THE STANDING SENATE COMMITTEE ON BANKING, COMMERCE AND THE ECONOMY
EVIDENCE
OTTAWA, Thursday, November 17, 2022
The Standing Senate Committee on Banking, Commerce and the Economy met with videoconference this day at 11:30 a.m. [ET] to study matters relating to banking and commerce generally.
Senator Pamela Wallin (Chair) in the chair.
[English]
The Chair: Hello to everyone watching us and those in the room with us here. This is the meeting of the Standing Senate Committee on Banking, Commerce and the Economy. My name is Pamela Wallin, and I am the chair of this committee.
I would like to introduce the other members now, beginning with Deputy Chair Senator Colin Deacon. We also have with us Senator Gignac; Senator Loffreda; Senator Marshall; Senator Massicotte; Senator Ringuette; Senator Smith; Senator Marwah, who is in for Senator Woo, and I think that’s our complement so far.
We are pleased to have with us today, as we continue our discussion on the state of the Canadian economy and inflation, Mr. Jean-François Perrault, Senior Vice-President and Chief Economist at Scotiabank. Thank you for your patience and indulgence. We have invited you on several occasions, and then we’ve had Senate business, which has kept us from doing that. So we’re very glad that you’re here. I gather you’ll have some opening remarks?
Jean-François Perrault, Senior Vice-President and Chief Economist, Scotiabank: I wasn’t planning on it, but I’m happy to do opening remarks, if you’d like.
The Chair: I was going to set the stage for you because just last night I was reading this article prepared by two senior fellows at Stanford University, and I thought this was perhaps the simplest assessment of the state of the Canadian economy that we could start with:
The most important source of Canada’s inflation is simple: Starting in 2020, the government borrowed more than $700 billion, and mostly handed it out. People spent it, driving up prices.
So can you tell us whether you agree with this assessment of the economy?
Mr. Perrault: I don’t fully agree with it. I think the point of departure is to compare what’s happening with inflation here relative to the rest of the world, to see if there’s something we’re doing different relative to other countries. When you do that, Canadian inflation is lower than it is in the U.S., Europe and the U.K. Each one of those governments did massive spending programs of various sorts.
Our sense is that when we look at Canadian inflation, about two thirds of the increase in inflation that we’ve seen since the pandemic — say, since the end of 2019 — is due to international factors. It’s due to U.S. inflation, oil price movements and supply bottlenecks, and about a third of that is kind of Canada-specific. You can link that to employment, wages and all those kinds of things.
I think perhaps where the fiscal issue comes more into play is the pace at which we’ve been withdrawing stimulus. We have an inflation problem. We would argue that we should have been withdrawing stimulus more rapidly. Perhaps we would have less inflation then.
Also, perhaps what the stimulus has done — as we know, Canadians have a large amount of money still in their bank accounts. There’s a fairly sizable buffer there. What that’s probably doing is blunting, to some extent, the impact of higher interest rates on the economy. It means the Bank of Canada will probably have to do more to bring things down relative to what would have been the case in the past, given that we have hundreds of billions of dollars in extra deposits in the system. That would not be there had we not been as generous on the fiscal side.
The Chair: Thank you for starting us off here.
Senator C. Deacon: Thank you for being with us today, Mr. Perrault.
Today’s the first day of our Competition Act consultation that has been undertaken by Innovation, Science and Economic Development Canada, or ISED. We’ve heard from a number of witnesses the importance of robust competition in helping to manage inflation. The governor has said it’s a very important ally in the fight against inflation, with interest rates obviously being a very blunt instrument that can have a lot of negative effects, and competition can have tremendous effects on the consumer.
I want to have you, if you could, speak to that from your perspective, to see if there’s agreement and concurrence around that issue and anything you’d like to add.
Mr. Perrault: Absolutely. When you think of inflation control, you can control it in two ways. You can control it by bringing down demand. Ultimately, inflation is a function of the gap between demand and supply. You can use interest rates to bring down demand or you can use policy, to the extent that you can, to raise supply. You close the gap by essentially making us more productive, allowing us to produce more with the same number of workers, for instance. That’s not a short-term solution. It never can be.
Governments have been trying — our government and every government — to raise productivity for a long time. Nobody has been very good at it, but it is kind of a magic solution. If you can find ways to do that, you would, without question, be able to raise our standard of living in a non-inflationary way. It’s kind of the holy grail of economic policy. If you can do that, you’re literally gold.
Senator C. Deacon: Thank you. One of the challenges we have is a Competition Act that’s weak relative to other G7 economies. It certainly promises to help spur productivity growth by having a more competitive marketplace. It creates opportunity for more business investment and the resulting gains. Is that something you would agree with?
Mr. Perrault: Yes, 100%. I think barriers to competition are a major problem for Canada. You can look to the Competition Act, to interprovincial trade barriers or to the protection we afford our economy internationally. Obviously, free trade is a great thing, but we don’t do free trade. We have managed trade.
I’ve always been a believer that when you approach trade policy, the best possible outcome is you just reduce your barriers irrespective of what everybody else does. Obviously, it’s not a smart negotiating strategy, but it forces you to be more competitive. It can be brutal, but it forces an increase in competition that is ultimately, I think, beneficial to how we do things.
The example of New Zealand in the 1990s is great from that perspective.
Senator C. Deacon: Thank you very much.
Senator Loffreda: Thank you, Mr. Perrault, for being with us this morning. We discussed this before, beginning with your 2021 publication entitled Why is the Bank of Canada Fighting Inflation Alone? You mentioned that more coordination was needed between monetary and fiscal policies.
Are you confident in terms of recent trends, policies and legislation that this is changing? What are your initial thoughts and impressions on the recent fall economic update, which has recently been released? How can we avoid a recession, given your analysis and what you’ve seen thus far? How long do you think it will take to achieve our inflation target, which historically, ideally, would be 2%?
Mr. Perrault: There’s a lot to unpack there. Let me start with the tail end of your question. We think inflation will be around the Bank of Canada target sometime in early 2024. We’re a long ways away from that.
Do I think there is great coordination between monetary and fiscal policies? No, I don’t. The reality is, as much as a lot of the inflation problem is foreign in nature, we still have an inflation problem in Canada. The task of monetary policy is to control inflation, but given how far inflation is from the target, given the gap, given the length of time it will take to bring inflation down and given the hit to the standard of living that occurs because inflation is as high as it is, we think this is an environment where we need a little more coordination and help from the fiscal policy folks to try to accelerate the return of inflation to target.
There, the federal government has actually been reasonably responsible on that front, but obviously, they have a surplus of revenues because inflation is high. That has allowed them to spend here and there to support lower-income individuals in particular. It’s kind of hard to argue against that, but the reality is, anything you do to blunt the impact of inflation or interest rates on the economy ultimately makes the fight against inflation more challenging.
