Two weeks ago I wrote a post "Monetary stimulus vs financial stability is a false trade-off".
My opening lines in that post were: "There's an idea floating around out there that I fear may be influential. And that idea is horribly wrong. Which makes it dangerous. And I want to try to kill it."
Today, the C.D. Howe Institute publishes a Commentary by Paul Masson "The dangers of an extended period of low interest rates: why the Bank of Canada should start raising them now".
That's the idea I was talking about.
If you are worried about the dangers of an extended period of low interest rates, the worst possible thing the Bank of Canada could do would be to start raising them now. Because if the Bank of Canada tightens monetary policy now, and this causes the economy to slip back into recession and disinflation, that would require an extended period of even lower interest rates in the future.
Now go read my old post. Update: and posts by Mike Konczal and Brad DeLong. Update2: and see how the Bank of Japan's looser monetary policy is raising interest rates on 10 year bonds (finally, now the bond market has woken up to the fact that monetary policy really has loosened).
Update 3: To see pictures of recent Canadian data, which illustrate my point here, see Marcus Nunes' post.
Update4: if you want a mechanical metaphor to help you understand the paradox here: the Bank of Canada is like a man balancing a pole upright in the palm of his hand. If he wants the pole to move north, he must first move his hand south, so the pole begins to lean north, so he can then move his hand north to prevent the pole falling over. Except the pole has expectations.
There's an idea floating around out there that I fear may be influential. And that idea is horribly wrong. Which makes it dangerous. And I want to try to kill it. But macro is hard. And it's not easy to explain clearly and simply.
I can only try. And I can only hope that others who are more influential than me, or can explain things better than me, will do the same.
"Sure, there's a risk that inflation is falling below target, and a risk that recovery will be delayed, and it would be nice if the Bank of Canada (or Sweden or wherever) could loosen monetary policy to prevent this happening. But monetary policy works by lowering interest rates and encouraging people to borrow more and spend more. And that creates a problem for financial stability, because some people are already borrowing too much. So there's a trade-off between monetary stimulus and financial stability, and monetary policy needs to take both objectives into account."
I made up that quote. But I don't think I made up the influential idea it expresses. And it's horribly wrong. It's almost the reverse of the truth.
The latest release on the value of building permits for Canada's CMAs by Statistics Canada provides an interesting perspective on a slowing economy. The numbers show that there has been a downward trend in the total value of permits since late 2012.
The Mowat Centre has issued a new report on Ontario’s fiscal balance within the Federation called "Filling the Gap: Measuring Ontario's Balance within the Federation." The report finds that: “based on the latest available figures, Ontarians transfer approximately $11B on net to the rest of Canada. This transfer is equivalent to 1.9% of the province’s GDP. This can be referred to as the gap between what Ontarians contribute to the federal government and what is returned to the province in the form of transfers and spending. This gap exists despite the fact that Ontario’s fiscal capacity is below the Canadian average.” This report is the latest installment in an effort by Ontario to redress the fiscal balance. That the size of the fiscal gap is almost identical to the current size of Ontario’s deficit is a convenient juxtaposition.
Budgets are political and aspirational documents as they lay out a future course for the economy and government revenues and expenditures much as the government of the day would like them to be. Well, the 2013 federal budget is no exception as a bit of additional study of the budget numbers suggests that balancing the budget by 2015-16 and generating surpluses thereafter is probably wishful thinking.
Statistics Canada has released its most recent report on police personnel and expenditures and notes that police strength measured as officers per capita declined in 2012 by 1 percent. Moreover, there has been a slight decline in police expenditures overall with spending in 2011 totaling 12.9 billion – a decline of 0.7 percent from the previous year. However, spending and officers per capita have generally grown over the last decade and police forces and police spending are higher than they used to be. What is of more interest to me are the numbers at the CMA level and their relationship with crime rates.
What a difference just a few months can make in the world of federal government finance. Apparently, weak commodity prices and a slowing economy are playing such havoc with government finances that Thursday’s federal budget will show a downward revision of economic growth forecasts as well as a shortfall in revenue that will be addressed by extra savings that will come from limiting the growth of federal discretionary spending – direct spending on programs and services as opposed to transfers.
