British Columbia

Victoria’s Raging Grannies led 160
supporters in the city’s Conference Cen-
tre Nov. 14 to demonstrate against the
military trade show there, sponsored by
the Armed Forces Communications and
Electronics Association (AFCEA).

Called by the Greater Victoria Disar-
mament Group and the Voice of
Women, the rally was organized to pro-
test the increasing militarization of the
economy.

VOW spokesperson Terry Padgham,
noting that arms manufacturers are look-
ing to the Third World for sales, called on
the Mulroney government to follow the
international trend towards demilitariza-
tion and to encourage the export of
goods which benefit people rather than

those which promote violence.

— Nadya Dowson

Why the high

By ED SHAFFER

Despite signs of a slowdown in the econ-
omy, John Crow, Governor of the Bank of
Canada is continuing to reaffirm his inten-
tion to keep interest rates high. Crow claims
high rates are necessary to fight inflation.
This justification is being met with consid-
erable skepticism by more and more con-
ventional economists, businessmen and
Progressive Conservative politicians. Pro-
vincial premiers like Don Getty of Alberta
and Grant Devine of Saskatchewan have
denounced it. ents:

In face of such strong opposition within
conservative circles, why does Crow pursue
this policy? Presumably he knows, as well as
his critics, that his justification is a weak
one.

First of all, inflation is not a major prob-
lem now. The present rate is approximately
5.4 per cent, well below the double digit
rates of the early 1970s and the average rate
of 7.2 per cent for the years 1976-1988.
Second, to the extent that inflation is a prob-
lem, it is not at all clear that high interest
rates are the most effective way to combat it.
The relationship between inflation and
interest rates is quite complex. Hes

While a rise in interest rates does, in its
first stages, cause some prices to fall, it also
increases production costs, thereby exerting
upward pressures on prices. No one can be
sure that the initial fall in some prices will
not be cancelled out by subsequent rises in
costs and prices.

The goods whose prices fall are usually
those held as inventories by businesses.
Since most businesses finance their invento-

ries with borrowed money, they will sell off:

part of their inventories to offset increases in
interest rates. This sell-off exerts downward
pressure on prices. There is, however, no
such downward pressure on new produc-
tion, which is burdened by increased costs.

Businesses then try to compensate for
this added expense by raising prices, a step
which fuels inflation. Not all businesses,
however, are able to increase prices suffi-
ciently to recover their additional interest
costs. This is especially true of small firms in
competitive industries, which are forced
either to cut other costs or to go out of
business.

These firms will lay off some workers and
pressure others to accept wage cuts. If they
go out of business, they will dismiss all their
employees, swelling the ranks of the jobless.
Farmers, in particular, are hard hit. Selling
to an international market, they do not have
the power to raise prices. Since most farms
are highly mechanized, farmers do not
employ many workers and therefore do not
have much room to cut wage costs. Because
of their inability either to raise prices or to
cut costs, a record number of farmers have
lost their farms. This crisis in agriculture is
one of the reasons Don Getty and Grant
Devine have been calling for lower interest
rates.

The end result of this process is an

increase in unemployment, which brings
with it pressure to lower wages and to
reduce workers’ benefits. It is quite clear
that this result is the main objective of
Crow’s “anti-inflation” fight.

The Bank of Canada has adopted the
concept of “the non-accelerating inflation
rate of unemployment” (NAIRU), which is
the rate of unemployment that keeps infla-
tion constant. It is, for instance, the unem-
ployment rate that keeps the present
inflation rate of 5.4 per cent unchanged.
Any unemployment rate below the NAIRU
will cause inflation to rise above 5.4 per
cent, while a rate above the NAIRU will
cause inflation to fall below 5.4 per cent.

The Bank of Canada has decided that the
NAIRU today is eight per cent. In other
words, as long as the unemployment rate is
below eight per cent, it will continue its high
interest rate policy. Since the unemploy-
ment rate in July was 7.5 per cent, we can
expect high interest rates to continue at least
until the eight per cent level is reached. At
that time the Bank of Canada may decide
that the NAIRU is nine per cent and use
high interest rate as a means of achieving
this goal.

CS Serer ae merce test tne aan a mae nt RE NTS
The high interest policy is
further monopolizing the
economy ... and increasing
unemployment.

Ge a eo

Unemployment is not only created by the
effect of high interest rates on costs but also
by their effect on the exchange rate. The
value of the Canadian dollar is closely
related to the difference between U.S. and
Canadian short term interest rates. If, for
instance, U.S. rates are higher, money will
flow from Canada to the United States,
driving up the value of the U.S. dollar and
lowering that of the Canadian. If Canadian
rates are higher, the opposite will happen.

_In mid-August the gap between Cana-
dian and U.S. short term interest rates was
at an all time high. The Canadian rate was
4.2 percentage points higher than the U.S.
one. A year earlier, it was 2.5 points higher.
For the entire post World War II period,
the Canadian rate was, on average, one
percentage point lower than the U.S. one.

Because of this widening gap, the Cana-
dian dollar has been rising steadily over the
last few years. In mid-August, the Canadian
dollar was worth slightly more than 85 cents
USS. A year earlier it was equal to 82 cents.
The exchange rate thus rose by four per cent
during this period. Between January 1986
and August 1989, it increased by 20 per
cent.