We’ve seen that in Canada honestly more at the provincial level. We’ve seen provinces put in place policies that are far more aggressive, far larger in terms of their impact, again, on low-income individuals, which frustrates the adjustment even further than the federal government does. All levels of government, I think, are not being particularly helpful from the Bank of Canada perspective.
Senator Loffreda: Obviously, fiscal responsibilities are extremely important at this point in time, but we are talking about a $3-trillion economy in Canada. You’re talking about a $12-billion package to help those who really need it.
Knowing all that and having analyzed it, how do you feel we could avoid a recession? Do you feel the Bank of Canada should continue increasing interest rates? Do you think the coordination at this point between the government and the Bank of Canada is happening? You did express it should be happening to a greater extent, but maybe elaborate a little bit on that.
Mr. Perrault: I’m not going to say a recession is unavoidable. We have a recession forecast, but it’s a very mild one. It’s minus 0.1% or minus 0.2% for a couple of quarters. Basically, we think of it more as a stall than a recession.
That’s a function of a few things. It’s a function, obviously, of the Bank of Canada tightening. The Bank of Canada is raising rates to slow economic activity, so if you don’t have a slowdown, then you have a problem.
It’s largely a function of what’s happening overseas. You have a recession in Europe, probably also in China, and a big decline in commodity prices in the last several months. Those are formidable headwinds for us. Absent that, we probably wouldn’t be in a recession.
How do you avoid a recession? Ideally, you avoid a recession because inflation comes down more rapidly than we thought in the next couple of months, and that allows the Bank of Canada to not continue raising interest rates. We think the Bank of Canada needs to continue raising interest rates a little bit — another 50 basis points in December — and probably stop there. The simple reality of inflation is, as long as it is above target, you need to bring demand down and close the output gap. That’s what the Bank of Canada is trying to do.
You can close the output gap — this is perhaps a bit technical — by growing more slowly than potential output in what we call a non-inflationary growth rate of the economy. You don’t have to have negative growth. If growth potential is 1.8%, which is roughly what we think it is, if you’re growing at 1%, then you’re frittering away some of this excess demand. Obviously, the more negative you are, the further away you are from potential and the more that kind of corrects itself.
At present, we think we need a bit of a recession to try to get inflation where we need it to be. Honestly, it doesn’t look like it’s lining up to be a serious one. It’s just a bit of a pause. The background to that is, obviously, the Canadian economy remains quite strong. It’s slowing, of course; it needs to slow, but the labour market is levitating. It’s still remarkably strong. We’re still seeing signs that consumer spending is, quite honestly, stronger than we thought it would have been.
These things suggest the economy is operating at a high rate of economic activity, and a bit of a slowdown actually wouldn’t be all that unhealthy. It kind of allows you to rebalance things for a little while.
[Translation]
Senator Gignac: Welcome to my former fellow chief economist. I have two questions, so I’d ask that you keep your answers fairly short. Here’s the first. This morning, the president of the Federal Reserve Bank of St. Louis said that interest rate increases had no impact on the economy. He even alluded to the fact that under the Taylor rule, a range of 5% to 7% on the U.S. federal funds would be appropriate. Do you think the interest rate increases have had an impact on the Canadian economy? Also, do you think interest rates could go up, in both Canada and the United States?
Mr. Perrault: Thank you for the question. First of all, the housing market is in correction in Canada, and it’s obviously a function of rising interest rates. We’re seeing the impact. People are paying more for their mortgages, rents are going up, and it’s all tied to the issue of tightening monetary policy. We know there is an impact, there’s no question about it. The impact may not be as strong in the U.S. as it is here, but we’re seeing it.
As for the potential increase, we think that the bank could stop at 4.25%. In the United States, it’s thought that it’ll stop at about 5%, but it will basically be based on the inflation performance. Admittedly, no one is very confident in their ability to predict inflation. Some big mistakes have been made in the last few years, not just in the private sector but also in central banks, the Bank of Canada, the Federal Reserve, the money market funds, everybody has made the same kind of mistake. We’ve underestimated inflation. Even if we think that interest rates will need to be raised a little more in order to control inflation, we must admit that there is still a risk that inflation won’t do what we had expected.
Senator Gignac: This leads me to my second question. I asked this question earlier this week. The government announced in the economic update that it was ending real return bonds, which have been around for 30 years. Is this a lack of confidence in the Bank of Canada on the part of the government?
All of a sudden, they’re going to stop issuing real return bonds, because the document states that the cost of real return bonds was much higher this year because of accelerated inflation. Do you think it’s a mistake for the government to stop issuing real return bonds? Canada will be the only G7 country no longer issuing real return bonds, even though all of this was launched with great fanfare in 1991, along with the Bank of Canada target.
Mr. Perrault: I think it’s a mistake. It’s about debt management and minimizing interest costs. I understand that these are expensive instruments in a context of high inflation, but the fact is that these instruments provide a perspective on inflationary expectations. There are survey measures — the Bank of Canada has done its own surveys — and there are all kinds of instruments to get a perspective on expectations. There are really no market instruments in Canada other than that. That’s a loss, in my opinion. The more information we have on the evolution of expectations, the better off we and the Bank of Canada will be.
[English]
Senator Marshall: Thank you. It seems like we’re into a spiral now in that the Bank of Canada is increasing rates, so the government is incurring more debt-servicing costs, and they are providing more assistance to disadvantaged individuals. Some economists say that the spending is causing more difficulty for the governor of the bank to bring inflation down.
How do you break that cycle? It seems like we’re in a cycle now. He’s raising rates, so the government has to spend more and pay more in debt-servicing costs, and that’s causing inflation to go higher, so he’s increasing rates again.
It goes back to what Senator Loffreda was asking. How do you bring fiscal policy and monetary policy closer? Is that an issue? How does the Governor of the Bank of Canada do that? I almost feel like he’s got a big task on his hands now because the finance minister keeps spending. How do you break the cycle? If you were the governor of the bank, what would you do to break that cycle? I know what I would do, but what would you do?
Mr. Perrault: Well, that’s a loaded question. Listen, there’s a reason central banks like the Bank of Canada are independent. They have to make really difficult decisions. They have to raise interest rates to control inflation, and doing that causes economic harm.
On the other side of that, you have politicians who don’t want their populations to be hurt. Inflation is a great example of that. Inflation is harmful, there’s no question about it. There’s a reason the Bank of Canada has a 2% target. There’s value to that. When you breach that target, it causes harm. It also causes revenues to rise rapidly. In some sense, it’s a bit of a boon for governments. We’ve seen the federal government and provincial governments essentially beat their fiscal objectives while raising spending because revenue is flowing in because inflation is high.
