A SPECIAL UE RESEARCH DEPT. REPORT

Interest rates and inflation

0 This is the third in a series of spe-
Cial reports by UE's Research Dept.
_ dealing with the current economic re-
Cession in Canada and the devastat-
ing effect it is having on family
budgets. This article is written in a
Popular question and answer style
with the questions in italic and the
- answers in light face.

_ Why are interest rates so high?
HIGH interest rates are a result of the fed-
€ral government’s misguided economic
Policies. The government argues that high
Interest rates will reduce inflation by

_ Weakening demand, that is by cutting

| down on people's abilities to buy more
 &00ds.

They also argue that high interest rates
are necessary to protect the value of the
Canadian dollar: if interest rates were
OWer, corporate investors would take
their money elsewhere and this would

force down the value of the Canadian dol-
lar relative to other currencies.

Will interest rates cure inflation?

No! We have had high interest rates for
SOme time and inflation has continued to
80 up, not down. Since inflation is not
Caused by too much demand for goods,
: decreasing demand through high interest
fates is no solution. In fact, high interest
fates probably make inflation worse as the
Cost of borrowing is used as an excuse for
creasing prices.

Ifit does not help fight
inflation, why are high
- interest rates continued?
_ High interest rates are an advantage for
Certain groups. Banks have been able to
Profit enormously by charging high rates

for loans while paying much lowerrateson »

€posits.
The most. recent bank profit figures
Show the results as seen in Table 1.

re.

‘ Table 1
~ Profits of Major Canadian Banks
1980-81
Profit
after taxes % profit
(9 mos. end. _increase

July 30, 1981 July 30 ’80-

‘(millions of $) July 30 ’81
Royal 367.1% 64.1%
Commerce 225.9 69.6
Bank of Mtl. 267.9 40.5
Scotiabank 170.1 6.8
Tor.-Dom. 195.3 58.6
Who else benefits from

high interest rates?

_ Large, powerful corporations. High
interest rates are a way of squeezing small
Usinesses out of the market. This opens
Way for large companies to grab a
8teater share of the market. :
ur tax system helps large corporations
Profit from high interest rates by reducing
Ir real interest rates below the inflation
fate. Small business can reduce their
interest rates less and individuals get no
duction at all as shown in Table 2.

By allowing large retailers to deduct 48
per cent of their loan costs, a 22 per cent
interest rate is reduced to 11.4 per cent.
Assuming that the retailer has the power to
increase prices at the inflation rate (cur-
rently 12.5 per cent), the real cost of his
loan is nil.

A similar pattern holds for the large
manufacturer. The small manufacturer
does less well, while the individual bor-
rower gets no relief. Assuming prices and
wages rise at the rate of inflation, the real
costs of a 22 per cent loan are shown in the
last column of Table 2.

The real situation is worse than Table 2
indicates. Large corporations actually
borrow at lower rates than others, and

have greater power to set prices above

inflation rates.

Individuals often pay two to three per
cent more for loans and rarely do wages
keep up with inflation. The real cost of
borrowing for individuals would be closer
to 12 to 13 per cent above inflation while
that of large corporations is minus two to
three per cent.

No wonder the banks and the multi-
nationals are applauding the government’s
high interest rate policies, while workers
and small business people are screaming!

What would be a cure

for inflation?

First, we must understand what causes
inflation. Economists, big business and
politicians have obscured the real cause of
inflation — the economic power of big
corporations to raise prices as they wish.

Inflation has been*accelerating through-
out the Western World because the in-
creasing market share of large corpora-
tions allows them more and mote scope to
force prices up.

Aren’t prices determined

by demand and supply?

These are influencing factors, but actu-
ally people set prices, not some im-
personal automatic process. Demand im-:
poses a ceiling and cost places a floor
under price, but the distance between the
two is manipulated by price-makers with
sufficient market power operating under
‘favorable conditions.

What conditions are favorable
for increasing prices?
Conditions that help corporations get

away with price increases are:

O Informal agreements not to compete
over prices.

’ 2 A high demand for a product.

O Generalized real costs increases.

C) Increasing availability of money and
credit.

