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Macdonald-Laurier Institute

Welcome to our new economy of shortages, comrades: Philip Cross in the Financial Post

October 15, 2021
in Experts, Domestic Policy, Issues, Latest News, Columns, Library, In the Media, Economic Policy, Philip Cross
Reading Time: 2 mins read
A A

Shortages imply that inflation is much greater than the official measures suggest, writes Philip Cross in the Financial Post. Below is an excerpt from the article, which can be read in full here. 

By Philip Cross, October 15, 2021 

Since the pandemic began, governments have focused almost exclusively on boosting aggregate demand — in the belief that understandably cautious spenders were the main threat to economic growth. But it is becoming increasingly clear that the pandemic’s more enduring impact is disruption of supply. The result is price increases exceeding forecasts and the prospect that persistent shortages will fuel inflation well beyond the three or four months that would qualify as transitory. As is often the case with crises, the pandemic has unleashed unexpected and unintended effects, bedeviling government planners everywhere.

Few people foresaw shortages as a likely outcome. In summer 2020, the Bank of Canada predicted the “decline in supply is likely to be relatively short-lived” — even though shortages had been emerging in many regions and industries before the pandemic. With immigration plummeting as borders closed, it was predictable that COVID would trigger a drop in labour supply, yet policy-makers were fixated on propping up demand for fear slow growth would put downward pressure on prices.

The most obvious manifestations of shortages are soaring prices for housing and commodities, notably oil and gas. Housing prices across Canada took off during the pandemic. But housing demand has outstripped housing supply since early 2015, when the Bank of Canada lowered interest rates, and the imbalance between the two has been slow to resolve itself, which is usually the case when governments interfere in the market’s normal adjustment to high prices. Government regulations, often at the local level, have prevented housing supply from rising quickly enough to dampen prices. As for oil and gas prices, firms are reluctant to invest after prices cratered in 2020, partly because some governments are blocking further development of fossil fuels. Compare these clogged markets with the market’s quick resolution of this spring’s spike in lumber prices.

***TO READ THE FULL ARTICLE, VISIT THE FINANCIAL POST HERE***

Tags: inflationeconomic policyDomestic AffairseconomyPhilip Cross

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