I think the governor needs to do what he needs to do, which is telling us what he thinks is going to happen with inflation, set rates in conjunction with that and, to the extent that he can, make the case with governments that there is a massive effort that’s required. The more they do to frustrate that adjustment, the harder his job is.
At the end of the day, you have to respect that, in a sense, the objectives are somewhat competing. He wants to slow things down, and understandably, premiers and the Prime Minister don’t want to incur the harms. At the end of the day, they’re the political ones who will get voted in or out. The governor is safe for a reason.
Senator Marshall: But the thing is, we keep thinking, “Oh, this time it’s going to slow down.” The next rate adjustment or increase is going to be less. I just don’t see it slowing down to what people are anticipating. It just seems like we’ve got the bank on one hand and the government on the other hand; who’s going to blink first?
Mr. Perrault: It can’t be the Bank of Canada. Again, there’s a reason we’ve committed to, as a country, the 2% inflation target. There’s a reason we have an independent central bank. That’s because we have decided collectively, or previous governments have decided, that attaining 2% is one of the most important things we can do as a country. That means the governor needs to keep going until that target is achieved. We think we can achieve that with a little more in the way of rate increases, but it could be we need a lot more rate increases. It could be that he needs to create a big recession to get that.
Senator Marshall: Do you think government spending is extensive enough that it’s actually impacting the inflation rate? A lot of economists do. If the government slowed down its spending, then it would help the governor of the bank with his job.
Mr. Perrault: We looked at the provincial and federal measures that were rolled out and added them all together, and we think that means the Bank of Canada has an index of 25 basis points. So our forecast for the Bank of Canada will be 4% by the end of the year, if governments weren’t doing what they’re doing. It’s not a lot, but at the margin it’s important. When inflation is as problematic as it is, you don’t want additional roadblocks because there are plenty as it is.
Senator Marshall: That’s very helpful. Thank you.
Senator Smith: Thank you, Mr. Perrault, for being here. You noted that Canada will enter into a technical recession in 2023. Oxford Economics has noted their pessimism is particularly pronounced for Canada and the U.S. compared to U.K., the eurozone and Japan. One of the biggest risks they pointed to is the rapid rise in house prices and the surge in household debt to go along with it. Can you comment on Canada’s housing market being at risk to the economy moving forward? How is it going to rebalance itself?
Mr. Perrault: That’s a good question. What you tend to find with international observers — folks who look at Europe, Canada and other countries — is they tend to look at housing in the same way, which is kind of a European approach. You look at interest rates, debt-servicing costs, debt-to-income and so forth. The Canadian market is very different in the sense that we are experiencing what other countries aren’t experiencing, which is an explosion of population, and we are not keeping up on the construction side. For the last number of years, we’ve had a tremendous growth in house prices. That is due, to a large degree, to this imbalance between the number of people we have versus the number of homes we have. Low interest rates exacerbate that. When you normalize rates and you bring them up, it contributes to the adjustment we’re seeing. We think this is largely temporary. Once we’ve seen the peak in mortgage rates and they’ve stabilized, this big gap between the number of homes that we need versus the number of homes that we have starts to reassert itself. You end up in a situation a year or two from now where housing price dynamics hopefully don’t end up in the 20% to 30% increase, but that we grow from where we land.
The adjustment we foresee is probably in the 20% to 25% peak-to-trough range. We’re down 10% to 15%, depending on which markets you look at. Now, 20% to 25% seems like a huge amount, and it is. So if you tell a European that prices will fall by 20% to 25%, it’s an Armageddon type of scenario.
House prices have increased so rapidly in Canada that if we land at 20% to 25%, that’s where we were, depending on the market, in early to mid-2021. It’s not like you’re rolling back years and years of price appreciation. You’re just rolling back 18 months. Obviously, for folks who have bought their places since, this is a hit; there’s no question about it. Anybody who bought their house in 2020, if you asked them what they thought about their house price in 2021, they can’t believe it’s worth as much as it is.
We’re going back to that level, we think, and then rising from that because effectively we have very high immigration targets.
Senator Smith: In Canada, there are expectations that the policy rate — and you’ve mentioned it — by the Bank of Canada will be 4.25% by the end of the year. You’ve noted that the U.S. Federal Reserve will need to hike its rate to 5% in 2023. Given our very close trading relationship with the U.S., what are some of the impacts of a higher policy rate south of the border on the Canadian economy?
Mr. Perrault: There are a couple of principal ones. One is the Fed is doing a little bit of our job. To the extent that the U.S. economy slows, we slow. That helps take pressure off U.S. inflation and ours. When U.S. inflation is lower, our inflation tends to be lower as well because we trade a lot with them. So there’s a beneficial aspect to that.
The challenge has been that expectations in the U.S. on the rate side have been more aggressive than in most of the rest of the world. You’ve seen a significant appreciation of the U.S. dollar. That has reversed to some extent in the last couple of weeks, but that strength in the U.S. dollar, which reflects interest expectations and a lot of risk aversion as well — which has been a big thing this year — lowers the value of our Canadian dollar and other currencies, which means the price of our imports goes up. There’s a bit of a trade-off.
We’ve seen prior to the last three weeks or so an extremely weak Canadian dollar. That is unquestionably going to add to inflation pressures.
Now, since that time, we’ve seen, essentially because there was inflation data in the U.S. that came in much lower than we anticipated a couple of weeks ago, a dramatic reversal in markets, including on the exchange rate side. The Canadian dollar is down 4 or 5 cents in the last 10 days, and that helps offset some of that. Those are the principal channels. A weaker U.S. benefits us on the inflation front. The challenge of higher rates is it can’t have an exchange rate impact, which largely seems to have worked itself through the last week or so.
The Chair: Could you give us your assessment of what’s going on in the markets right now?
Mr. Perrault: It boils down to the response to Senator Gignac, which is that there has been a tremendous amount of uncertainty about what’s going to happen with inflation. Markets and central bankers for the last 18 months have basically said that inflation will slow a couple months from now, or six months from now. That’s not happening. As a result of that, you’ve had interest expectations that have gone up throughout the year. The question has been: From a market perspective — largely from a U.S. perspective — how high will the U.S. need to raise interest rates to control inflation? The higher U.S. rates go, the weaker the U.S. economy is. It reduces earnings and creates market challenges.
So you see markets being incredibly volatile as data come in suggesting inflation is going to start to turn, and they do the opposite when you get data that suggests inflation is not. You’ve had remarkable volatility in equity and credit markets that’s largely around this notion of whether we are going to get a handle on inflation. Are we going to be more comfortable with inflation?
