If They Only Knew

Bank of Canada governor Tiff Macklem is getting a lot of advice from Canada's opposition leaders. Andrew Coyne writes:

As he steers inflation back to Earth – the three-month annualized rate was 4.3 per cent in October, a third of its spring peak – Bank of Canada governor Tiff Macklem must surely take comfort in the knowledge that, should he need any advice on how to proceed, he need not rely only on the bank’s world-leading roster of economists, but can tap the deep wellspring of expertise on the opposition benches.

Just now they are sending somewhat conflicting signals. Where Conservative Leader Pierre Poilievre holds the governor to blame for inflation having reached such levels, NDP Leader Jagmeet Singh is equally concerned that he might do something to reduce it. For where Mr. Poilievre believes current inflation levels are solely and entirely a function of bank policy, Mr. Singh believes it is caused by everything but: corporate greed, profiteering, price-gouging.

Their prescriptions, likewise, are diametrically opposed. Besides firing the governor – he seems no longer to be advocating the wholesale adoption of bitcoin as a way of “opting out of inflation” – Mr. Poilievre has lately suggested he would alter the bank’s mandate to require it to keep inflation at 2 per cent, as is currently the target, but “with an eye not just to CPI inflation, but asset price inflation.”

For his part, Mr. Singh complains of the bank’s “one-size-fits-all” approach, which is to say its use of the instruments of monetary policy, such as interest rates, to control inflation, rather than addressing the “root causes” of price increases: along with greed, they include supply chain bottlenecks and the war in Ukraine, issues that are not widely considered to be within the bank’s ability to control.

The analyses of both men are simplistic:

Mr. Poilievre subscribes to a cartoonish version of monetarism in which any large increase in the money supply automatically translates into higher inflation. This is not actually what either theory predicts or real-world evidence confirms. The long-run correlation between money growth and inflation holds, but in the short run all sorts of other factors can intervene.

Mr. Singh’s objection, and that of his allies in the labour movement, that the bank ought to be less focused on inflation and more on fighting unemployment (the president of the Unifor union went so far as to accuse the governor of waging a “class war” against workers) is based on the belief that there is some tradeoff between the two.

In the short run, that may be true: Indeed, the governor has been frank that unemployment, currently at a 40-year low, will have to rise somewhat if inflation is to be tamed. That’s simply a recognition of reality: Wages make up 70 per cent of the final prices of things. So long as wages are rising at 5 per cent, good luck holding prices to two.

But in the long run, there is no tradeoff, as we learned in the 1970s. To hold unemployment to some arbitrarily fixed level requires not just higher inflation, but accelerating inflation. That’s not sustainable.

If only Mr. Poilievre and Mr. Singh really knew something about economics.

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