A revised and updated version of this post is on the Globe and Mail website here. Thanks to all of the WCI commentators who helped me get my head around the HDI calculations.
For much of the 1990s, Canada topped the United Nations' Human Development Index (HDI). Newspaper headlines and politicians declared we were the best place in the world to live. This year, Canada slipped again in the HDI rankings, from 10th (tie) to 11th. What has happened? Why aren't we the best place in the world to live any more?
Paul Krugman asks "Why don't we have deflation?" His answer is: downward nominal wage rigidity. And he shows that graph of frequency distribution of nominal wage changes with a big spike at zero.
I don't think that's quite the right question. So I don't think that's quite the right answer. (Even though, sure, that graph is almost certainly telling us something important.)
"Deflation" means falling prices (a negative inflation rate). "Disinflation" means a falling rate of inflation, so prices rise less quickly than they did before. My question is: why don't we have disinflation (until now)?
Well, Ontario has a new finance minister – Charles Sousa – and according to the Toronto Star: “Charles Sousa, the two-term Mississauga South MPP who finished fifth in last month’s leadership race, will succeed the retiring Finance Minister Dwight Duncan at the treasury. An affable former Royal Bank executive, Sousa inherits a $11.9-billion deficit that the minority Liberals hope to eliminate by 2017-18.” As far as inheritances go, I suppose I would prefer to be on the receiving end of a few thousand acres of rolling English countryside and Downton Abby rather than an 11.9 billion dollar deficit. No doubt, the new minister has been briefed on what is coming down the pipeline. The most recent Ontario quarterly finance update provides a lot for him to chew on.
Carleton University admits more male students than females. But it graduates more female students than males. Why? What, if anything, can and should we do about it? (I don't know.)
The public access data is here. (Datacubes is a lovely tool, but it takes a little time learning how to use it.)
You can see there's a difference from the public access data. I can also get access to Carleton internal data. Except I can't seem to access it from home, so what follows comes from memory:
This post is premature. It's too early to say for sure. And I don't have any real answers to explain this (possibly non-) event. I'm trying to fit together a number of things that have been puzzling me.
In my morning newspaper, I came across a hardware store flyer advertising a great new innovation – toilet with pump! Essentially, along with your regular toilet, an additional water storage tank and pump is installed that allows you to store recycled water used from your sink, tub, or shower and then use it when you flush.
The motto that graces our national coat of arms is well known to Canadians but what is less well known is just how succinctly it encapsulates the economic vision of nineteenth Canadian business elites and the Fathers of Confederation, as well as summarizes the subsequent economic development of Canada in the half-century after Confederation.
Andrew Coyne has an excellent piece in the National Post dealing with why there are no good reasons for corporate handouts in the wake of yet another round of assistance to the automobile sector. He asks what the economic rationale for this assistance is – that is, what is the economic value? He argues that what passes for economic arguments in support of corporate assistance and bailouts really are but “pseudo-arguments”. For example, we must subsidize the auto industry because we must be in the automobile business – in essence, the auto industry is special. Or, other countries are assisting their manufacturing sectors with subsidies so we need to do so to compete.
I think my last post was very clear. Inflation targeting failed. I know this post won't be clear. But this post tries to answer the question that my last post begs to be answered. Why did inflation targeting fail?
I used to think that if the Bank of Canada succeeded in keeping inflation on target, there wouldn't be deficient-demand recessions. There might be falls in output and employment due to droughts, earthquakes, plagues of locusts, and other supply shocks, but there wouldn't be falls in output and employment due to deficient aggregate demand. Unless the Bank of Canada's crystal ball failed, so it let inflation fall below the 2% target, which would cause a deficient-demand recession.
I was wrong. The Bank of Canada did keep inflation almost exactly at the 2% target, but there was a deficient demand recession.
If you had told me in 2008 how long the recession would last in many countries, I would have predicted that inflation would have fallen a lot in those countries. It didn't fall a lot. In some countries, like the UK, it didn't fall at all. I would have been wrong.
The Bank of Canada has been very successful in keeping inflation on target. Which is what the Bank of Canada was supposed to do.
But keeping inflation on target has failed to prevent recessions caused by deficient aggregate demand. Which is what keeping inflation on target was supposed to do.
The problem is not the Bank of Canada. The problem is the Bank of Canada's inflation target.