I would say in the last week or 10 days or so, we don’t want to pay too much attention to monthly movements and indicators, but what happened was the October data for U.S. inflation were weaker than expected. We’ve been waiting for a positive surprise on inflation. We got that positive surprise, and it created much more certainty about the path forward. There’s still plenty of uncertainty. You’ve had a significant move upward in equity markets and pretty significant drop in interest rates. Maybe this is going to work out in line with our expectations.
The Chair: That was very helpful. Thank you.
[Translation]
Senator Bellemare: Thank you for being with us, Mr. Perrault.
Yesterday, it was reported on the news that rental costs were rising significantly and that people were disappointed because inflation hadn’t dropped as expected. We know that rising interest rates can have a rebound effect on rising rental costs. Don’t you think that Canada should follow the example of other countries, such as the United States and certain European countries that have tax deductions for interest rate costs, which prevents the increase in the cost of living from being passed on to rents and makes it possible to fight inflation effectively?
Mr. Perrault: The fundamental problem with rents is an imbalance of supply, meaning what’s available for housing, be it rentals or properties, relative to the population. Until we fix that problem... It’s a feedback loop: interest rates are raised to slow down the economy, which increases the cost of mortgages, and people no longer qualify for certain mortgages. They have to find a place to live and, because there aren’t enough houses, they have to rent an apartment, which drives up the cost of rent.
Senator Bellemare: Shouldn’t we have tax deductions in the tax system for individuals for mortgage expenses, like those that exist in many countries?
Mr. Perrault: I’m a homeowner, so to be honest, I would like that. Under the current circumstances, since there is an imbalance between supply and demand, any measure that increases affordability, such as a tax credit on interest payments, would increase the imbalance between supply and demand. It helps people in the short term, but in the long term, it drives up prices even higher than they would have increased.
Senator Bellemare: In fact, it might be a matter of increasing even more, and having inflation increase even more. That might reduce the rebound effect. That was the objective in the countries that have adopted them in the past.
Mr. Perrault: That’s the example I gave for Europe. We have a particular situation in Canada. Population growth is so strong that it’s not comparable to what is happening in Europe. This dynamic complicates economic policy in terms of managing inflation or the housing market, because we have this constraint in terms of housing supply. It’s not a constraint in Europe, the United States, or elsewhere in the world. It’s unique to what’s happening here. The results that you might get elsewhere don’t necessarily apply here.
[English]
The Chair: That’s an important point you’re making because we’re seeing the immigration numbers too.
Senator Yussuff: Thank you, Mr. Perrault, for being here. The challenges Canadians are facing are not unique to any one of us, but the reality is some are also doing relatively okay compared to those who are struggling in this economy. Recognizing that reality, most of the government measures have been to try to address the people who are feeling most of the pain. Most of the measures the government has put in place so far are not permanent. They are temporary in the context to recognize the reality.
I’m not an economist, so I will prejudice my comment and question in that context. We’re not immune to the fact of the struggling of people in society, and we have to do things to ensure this struggle is not as painful as it could be if the government didn’t step in.
How would you address what the government is doing, recognizing the people who are getting the assistance?
Mr. Perrault: If you are going to do something to help, the more targeted and the more temporary the measures are, the better. To the federal government’s and some provincial governments’ credit, that has been the case. So it’s done in the right way, if you will, but the consequence of that is you need more of an adjustment. There are no ifs, ands or buts about it. Effectively, what the Bank of Canada is trying to do is cause no harm. You have to encourage people to save and spend a little less. I know inflation is a problem, particularly for folks at the lower end of the income scale; there is no question about it. If I were a politician, I would probably do something similar to what has been done, which is trying to help out those who need the most amount of help, understanding, though, that by doing that I’m prolonging the pain or shifting the burden of adjustment away from those people to other types of individuals.
Senator Yussuff: We’re not talking about numbers; we’re talking about people. We have to recognize there is a lot of pain going on, except we’re not all feeling it the same.
What has been clear from what we are reading in the media and from following the data is prices have outpaced inflation to a large extent. Price adjustments that we’re seeing on our nightly newscasts give people a sense of anger about they are paying. It has no relationship to the inflation-adjusted numbers. I understand we need to deal with this, but there are some folks who are doing far better in the fact this is an inflationary measure. It seems to me, to be fair, there is not enough recognition about the folks who are doing far better in regard to price adjustments than the people who have the burden of pain in regard to the inflation in our society. Would you agree that this is a reasonable assumption based on the numbers we’re seeing in the media?
Mr. Perrault: There is zero question that inflation is extremely painful, particularly to folks at the lower income side of things. If you want to design a policy package to try to help those individuals out — and they need help; there is no question and I’m not debating that — you probably should be thinking about a fiscally neutral package. While you provide support to certain types of individuals, you have to find a way to take that away from other parts of the population. It’s not a corporate thing but an individual thing. Maybe you raise taxes on folks who are earning more, so you keep the impact neutral at the fiscal level, so the budget balance isn’t affected; you’re just shifting how that balance is spent. If I were the Prime Minister, that’s how I would think about it in a world where inflation is high and I want to help people out. You can’t help people out without that adjustment.
Senator Yussuff: We are living in interesting times, and this federation of ours is not unique in how it functions. When we get there, I don’t think I’ll be around this table asking you questions either.
Our provincial governments are part of the solution as they are part of the problem, and, yes, I think there is some recognition about what we are all doing.
But at the same time, the challenge we face, which you have outlined in regard to looking at how we can improve the standard of living in this country, and that is productivity, is a unique problem to our country. It’s not unique in the world; other countries are facing the same problem.
At the end of the day, as we come out of this recession or the inflationary period we are in, we have to figure out how collectively how we do better to deal with increasing productivity because it is about increasing the wealth of all Canadians. Maybe I will give you the last word on some of the things you think are practical but also useful that we can look at in the long term.
Mr. Perrault: Perhaps the most politically challenging but most effective way would be to rethink interprovincial trade barriers. We’ve known for a long time that this likely comes at a cost of several billion dollars a year in terms of lost economic output. It frustrates competition and investment, but it is an incredibly difficult thing to do politically. That’s where I would focus my energies in the short run because that has the ability to have a long-lasting impact on how our economy is structured and how we capitalize on our strengths and minimize our weaknesses, and it leads to the most efficient allocation of capital within the country. I would focus my energy there.
Absent that, I may not be a politician but I’m not so naive to think this will happen overnight.
You also have to find ways to increase investment dramatically. You can use the tax code and government programs of various sorts, but we need to effectively use more capital of each unit of labour that we have in this country than we have in the past.
It’s harder to do than say. But if you were to affirm, “You spend $10 million on some type of capital investment, and I will give you 25% of that,” it’s difficult to see how farmers wouldn’t respond to that in the short run. It might not be the smartest way to go about it, but there are ways to turbocharge investment that might provide a rapid payoff in terms of productivity. Whether that has lasting effects on how we think about it is a different story. I would be very supportive — and we have; we’ve written about this in the past — of measures that find a way to dramatically reduce the cost of investment in Canada so that firms can increase.
