Saturday, August 27, 2005

Bank of Corporate Canada

Of all the responses to the recent news of higher corporate profits, I don't recall anybody suggesting that we should try to cut down on economic activity in order to prevent them. But it's a different story when wages and tax receipts increase:
Wage growth by this measure is now running at an eight-year high of 3.4% on a year-over-year basis, up from 1.3% just four months ago -- an "unprecedented acceleration in the 15-year history of this series," Mr. Wolf said.

The rise is highly bullish for the Canadian consumer going forward, providing important offsets to higher energy prices and relief for heavily indebted consumers, Mr. Wolf said.

"But they will be treated with great concern by the Bank of Canada, whose greatest fear has arguably been that the tight labour market -- reflected in the 30-year low in the unemployment rate -- would push up wages and threaten durably higher inflation," he said. "Those fears appear to be rapidly materializing."...

Bank of Canada staff may not be the only ones sweating over the data. The higher numbers, taken directly from payroll receipts, mean the federal government will have pulled in another heavy personal tax load in June, despite protestations the surplus is not surging by the minute.

What we have here is the ultimate rebuttal to the "rising tide lifts all boats" claim that underlies most tax-cutting philosophies. Even if that were otherwise true (which is itself far from clear), the financial system is now set up to make sure that the expected cause and effect can't happen. When the rising tide actually arrives, the Bank of Canada is there to drain the reservoir just as the benefits were about to be felt society-wide.

For those riding the initial wave, it's a great system: the ultimate effect is to promote top-end gains while ensuring that most Canadians don't keep up. For everybody else, though, the main effect is to hurt the relative purchasing power of non-wealthy Canadians compared to wealthy ones.

All the more reason why most people should want and expect a calmer sea in the first place. After all, much fewer people get thrown overboard that way.

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