What the numbers tell us
All my life I have supported conservative causes and parties financially, in my writings, and lectures. I even spent four years in the federal parliament as the member of the right-wing Reform Party. Yet, in this election I will vote for the Liberals and hope that Justin Trudeau will head the next government.
No, I am not out of my mind nor have I lost faith in conservative principles. Instead, I believe that it is in the longer run interest of the conservative movement in Canada if the Liberals and Trudeau will be in office during the next four years when they will face the need for highly unpopular policies needed to deal with the inevitable consequences of their past, irresponsible economic and social policies. They will lose voter support for many years, which would befall the Conservatives if they were in power when these policies must be adopted.
The past irresponsible Liberal economic policies will lead to inflation and higher interest rates needed to deal with it. Inflation has already begun and led to significant increases in the prices of gasoline, food, lumber, automobiles, and housing. Expecting inflation, investors have bought inflation-proof assets such as bitcoins, gold, works of art and collectibles, driving up their prices to unprecedented heights. All the necessary conditions for the continuation of this inflation are in place.
Inflation inevitably leads to higher interest rates. If the Bank of Canada does not raise rates soon, it will have to raise them later when the experience of the 1970-80s is repeated. On that occasion, price increases were considered to be due to temporary, reversible events and therefore not requiring higher interest rates. As it turned out, the increase in the price of energy caused by OPEC output restrictions led to price increases in other commodities, which ultimately spread to the rest of the economy, led to higher wages, and made the Bank of Canada use record levels of interest rates to stop the price increases.
If the Bank of Canada accepts the view that current price increases are not temporary and reversible, it will raise interest rates soon to reduce excess demand, which is the ultimate cause of all inflations. Continued federal deficits and spending by consumers of the excess holdings of money created by poorly targeted transfers during the pandemic will not help but make the Bank’s job more difficult.
Whether soon or later, interest rates will almost certainly increase during the mandate of the next government. The higher rates will increase mortgage defaults, higher unemployment, personal and business bankruptcies, and government deficits. Canada’s economy will be in a classic recession bringing great hardships to many.
But this is not the only serious problem caused by higher interest rates. The cost of servicing the record federal debt of $1.3 trillion will increase and add to the already programmed large deficits. The country’s credit rating will be lowered by international credit rating agencies and further increase the government’s borrowing costs.
The bottom line is that, within the term of the next government, the Liberals will have no choice but to adopt politically very costly cuts in program spending and increases in all taxes. They will try to blame the Conservatives, the pandemic and climate change for the need to adopt the highly unpopular policies. These efforts will not be credible.
The large debt is due mostly to Liberal-inspired woke policies designed to increase the welfare state and pandemic-fighting policies that cost much more than they would have if timing and targeting had been better. The cost of climate change policies will hit consumers hard who will see no clear benefits, especially as China and other big polluting countries fail to reduce their levels of pollution.
If the Liberals win the next election, they will face another serious political problem, which is the result of their strong moral support of interest groups whose members have in common certain personal characteristics that are united under the LGBTQ+ banner and include natives and racial minorities. The Liberal have until now supported these minorities mostly by encouraging them in their view that are suffering from personal and systemic discrimination, which is the cause of their low incomes and social status.
Many ordinary Canadians preoccupied with work and other personal concerns have been unaware of this Liberal support of minorities. Others have accepted them because they have not been affected materially or find them consistent with their sense of moral responsibilities for the underdogs in society. However, in the coming years, these interest groups will demand that the Liberals adopt the “Reset” policies they promised to eliminate discrimination and create greater equality of income and social standings.
The equalization of incomes will require higher transfer payments to these groups and increased taxes on high-income Canadians. The elimination of discrimination will require the mandated use of quotas in employment and educational institutions. Meeting the demands of natives will require large spending increases. Immigrant communities will be satisfied only if they can welcome increasing numbers of their relatives and friends who upon arrival will increase shortages in the housing market, and public health and recreation facilities.
These policies will materially affect the vast majority of Canadians who are not members of the LGBTQ+ community, natives, and immigrants. They will also feel unjustly accused of personal and systemic discrimination and oppose resets in Canada’s culture and economic system that have served them extremely well in the past and evolved successfully through time.
It will be good to see the Liberals lose much voter support if they win the next election as they deal with the cost of inflation, higher interest, a recession, and the consequences of having created the high expectations of minorities. The Conservatives will benefit from the Liberals conundrum and will have strong voter support for a long time in the future. That is why I will vote Liberal and urge others to do the same.
Herbert Grubel is Emeritus Professor of Economics at Simon Fraser University, and a Senior Fellow at The Fraser Institute.