The Chair: For the record, I can’t remember how many reports this committee has issued calling for a breaking down of interprovincial trade barriers. We just keep calling for it.
On your second point about incentivizing investment, you then have the government back picking winners and losers.
Mr. Perrault: The proposal we had, which was early in the pandemic, is you can have — and it sounds horrible because it sounds like corporate welfare — a program that says, “We will match 25% of the investment that any firm does, or firms in a broad range of industries,” and you limit the time to a two-year sale so that, “If you do this in the next couple of years, we will give you 25%,” without picking winners, without saying, “We will only do this industry in this part of the country.” It’s expensive, but it’s expensive only if it works.
Senator Marwah: Thank you, Mr. Perrault, for being with us this morning. The conventional wisdom has been that inflation is largely due to supply chain shocks — I think your opening comments said much the same — rather than the fiscal policies used to manage the pandemic. There has been a lot of focus on the fiscal side: What does the Bank of Canada do? What impact do the interest rates have, et cetera?
I would like your thoughts on the supply side, the supply shocks. What can we do? Do we just sit back and say it is out of our reach and there is not a whole lot we can do? Is there something we should be doing better, not just now but protecting ourselves from future supply shocks? Is onshoring the problem? What are the solutions to look at on the supply side?
Mr. Perrault: Let me rewind a little on that. Our sense is while much of the inflation we’re dealing with in Canada is foreign in nature and occurring outside of our borders, a lot is related to demand. Governments around the world stimulated. It is clear that we have overstimulated; there’s no question about that. Demand rose extremely rapidly and firms couldn’t keep up. That was a very large degree of what has happened on inflation; at least, that’s our interpretation. There are bottlenecks, chip shortages and various things that exacerbated that, but that’s our view.
On the supply dimension, we’re starting to go through a rethink that is long overdue in terms of how we think about supply chains, and you can layer the green transition into that. But it starts in the Trump years when we had a free trade deal with the Americans and, all of a sudden, you didn’t know the value of the free trade deal because you had these things slapped on you left, right and centre. Trump was explicit in his desire to reshore production to the U.S.
What’s going on with Russia and Ukraine and China — the importance of stable sources of all kinds of different metals and minerals as well as other goods, which we are excessively relying on China for, for instance — creates a huge vulnerability for the transition.
I look at what’s going on around the world and as disturbing as what we’re seeing happening in Russia is, and as challenging as what’s happening in China is for the Chinese economy, I think it is a huge opportunity for us. If we are able to capitalize on that using the trade agreements we have, using the stability or banking on the stability of our economic, political and judicial systems and the broad metals and minerals capabilities we have — which is partially exploited — combined with what I honestly think is an incredibly forward-thinking immigration policy — basically increasing our human capital by leaps and bounds compared to other countries — and put all those factors together, it can make a very compelling business case for Canada in the years to come. I don’t know that we are there yet, but if I were the government, this would be one of my number one things: take advantage of what’s going on now from an international perspective, given the depth of skills and resources that are available to us, because we are uniquely positioned from a global perspective on that.
Senator Marwah: I tend to agree with you. There is a great opportunity for Canada to capitalize on some of the inefficiencies that have occurred as a result of the war in Ukraine, and China and so on.
I look at the free trade agreements we have signed — I have been a sponsor of many — and in every free trade agreement we have signed, our exports rise much slower than our imports. Free trade is not helping as much as we would like it to help.
Why is that? Do you have any thoughts on how we can take advantage of this opportunity?
Mr. Perrault: Reducing trade restrictions is obviously better than having more trade restrictions. There is no question about that. I have never been of the view that free trade deals are these game changers in terms of how our economy operates. They open up markets to some extent. At the end of the day, if we are not as productive as our competitors and you open yourself up — well, if you open yourself up to competition and you’re not as competitive, guess what? You import more and you export less. The trade dynamic doesn’t work in your favour.
There are studies that suggest that some free trade deals have had a pretty good impact, but my perspective on the trade dimension has never been to rely on trade deals. Instead, rely on competition and policies that increase competition, and if you do that and marry that with more trade deals, then you will be much better off. We have focussed more on the opening up of markets rather than ensuring that we are as competitive as we can be and take advantage of those markets, as well as markets where you don’t have a trade deal, because there are plenty of those as well.
The Chair: Can we wrap up with your thoughts about the relationship between the Bank of Canada and the Department of Finance or the minister? With all the quantitative easing that we saw, there started to be a growth of criticism of the bank, that it was being used as a pawn and it was losing its credibility. On the other hand, you are saying they need to work in a more coordinated way so that the government is more directly helping out the bank to accomplish its ends as opposed to spending money, which may be counterproductive.
How do you see this relationship? How should it actually work? The finance minister and the governor, they talk, they have meetings and discuss. Do you want to see a more formal structure or a less formal structure? What would you propose?
Mr. Perrault: I don’t know that they need to change the structure as it is. I worked there for quite a while. I don’t think things have changed that much since I have left. It is an independent organization. The challenge we face is unique to the circumstances in that, usually, governments stimulate when things are not going very well. So there is an alignment of interest. When things are not going very well, inflation is low, so you have the Bank of Canada cutting rates, usually, when inflation is low, and the government is helping out on top of that. It is working in the same direction. We have had a bit of the opposite of that since the pandemic.
I don’t for a second believe the Bank of Canada has been politically influenced. I don’t subscribe to that view at all. I know some people do; I don’t. I think the governor has been independent. He has made mistakes, of course. Every central banker has made mistakes, and we can go through all those mistakes if you like, but I don’t think they are political in nature. I don’t think it’s because of undue political pressure or undue influence from members of the opposition.
The Chair: That is very helpful. Thank you. This is material we need on the record. Again, our thanks to Mr. Jean-François Perrault, Senior Vice-President and Chief Economist at Scotiabank. We are glad that we have finally seen you and been able to have this conversation in person. Thanks again for your time and insights.
Senator Colin Deacon (Deputy Chair) in the chair.
The Deputy Chair: I am Senator Colin Deacon, and I am deputy chair and am now chairing this panel. We have the pleasure of welcoming Pierre Fortin, Emeritus Professor of Economics, University of Quebec at Montreal. I want to thank you for joining us by video conference, Mr. Fortin, and the floor is now yours for opening comments.
[Translation]
Pierre Fortin, Emeritus Professor of Economics, University of Quebec at Montreal, As an individual: First of all, I would like to emphasize that I am very honoured by your invitation, especially since it is rather moving for me, since my own grandfather was a member of Parliament and a senator during the Great Depression of the 1930s. The Fortins have returned to the Senate, so I thank all the members of the committee.
