corners of the House of Commons, except for the Conservative Party, that somehow it's the people who go out there and work their tails off and create a successful business who are our problems in society. Nothing could be further from the truth. Our entrepreneurs out there are really the heroes of our economy. As young women go out there, they create new businesses. As newcomers come to our country, often coming with nothing but the shirt on their back, they pull themselves up by their own bootstraps and create new businesses. Those people are heroes, and yet, unfortunately, too much out there by this government, and maybe even just in general, is demonizing these folks once they achieve some level of success.
There are some folks who get lucky—there's no doubt about that—but most of the business owners I've ever talked to who've been successful have worked their tails off. They've given up years, if not decades, of their lives to completely focus on their businesses. Some do it at the cost of spending time with their families. Some do it at the cost of any type of recreation or pleasure or fun. They just work, and they work hard. I hear individuals demonize these folks simply for having made it, for being that “one in 10” business that is actually successful in our country and has overcome the barriers in their own lived experience to be successful. I think we should be there with a helping hand and not demonize these individuals for achieving some level of success.
I'll continue on and talk a little bit about another article by Mr. Cross, entitled “Statcan focuses on inflation trees and misses the forest”. The subtitle is “Real causes of inflation are crazy-high government deficits and too-low interest rates”. Here he's talking a little bit about inflation:
Statistics Canada recently published three short papers that provide a mishmash of data and analysis about the inflation we have experienced since 2020. They claim to pinpoint the impact on prices of imports, wages, profit margins and other non-labour costs. But the results depend on highly questionable assumptions, sometimes are contradictory, and in the end add little to our understanding of inflation’s origins.
Start with “Import prices and inflation in Canada.” This paper suggests import prices rose steadily to contribute about half the increase in GDP prices in 2022. So the government is partly right: some inflation was imported. But not all imports are created equal and their prices move in different rhythms. Imports used in exports are mostly parts needed to manufacture autos, machinery and equipment. They are distinct from imports for domestic consumption, which include a wide array of consumer goods, such as clothing and electronics. After 2019, prices for consumer goods rose 14.4 per cent. But auto prices rose only 5.7 per cent and the prices of electrical equipment actually fell slightly. So inflation pressures from the foreign sector didn’t have a uniform impact.
The study also assumes a full pass-through from import prices to output prices. But businesses' ability to pass price increases along depends on the state of the economy and how competitive markets are. There was no pass-through from the plunging loonie to higher import prices in the first half of 2020 because demand cratered as the pandemic began. Even assuming full pass-through when the recovery was still fragile in 2021 is questionable, but by 2022 demand was so robust one of the companion studies found output prices actually rose more than import prices. With pass-through varying in this way, it's just not possible to have great confidence about import prices' impact on inflation.
The broad thrust of this Statcan paper is that import prices rose after 2020 due to a combination of robust domestic spending and a lower exchange rate, as if these were international factors beyond government's control. But government policies contributed heavily to both the surge in spending and the lower dollar. Though Russia’s invasion of Ukraine sent energy prices soaring the loonie fell because investors knew Canada’s oil and gas industry would not be allowed to expand into Europe—which was confirmed when the prime minister personally and publicly rejected German Chancellor Scholz’s request for more natural gas.
Next up is a study of “Inflationary pressures, wages and profits.” It compares labour costs, which are mostly wages and salaries, to total “non-labour costs”—a hodgepodge of profits, interest, depreciation, and indirect taxes. Unfortunately, lumping all non-labour costs together encourages readers to interpret the results as part of the simplistic “wages versus profits” narrative that dominates public debate. As a result, the study’s conclusion that labour and non-labour costs contributed about equally to the rise of GDP prices is not very informative and potentially quite misleading. In fact, the third Statcan paper suggests profits played only a minor role in non-labour cost increases.
That third paper, “Markups and inflation: Evidence from firm-level data,” looks at firms’ marking up of prices over costs as a contributor to inflation—in other words, “greedflation.” Statcan’s conclusion is that rising markups account for only one-fifth of the increase in consumer prices during the pandemic and are therefore not a “main driver of inflation.” The contribution of markups to GDP price inflation was even smaller at 13.4 per cent. This result suggests that most of the outsized contribution in non-labour costs noted in the second study came from interest rates and indirect taxes, which are largely controlled by governments.
The problem with these three studies is that slicing and dicing particular sources of inflation obscures what’s really going on. The underlying impulse for higher inflation after 2020 was the injection of massive fiscal and monetary stimulus into aggregate demand, including paying millions of Canadians to stay home, just as breakdowns in supply chains sharply reduced overall supply. Although a mechanical approach to prices in specific sectors such as food, shelter and transportation is useful for short-run analysis, inflation’s underlying trend is determined by the gap between potential output and the aggregate demand for it, as the Bank of Canada repeatedly reminds us (even if its actions aren’t always consistent with the reminder).
It is hardly surprising that both workers and firms took advantage of shortages.... But Statcan contributes little to the public’s understanding of inflation by encouraging finger-pointing about whether wages or profits rose more than prices, when it was governments that mismanaged demand and supply and aggravated the disequilibrium between the two in so many markets, thus empowering businesses and workers to raise markups and wages. Worse, Statcan leaves itself open to charges it is helping absolve the government, including the Bank of Canada, of its responsibility to control inflation.
That is a pretty fair discussion regarding the causes of inflation.
I might take a little break at this point. I do want to get back to it, so if you would put me back on the speakers list, Mr. Chair, that would be fantastic. I'll take a little break here, because I know my other colleagues want to talk a little bit.