An increase in the exchange rate raises
the price of Canadian goods in foreign
markets. If, for instance, a Canadian expor-
ter a year ago sold goods to the U.S. for

interest rates?

$100 Canadian, the American importer had
to pay $82 U.S. Today, the American
importer will have to pay $85 U.S. This
increase in the U.S. price puts Canadian
exporters at a disadvantage vis-a-vis U.S.
competitors.

Conversely, import prices into Canada
fall. If, for instance, an American exporter a

year ago sold goods to Canada for $100 —

U.S., the Canadian importer had to pay
$122 Canadian. Today, the Canadian
importer will have to pay $118 Canadian.
This decrease in the Canadian price puts
domestic Canadian firms at a disadvantage
vis-a-vis U.S. competitors in Canada.

. Because of the rise in the exchange rate,
Canada’s surplus in its balance-of-trade (the
difference between exports and imports) has
been falling. Accompanying this fall has
been a decline in jobs both in the export
industries and the domestic industries com-
peting with imports.

This rise in the exchange rate is also
linked to the Free Trade Agreement (FTA)
with the United States. During negotiations
over the agreement, many U.S. congress-
men complained that the Canadian ex-
change rate was too low, giving Canadian
exporters an “unfair” advantage in the U.S.
market. They saw no reason to allow Cana-
dians goods to enter the U.S. duty free as
long as the Canadian dollar was “under-
valued.” It was around this time that Cana-
dian interest rates began to climb at a faster
rate than the U.S. ones and the Canadian
dollar began to rise.

Finally, the Bank of Canada is using high
interest rates as a means of bringing about a
“perestroika” of the Canadian economy.
There is a belief that with the FTA and the
scheduled economic integration in 1992,
firms operating in Canada must become
more competitive. This not only means that
wages have to be lowered but also that the
firms have to be bigger. The day of the small
fry is over.

The high interest rates enable the large
firms to take over the smaller ones. The
large multinationals are not hurt by these
rates. First, they have the market power to
raise prices. Second, many are flush with
cash, which they can invest at the high rates.
Third, they can borrow money at signifi-
cantly lower rates than the small firms by
tapping the money markets of New York,
London, Paris, Frankfurt and Tokyo. With
these financial resources, they can buy out
the small firms hurt by the high rates. These
buyouts are now taking place at an acceler-
ated rate.

The high interest rate policy is thus
further monopolizing the Canadian econ-
omy. It is creating a perestroika that is hurt-
ing the workers, the farmers and small
business people. It is a perestroika that
offers a bleak future to the Canadian peo-
ple.

Ed Shaffer is a professor emeritus of eco-
nomics. This article first appeared in Cana-
dian Jewish Outlook.

New approach
needed to cut
policing costs

Vancouver city council agreed on
Nov. 7 that the police force should be
increased by 40 more officers. The addi-
tional cost will be almost $2.5 million.

The chief of police wanted an addi-
tional 82 officers at an estimated addi-
tional cost of $4.9 million. COPE
members of council felt that this was too
much for taxpayers at this time and the
majority of aldermen agreed with us.
Police costs are already at $70 million a
year — one-fifth of the city’s entire
budget.

The problem of too much work for
too few officers needs to be tackled in
other ways. More police isn’t necessarily
the whole answer. Our city police force is
being compelled to do too many jobs
that don’t really require police. Let me
give a few examples.

The provincial government has trans-
ferred Riverview Hospital to a private
society. Mental patients are now sup-
posed to be treated in homes or smaller
establishments but it’s just not working
out that way and the provincial govern-
ment knew it wouldn’t. Some of these
people are finding themselves on the
streets where they have to be picked up
by police officers. What the provincial
government has done is cut its own
expenses by changing Riverview and
transferring-the problem and the addi-_
tional cost onto the city of Vancouver.

Police constables now have to inspect —
commercial vehicles. This one job alone
takes up the time of three officers. This is
really the responsibility of the highways
authority, not the city police force. It’s
one more responsibility the provincial
government is shoving on our city.

The police have to attend to car acci-
dents. Many of these are caused by faulty
vehicles that shouldn’t even be on the
road. The provincial government showed
a callous disregard for human life when it
abandoned the testing of vehicles. It may
have saved money by closing down the
inspection stations but it increased the
cost of policing and hospital care for
accident victims. Reinstating govern-
ment inspection of motor vehicles would
help to reduce the need for more police.

The provincial government should
also take over the operation of the city’s
jail. That is really the responsibility of the
provincial solicitor-general. Police offic-
ers shouldn’t be doing this kind of work;
they should be out on the street. The
chief of police estimates that if the
solicitor-general’s department would
take over this job, it would release an
additional 42 officers for work on the
street.

Firearms need to be strictly regulated.
In Seattle, where everyone can have a
gun, the risk of anyone being killed by a
gun is five times greater than in Van-
couver. Social laws of this kind protect

‘ the community against violence, cut

down crime and therefore reduce the
need for more police.

Having more police doesn’t solve
everything. Attending to social problems
will greatly reduce both crime and the
need for more police.

Pacific Tribune, November 20, 1989 e 3