The presentations by the previous witnesses and the questions you asked prompted me to start with four topics: the behaviour of the Bank of Canada, immigration, the labour shortage, and the current economic downturn.
[English]
First, on the Bank of Canada’s behaviour, I want to make sure that we all understand that the bank was not in error for waiting until March of this year before putting out the big guns against inflation. There were episodes in the past — in 1951, 1991 and 2003 — when a sudden burst of inflation quickly disappeared by itself without any need for central bank intervention. Until last winter, nobody knew for sure whether this would happen again or not.
Governor Macklem was right to avoid the risk of killing jobs with what would have been a costly increase in the policy interest rate with no benefit. He behaved in full accordance with the official inflation control agreement. The latter states that the primary objective of monetary policy remains “to maintain low and stable inflation over time,” but it also stipulates that it should do so with an eye to “supporting maximum sustainable employment.”
Now that inflation has turned out more resistant ex post than everyone expected ex ante, we should all refrain from shouting out that the governor’s management of the risk was in error.
Second, on immigration, there has been a doubling of the number of new permanent and temporary immigrants admitted to Canada, from 330,000 in 2016-17 to 658,000 in 2021-22. Is this the appropriate course to follow by Immigration, Refugees and Citizenship Canada? Definitely not: This mammoth jump in immigration is much too large.
First, existing peer-reviewed research has shown that the effects of immigration on labour shortages, population aging and the standard of living are null or microscopic.
Second, all those who are very much in favour of immigration, including myself, must understand that exceeding the economic and social capacity of Canadian society to adequately welcome and integrate newcomers runs the risk of mounting public opinion against immigration.
Earlier this year, an online survey by Environics found that 48% of Canadians already feel that there is too much immigration to Canada. The recent surge in anti-immigration sentiment in Sweden and in the United States is a warning sign that trying to run too fast could destroy popular support for immigration, even in traditionally very open and progressive societies like ours, and eventually induce governments to bring down immigration flows to abysmal levels, just as has unfortunately happened in these other two countries.
Third, on labour shortages, when we expand the labour force through more immigration and greater participation of older Canadians, however desirable these two are by themselves, the demand for labour eventually increases as much as the supply of labour. Therefore, labour shortages are not reduced. This being so, where, in fact, do high job vacancy rates such as 7% in the U.S. and 5.5% in Canada come from? The straight answer is that it comes from the economy running at, or close to, its full potential.
Unemployment is at a 50-year low. From 2016 to the first half of 2022 in Canada, the unemployment rate went down by 1.5 points, while the job vacancy rate went up by 3 points. We macro economists call this negative relation between vacancies and unemployment the Beveridge Curve. In the short term, the only tool at our disposal for lowering the job vacancy rate is forcing the unemployment rate to increase. This is exactly what monetary policy is currently out to do by raising interest rates.
The grain of hope that remains for the coming months is that the incipient economic slowdown will decrease job vacancies more than it will increase layoffs and unemployment; we’ll see.
Fourth, and finally, on the slowdown itself, how long and how deep will it be? The honest answer is that no one knows for sure. The most recent data shows that the growth rates of GDP, jobs and vacancies have indeed begun to slow down. Given that the lags in effects of monetary policy are usually distributed over several quarters, there is likely more to come. True, the three-month core measures of inflation are still around 3.5%, so not yet down to 2%, but they have been on a declining path recently.
Moreover, supply chains are unravelling and wages are not leading inflation. Cumulatively, since early 2020, they have increased 3.5% less than the CPI — the Consumer Price Index. Fixed weighted average hourly earnings have grown at an annual rate of 3% between February and August and 0.7% between May and August. These developments suggest that disinflation is already on the go.
I must admit, I am a bit worried by Governor Macklem’s recent statement that he expects the policy interest rate to rise further. The risk of over-tightening is there. Again, we’ll see. I pray to my parents in heaven that they guide him to avoid us an ugly exit from this exercise. He’s not a bad guy.
[Translation]
Thank you for listening. Obviously, there are many other issues I could have raised, but since I have already spoken enough, it will be up to you to raise the ones that deserve the most attention. Thank you.
The Deputy Chair: Thank you, Mr. Fortin.
[English]
Those were great opening comments.
[Translation]
Senator Bellemare: Mr. Fortin, I’m very pleased that you’re here. We have been colleagues in the past, and we share many common projects. To that end, I would like to ask you the following question. You’ve been involved with a group of economists in promoting a dual mandate for the Bank of Canada. Can you explain why you think price stability is as important as the maximum employment rate in a society? Why isn’t price stability the key element?
Mr. Fortin: Maximum employment means not only that all or almost all workers are employed, for example when the unemployment rate in Canada is between 4% and 5%. It also means that businesses are at their maximum capacity, that is, they’re using all the human and material resources available to them. In other words, it isn’t only human resources that are involved, but also material resources and all the investments that go with them.
Of course, in the 1930s, we had the mother of all recessions, when the economic and social situation was absolutely tragic. At that time, the goal of full employment was set by the Government of Canada under Mackenzie King and the U.S. government under Franklin Roosevelt as a central objective, in addition to price stability. So we have to operate with those two broad objectives, not just one.
Senator Bellemare: Would a dual mandate in Canada make a historic difference in our labour force participation, unemployment rate, and so on?
Mr. Fortin: Having a dual mandate?
Senator Bellemare: Yes.
Mr. Fortin: If we compare the performance of Canada and the United States over the past 25 years… By “performance,” I mean the evolution of the inflation rate and the unemployment rate in both countries.
First, in terms of inflation, Canada has averaged an inflation rate of 1.8% or 2% until very recently — until 2019, of course, before the pandemic. In the United States, the rate has been about 2% or 2.5%. Both governments have achieved about 2%. So there’s really no difference between the two countries in terms of inflation performance. Of course, we can discuss the last two or three years, but that’s another question you may have in mind.
In terms of employment, the unemployment rate in the United States has, on average, been lower than the unemployment rate in Canada over the past 25 years. I’m going to use the last 30 years as a reference, because it was from 1992 onwards that Canada really applied its policy, which was to target a 2% inflation rate indefinitely.
So the unemployment rate in the United States has been lower than in Canada, not only because the two unemployment rates are measured differently. Normally, the unemployment rate in the United States is lower than in Canada. First, because there are many more people in prison in the United States and, second, because the U.S. labour force survey questions are much more stringent in determining whether someone is unemployed.
Even allowing for this gap, which Statistics Canada publishes regularly, the U.S. employment performance has been somewhat better than Canada’s.
This suggests to me that having a dual mandate and being very clear, like the Federal Reserve statement that is renewed every January… If these two objectives were pursued, there is no factual empirical evidence to show that this would make the situation worse in Canada; quite the contrary.
