When an economist is no longer an economist

There’s been a number of accomplished economists who entered politics to try to bring more economic rationality to public policy, but inevitably these economists fail to bring economics to politics and instead become pretty standard politicians. Case in point is our current prime minister, who in large measure was elected because of his impressive resume and economics training (Oxford PhD in economics) and how that experience and knowledge was assumed to guide Canada through the troubled waters of the Trump presidency, and particularly Trump’s assault on the longstanding Canada-U.S. relationship. Unfortunately for Canadians, Carney has proven the rule that when economists enter politics, they forget their economics and become politicians.

The most poignant example of politics overtaking economics for Prime Minister Carney relates to his government’s energy policies. Carney and his energy minister have been adamant that increasing costs through mandated carbon capture and a higher industrial carbon tax will make Canada’s energy sector more competitive.

Consider the basic economics of their argument. The price for Canada’s oil is set on international markets and it’s a relatively homogenous product, meaning that you can’t differentiate between Canadian oil and, say, Venezuelan oil in a way that a person could differentiate between other products such as Coke and 7-Up, or McDonald’s and Tim Hortons.

Canadian oil producers and distributers don’t get to set their prices; they’re what economists call price takers. The policies of the Carney government will increase costs to oil producers without changing their prices or their revenues. Consider one estimate—that just the carbon capture requirement for developing and distributing oil will increase costs by between $17 and $23 per barrel in Alberta (at the time of writing, the price of western Canadian select was US$61). A recent study, which examined both the costs of carbon capture and the new higher industrial carbon tax, concluded it would increase the costs of Alberta oil by 19.6 per cent and natural gas by 39.1 per cent, and render Alberta uncompetitive with its U.S. counterparts.

Yet Carney and his energy minister argue relentlessly that higher costs will make Canada more competitive. But how? We’re not price competitive because, again, we’re price takers. We can’t genuinely differentiate our product from other producers, and neither the prime minister nor his energy minister have identified any buyers willing to purchase Canadian oil (or gas) at a premium. And we’re certainly not investment competitive since these increased costs necessarily mean lower returns to investors.

In reality, a “higher cost leads to improved competitiveness” isn’t an argument any credible economist would make. It’s an argument politicians make to obscure the costs of their policies.

And energy policy isn’t an isolated incident. In a 2025 interview, when asked about the implications of the industrial carbon tax more broadly, Carney explained that only large companies pay the tax, and many of the products they produce, individuals don’t consume directly. He specifically asked the interviewer “how much steel are you using these days” to try to argue that average Canadians would not experience higher prices because of the new higher industrial carbon tax. Again, this is a political argument that fails basic economics.

First, higher costs, whether through taxes or regulations, imposed on producers are largely passed on to consumers through higher prices. The consumers may not see the actual industrial carbon tax as a specific cost to them, but they’ll experience higher prices on goods affected by the tax. Second, the idea that consumers don’t use primary products such as steel is again political rhetoric rather than economic reality. Consider your car, appliances, kitchenware, food cans, tools and hardware, to name a few.

And there’s the more recent announcement by Carney and British Columbia Premier David Eby on a bailout of condo developers in B.C. It’s important to acknowledge that the prime minister’s comments don’t seem in line with the official announcement from the federal government or the subsequent clarifications on the condo program. However, his comments, which were prepared in advance, did talk about buying unsold condos from developers who were unable to sell due to potential losses at the same time that borrowing costs are rising.

Someone holding a PhD from Oxford should understand the layers of problems with the announcement. First and foremost, economists worry about incentives and how they influence our decisions to work, save and invest, be entrepreneurial, and take risks such as starting a business. The Carney-Eby announcement essentially indicated that private firms could take risks and if they’re right, they profit, but if they’re wrong, they can go cap-in-hand for bailouts from governments.

The incentives for privatizing profits and socializing losses through governments are terrible. They encourage private firms and even entrepreneurs to take excess risks and approve ill-advised projects because they assume they’ll be bailed out by governments (i.e. taxpayers). In introductory economics, students learn about “moral hazard,” which basically refers to situations wherein one party takes on risks knowing they won’t bear the full costs of failure because another party, usually government, will absorb some of the costs.

(As a side note, there’s interesting work arguing that U.S. Federal Reserve Chair Alan Greenspan’s original 1995 bailout of the Mexico peso set the stage for multiple financial crises because of moral hazard. The argument is basically that players in financial markets increasingly recognized they could take on large risks, and if the risks were deemed systemic, central banks would bail them out.)

Carney knows about moral hazard but chose to ignore it and the costs it will impose on taxpayers, directly through the cost of the bailout but also on the economy more broadly as excessive risks are taken.

There are more examples but suffice it to say Prime Minister Carney is ignoring his economics training in favour of convenient political compromises. At the very least, Canadians should start thinking and treating our new prime minister as a standard politician.