Carbon tax the last straw?

  

My first economics course was magical. We learned how supply equals demand, how prices are set, and the concept of perfect competition. 

It was the simplest version of the theoretical world ever, and with youthful naivete, I gobbled it all up. Then came second-year environmental economics... No longer were the graphs so simple. There’s more to just supply and demand, as it turns out – pollution is involved! And the price of pollution depends on how much we, the public, care in dollars and cents. The current carbon tax debate is a real-world example of this dilemma. 

I considered taking third-year economics courses, but then decided to quit before the mathematical complexities overwhelmed me. I guess I prefer the simple graphs and explanations about how our economy works. And maybe, given economists’ poor track record as of late, the complex formulas don’t always serve them so well. 

Granted, the pandemic threw a wrench into things. Economists are good at assessing small societal changes but they’re not as prepared for full-blown global disruptions. Most didn’t foresee the stock market’s rise despite the momentary economic meltdown, nor did they foresee the inflationary pressures that followed. They didn’t expect interest rates to increase to where they are today.  

Perhaps even more troubling is that they fail to understand how devastating this new economic reality is for the average person. 

What I keep hearing from economists is that inflation isn’t as impactful as we think it is. Why? Because wages are increasing faster (in Canada, four percent a year!) With such good news, government leaders and economists alike are baffled as to why people aren’t happier in this economic climate. Even if we did experience a 12% increase in our salaries since the pandemic (that would have been great), groceries alone have increased 22% over that same time period!

But grocery prices are only a small part of it. Higher interest rates have caused financing costs for major purchases like cars and houses to skyrocket. This is a result of central banks increasing interest rates, which interestingly, much of the public thinks is intended to make things more expensive. 

My economics 100 class taught that central banks increase interest rates to bring prices down, not up. What we didn’t discuss is the collateral damage. By hiking interest rates, central banks hurt the economy in the short term (higher borrowing costs) for its long-term benefit (lower inflation). 

The problem is debt levels among Canadians are already dangerously high. When people in their 30s have only known interest rates of two to three percent, it can be devastating to suddenly have to pay six percent on a mortgage. The average price of an average home in Canada is expected to rise another five percent this year to $843,000 – I'd hate to know the monthly mortgage payment. In Canada, the average new vehicle loan payment in 2023 was about $900 a month. That’s what my mortgage was five years ago! (Yes, I’m an entitled Gen Xer – just a little less entitled than the Baby Boomers!)  

This is why the federal government should probably reconsider increasing the carbon tax this April. While I understand the economic rationale behind a carbon tax with a rebate (I can see the little graph in my head), it doesn’t make sense to the ordinary citizen. They see higher gas prices every day, particularly compared to our southern neighbour who doesn’t have a carbon tax or a GST. They also forget about the money that gets deposited in their bank account every few months (unless you live in BC, where it’s even worse because you likely get nothing!) 

In an inflationary environment that’s just beginning to cool, a 23% increase in the carbon tax this April is going to add one more straw to the proverbial camel's overburdened back. While relatively small, it could have unintended consequences for an economy that's beginning to falter. The economy is as psychological as it is about real dollars, something I also never learned in my economics class (what did I learn??)

Economists and governments of all stripes need to get a handle on that.