Senator Bellemare: Thank you very much.
[English]
The Deputy Chair: Thank you, Mr. Fortin.
Before I hand things over to Senator Gignac, I’d like to ask a quick question, if I could, about immigration. I’m a senator from Nova Scotia, and we’ve seen our population go above a million people. We’ve seen the fastest growth in population in 50 years. It’s certainly had an effect on our schools, our health care system and our housing prices.
Could you speak to the inflationary effects that you see potentially needing to be managed from the big increase in immigration that has been announced and that we’re expecting to see?
Mr. Fortin: If I understand you well, you’re asking whether increasing the rate of inflation in Canada would have inflationary —
The Deputy Chair: I must have misspoken, I apologize. I’m asking about how increasing the rate of immigration could have inflationary effects. Certainly we’re seeing increased costs in our health care and education systems and in our housing prices in Nova Scotia, where we’ve seen big growth.
Mr. Fortin: I don’t believe it would have serious inflationary consequences because immigration has a dual effect. It has an effect on the demand for goods and services and on the supply of goods and services. More immigrants bring more labour supply to Canada. That has an anti-inflationary effect because supply increases go against inflation.
On the other hand, once the immigrants are here and they work and spend their income, of course, demand for goods and services and labour increases, as well as indirectly through government services that are given to them through social assistance or health services, et cetera. Overall, what they do in terms of increasing the supply of labour would be enough, over time, to finance what is required to cater to their needs from government services at the beginning.
Of course, there could be some fluctuations over time. The timing might be different in terms of the increase in supply and the increase in demand for labour. Over time, I think it’s levelling off. There’s no net inflationary effect of immigration.
[Translation]
Senator Gignac: Good afternoon, Mr. Fortin.
You said that you were emotional about coming to the Senate to testify. I share that sentiment, as I was privileged to have you as a professor at university and to benefit from your advice and wisdom throughout my career. I thank you for that.
I have two questions for you, if time permits. I’d really appreciate it if you could keep your first answer brief.
In fact, since the central bankers meeting in Jackson Hole, there’s been a change in attitude on the part of the central banks. Some are even saying that they don’t want to repeat the mistake of the 1970s and that it’s better to tighten things up a little too much, even if it means lowering interest rates later and creating a recession, rather than not tightening enough and repeating the experience of the 1970s.
What is your reaction to all of that?
Mr. Fortin: My reaction is this: it depends on the ability of our people, whether they are businesses or workers, to absorb a rise in interest rates.
It’s pretty obvious. For example, if the inflation rate is 8%, and you want to lower it to 2%, then you have to lower it by six percentage points. Technically, macroeconomic results indicate that to lower the inflation rate by 1%, a two-point increase in the unemployment rate is required. Therefore, if you want to reduce the inflation rate from 8% to 2%, that requires a 6% decrease in the inflation rate and a 12% increase in the unemployment rate.
I’m not sure… Obviously, you and I would have no problem keeping our jobs, but there may be quite a few people outside our homes and our building who would be affected. Therefore, it’s imperative that the authorities make the decision and ask themselves this question: Do we go for two years with a 3% or 4% increase in the unemployment rate, or do we go for just one year with 10% or 12%?
Yes, it’s true that central bank bankers tend to work as if pulling off a Band-And: they rip it off suddenly, it hurts in the moment, but the next day everything is fine. The problem is that the impact of this unemployment can last a relatively long time for someone with an average income who is likely to lose their job. You have to ask that question in response to your question.
I’m sorry, I took more time than I thought I would, but your question was spot on. Of course, the best thing that can happen to a teacher like me is to have former students who do better in life than he does.
Senator Gignac: Immigration is a very sensitive issue in Quebec. You mentioned that even in Canada’s case, 500,000 immigrants is still a very high number and that it exceeds the country’s economic and social capacity — I’m quoting you.
How is economic and social capacity measured in Canada? How is it measured in Quebec? Finally, is Quebec right to set a target of 50,000 immigrants, which would equal only 10% of Canadian immigration? You can send me a written answer, Mr. Fortin, if you think the answer will take more than two minutes.
Mr. Fortin: Economically speaking, capacity isn’t the issue. Immigration can easily increase economic capacity. Economically speaking, the problem is knowing what impact immigration will have on the labour shortage, population aging, and income per person. All the scientific literature says the same thing, that the impact is low and negligible. It’s not that economic capacity can’t go up, it’s more that immigration has little impact on those factors.
Secondly, with respect to social capacity, I don’t know what it is. The great American philosopher Robert Pirsig wrote a book called Zen and the Art of Motorcycle Maintenance. In it, he asks “What the hell is Quality? What is it?” He responds, “Even though quality cannot be defined, you know what quality is”.
The same thing goes for our immigrant reception capacity. I don’t know how many immigrants we can take in, but we saw very well that the United States is having problems with immigration. In Sweden, we saw very well that going from 50,000 to 120,000 immigrants within two or three years caused such a stir in people that they now fear racism and xenophobia are on the rise. We may well have to reduce our reception capacity to below what you and I would consider appropriate. We’ll have to decide how risky it is for us to engage in a massive wave of migration that would obviously take us beyond our immigrant reception capacity.
Senator Loffreda: I’d like to thank Professor Fortin for being with us. I believe you answered my question in your response to Senator Gignac. You talked a lot about immigration and its impact on labour and inflation. You questioned the Canadian government’s current strategy. Can you give us more details on that? What parameters need to be considered to determine Canada’s reception capacity?
I’m asking because we have a million unfilled positions in Canada and a million Canadians who are not working. There are a number of ways forward, but when I visit seniors’ homes and hospitals in Quebec and Canada, I see many immigrants holding key positions in those areas.
Could you elaborate a bit on that? If not, I have another quick question about climate change.
Mr. Fortin: With respect to immigration, I feel our capacity needs to be determined based on discussions and consensus between the governments in charge of immigration — in Canada, that would be the federal government and the Quebec and provincial governments — so we can decide what capacity might best meet our most pressing needs overall.
Right now, the problem with the huge wave of migration that’s around the corner for Canada is that it’s going to raise Canada’s immigration rate to twice that of Australia. Australia is the second biggest country of immigration in the world. In other words, they want to take the rate in Canada to twice the rate of the second-largest country of immigration.
The question isn’t do we go there or not, it’s how quickly do we do it? How many immigrants are Canadians willing to accept? I think the danger is that if we go too fast today, tomorrow or the day after tomorrow, other governments will take power in Canada and say that we can’t accept 500,000 immigrants because our fellow Canadians don’t want that, but we will bring that number down to 150,000. That’s what happened 25 or 30 years ago. If we try to move too fast, we risk taking a step back. That’s the main point I wanted to make.