(© Drying up of necessary investment.

C Devaluation of the currency.

© Unstable economic conditions.

C Waning confidence in money.

None of these, necessarily, cause in-
flation. They are simply conditions which
allow and justify corporate price-setters’
decisions to raise prices. ‘

Who is responsible forthese.
conditions favoring inflation?
Government action (or inaction) is a di-

rect cause or a contributing factor with

respect to most of these conditions.

ee eS Table 2
ee After-tax Borrowing Costs of Loans at 22% ee.
 % of eee, iis iene
a wee inflation
deductible pate. rate)
48% 11.4% -1.1%
gr 12.8 0.3
98 17.2 a 4.7
4 22.0 9.5

CORLESS

Is there any cure for
inflation in Canada?

There is no permanent cure in a private
enterprise economy in which the pursuit of
profit encourages the pushing up of prices
whenever conditions are favorable. But
there are things governments can do to
curb price-raisers, minimize conditions

favorable to price boosting, and: ease the.

burden of unavoidable price increases.

What specifically can we do
in Canada to reduce inflation?

1. Freeze consumer prices and establish
selective control of leading corporations’
prices of basic necessities.

This is not an ‘incomes and prices”’
policy. Itis price control, pure and simple.
Under this plan, prices could be raised

’ by non-controlled companies, but their

higher prices would cost them customers.
The price control procedure would be a
way to mimic the competitive market
situation by ruling out market power as a

basis for forcing prices up.

Exports would have to be placed under
quantity control to prevent Canadian pro-
ducers from starving the home market.
Import prices of key commodities would
have to be controlled, and indispensable
goods subsidized if necessary to prevent
gouging of consumers.

2. Direct government intervention to break

important supply bottlenecks.
The government must assure an

_ adequate supply of necessities at afford-
~ able prices. Three priorities are: a crash
program of reasonably priced housing, an

end to blackmail by energy producers
through the nationalization of major oil
companies and the institution of a reason-
able Canadian price for oil and gas, and
an end to the restriction of food supply
by marketing boards.

Farmers deserve decent, stable in-
comes, but the way to achieve that is not
by holding food supplies off the market to
boost prices artificially.

3. Index incomes sources of the disadvan-
taged.

All pensions, social security benefits,
welfare supplements, minimum wages and
other social. assistance: payments should
be indexed to the Consumer Price Index.

\

4. Preserve the indexing of personal
tax exemptions.

This essential protection against in-
flation losses must be maintained.

5. Impose progressively lower ceilings on
interest rates for all forms of consumer
financing.

To protect against the pull-out of capital
to the United States, exchange controls

-would have to be introduced.

6. Impose a moratorium on home
mortgage foreclosures and sales under
the power of sale. :

No family should lose its home because |

of the government's misplaced high inter-
est policy.
7. Scrap ineffective ‘‘cures’’ for inflation.

High interest rates, tight money policies
and wage controls have not worked when-
ever they have been tried. They only
cause unemployment and shift economic
burdens onto low and middle-income
earners and the poor. :

8. Cut military expenditures.

Total Canadian military expenditures
since World War II have been about $67-
billion — a sum equal to the assets of the
largest 13 Canadian corporations. This
sum could have been put to better use on
sorely-needed social programs.

9. Meet the threat of a capital strike
head on.

In addition to exchange controls, to
prevent the outflow of capital, taxing
power should be used to direct private
funds into socially-useful investments.
Nationalization should be used where
corporations refuse to co-operate or at-
tempt to sabotage policy in the public in-
terest. 4
10. Implement a Canadian

industrial strategy.

Ultimately, our hopes are based on a
strong economy which has as its core ele-
ments: a healthy home market, an invest-
ment policy directed to import substitu-
tion and increasing production of goods
using our own resources, reduction in our
dependence on foreign investment, pro-
tecting the future supply of Canadian
energy at prices related to Canadian costs
of production, and recognition of labor's
rights and potential contributions.

wewr

This feature reprinted courtesy of
UENews, journal of the United Electrical
Workers, siaieaiiac

_ PACIFIC TRIBUNE—NOV. 27, 1981—Page 7