Having said that, I come from an immigrant family. My five children are immigrants. All of my grandchildren are immigrants, except for one. They are an absolutely wonderful Canadian family. However, you need to be able to refute the idea that you’re against immigration when you want to put up safeguards. Conversely, if your pro-immigration, you need to warn the Government of Canada that we are in danger of going much too far.
I apologize for taking so long to answer you. I’m ready for your question about climate change.
Senator Loffreda: Thanks for your response. In a recent interview, you talked about solutions for climate change. You said the only solution was technology.
I recently read a series of articles in The Wall Street Journal that talked about four solutions. Two of them were to not develop our resources. The Wall Street Journal also talked about consumption. No one is talking about using less, because this affects us all and most of us are going to vote. Instead, we talk about governments: no one is finding ways to use less. Do you agree that using less would be another solution for the climate change we’re experiencing?
Mr. Fortin: I believe we need to let our people make their own decisions about their consumption, based on the environment they are going to live in.
With respect to the climate change strategy, first, Canada has a strategy based on the carbon tax. It’s really not a bad strategy at all. However, we must realize that it has certain limitations. There’s no guarantee our fellow Canadians will agree to a three, four or fivefold increase in the carbon tax in the coming years. Any government that appears to be moving too far in that direction might well trigger a rebellion.
On the other hand, we’ve seen technology make a huge contribution — I’m talking about the government strategy President Biden has just set in motion with the inflation reduction act, which is really climate change legislation. With this law, the U.S. government has decided to use the carrot, not the stick. I think the American people will surely buy into fighting climate change and greenhouse gas emissions in a much more positive way than if they were simply told that the carbon tax was going to double, triple or quadruple in the coming years.
Third, we have an excellent reason to be optimistic — wind power now costs next to nothing. The cost of wind power in the United States is now about four cents per kilowatt-hour, down from 20 cents per kilowatt-hour a short time ago. Technology is therefore solving a big chunk of our problem. That’s a problem for Hydro-Québec too: If wind power is so cheap, how can we export electricity to the U.S. if it costs us 6 to 8 cents to produce and we need to sell it at 4 or 5 cents? That’s a big step forward in the fight against greenhouse gases.
Of course, this means that Manitoba Hydro, BC Hydro and Hydro-Québec need to adapt their trade with the United States, if they expand it.
Senator Massicotte: Good afternoon, Professor Fortin. Like my esteemed colleagues, I appreciate your thoughtful comments and judgment. Congratulations on your success.
Mr. Fortin: I must say, I do work hard.
Senator Massicotte: My question is about productivity. For decades, people have been saying how important productivity is, and we always see it as a solution for slow economic growth. At the same time, we’re having a lot of trouble improving it. How is it that we’re making so little progress in that respect?
Mr. Fortin: It’s true that Canadian productivity isn’t growing as quickly. It’s already lagging behind U.S. productivity. It’s been more sluggish than U.S. productivity over the past 20 years. You’re right to be concerned about it.
Productivity has gone up 30% in the United States, but in Quebec and Ontario it’s only gone up 10% in the entire 20-year span from 2001 to 2021. It’s really a problem.
The best answer I can give you is what my colleague Elhanan Helpman, who is a professor at Harvard and Tel Aviv, says in his most recent book, The Mystery of Economic Growth. Much like the Holy Trinity, productivity is a mystery. My wife the seasoned entrepreneur always says, “Stop looking for what drives productivity, you will never find it. There’s only one answer, and that is to apply the Nike tagline, ‘just do it’”.
I would still say that it’s important we accelerate education in this country, especially university education. It’s absolutely fundamental, because our gaps with OECD countries can affect our productivity.
Secondly, I was quite surprised and fascinated when I saw the results of a survey IBM International did of top business leaders worldwide. Three hundred and sixty-five business leaders said that if their productivity had increased, it was because they had asked their employees about it on the factory or office floor. In other words, listen to your employees. That’s the best way to get your productivity up fast. In Canada, perhaps we don’t stick enough to that maxim reflecting IBM’s survey of the big corporations.
Finally, competition policy is important; we talked about it earlier with Mr. Perrault and the few senators who brought it up. Obviously, Canadian companies do better in a competitive environment than when they have few competitors. This is especially important because it’s been proven that the monopoly power of big multinationals like the GAFAM has grown considerably in the past 10 or 20 years. So the message we’re receiving is that our Competition Bureau — they call it antitrust in the United States — must have some teeth to better monitor the state of competition in this country.
I’m going to tell you a story. In the mid-eighties, Premier René Lévesque said, “Free trade is what is needed for Quebec”. Looking at the Canadian athletes who had recently won gold medals at the Olympics, he said that the economy was like sports, and the only way to win gold was to compete against the best in the world. It really all comes down to that. Obviously, some of your colleagues have understood that very well. I totally agree with them.
[English]
The Deputy Chair: Thank you, Professor Fortin. I just have one point of clarification. I would expect, based on what you said, that policies that affect competition spread well past the Competition Act itself. Is that something you would agree with? We’ve got so many policies in place that provide regulatory moats around incumbents and oligopolies. I would expect that you see that as being an important part of the review to spur competition in this country.
Mr. Fortin: Absolutely.
The Deputy Chair: Thank you.
Senator Bellemare: I have one question about the Inflation Reduction Act of 2022 in the U.S., which one might call a climate act. Is this an invitation for Canada to do the same thing or would you take it as an opportunity or an obligation for Canada to do that?
[Translation]
Mr. Fortin: Yes. I feel the shift initiated by President Biden in the U.S. — and I can see Janet Yellen behind all this and her fellow cabinet members, they are brilliant people who understand the climate situation — it’s a shift toward the carrot, not just the stick, and it needs to be top of mind for Canada in the coming months.
I understand that Ottawa is in conflict with the provinces that oppose the carbon tax and it wants to defend the tax against the provincial governments not warming up to it. However, I believe it’s time for the Canadian government itself to consider alternatives.
I know that the government already supports emerging technologies with a subsidy for consumers who adopt electric transportation, among other things. Consumers generally prefer subsidies over taxes.
Subsidies are not ideal. As an economist, I understand very well that I couldn’t develop a theorem to defend that position. However, in the real world, we certainly need to show there are benefits to switching from fossil fuels to wind power or other less toxic energy sources; a move in that direction could be perceived as a semi-shift by the federal government, and it would also show that the government is somewhat open-minded rather than fixated on the carbon tax.
Senator Bellemare: We can hear the wisdom in you. Thank you.
[English]
The Deputy Chair: On behalf of my colleagues on the Standing Senate Committee on Banking, Commerce and the Economy, I want thank you, Emeritus Professor Pierre Fortin, for your time with us today.
(The committee adjourned.)