John Robson: Bank of Canada Should Worry About Inflation, Not Economic Planning

The Bank of Canada building in Ottawa in a file photo. (The Canadian Press/Sean Kilpatrick)

Commentary

We are saved. Forget people shooting up Jewish schools and the feds shelling out some $50 billion annually on debt exceeding $1.2 trillion. The Bank of Canada will make a rate announcement on June 5. Having read the tea leaves, split the shoulder blades, and perused the thesaurus for “vague yet reassuring,” they will fine-tune the economy as always.

Alas, as a mere historian, I only know what havoc dumb mistakes wreaked in the past. I have no Ouija board to spell out “Bank of Canada could tilt to July rate cut to benefit from flood of data,” as Reuters put it on May 22.

Of course, part of the bank’s job is to keep everyone guessing to avoid debilitating economic uncertainty or, worse, sudden debilitating certainty that they’re flying blind. So Global reported in April that “The Bank of Canada held its benchmark interest rate steady on Wednesday amid signs that inflation is easing, with officials acknowledging that a rate cut in June is ‘within the realm of possibilities.’”

Really? They can do it? And might, unless they don’t? No wonder the acolytes rushed to reassure us all was tilting well within the realm of vacuity.

Outside the séance, the trouble with central banks is they think they run the economy. Long ago, their job was to keep the currency sound, which was boring and caused conflict with politicians who kept proposing silly policies that would detonate it. But it had one remarkable virtue: it was possible.

Then came John Maynard Keynes, who chucked neoclassical economics out the window along with the presumption that non-intellectuals were rational, and proclaimed a trade-off between inflation and unemployment. So instead of fighting inflation as another independent dopey way governments could ruin things, central bankers started thinking that in hard times, including for politicians facing re-election, they should turn inflation up slightly, and once everyone had a job, nudge it down again.

The prestige. The excitement. Plus, “fine-tuning” the economy to give everybody everything let bankers work with politicians, not fight them, as bureaucrats with Ph.D.s and elected officials with handout-hungry constituents were also meant to run deficits in slumps and then surpluses in booms. Sorry if you laughed coffee out your nose, but it was the plan. Free cash for life. Wheeeee!

The downside is it didn’t work. As soon as it was seriously attempted, in the United States in the mid-1960s with Canada independently following suit soon after, it turned out there was no “Phillips Curve” along which inflation and unemployment slid in inverse tandem. Instead, we quickly got “stagflation,” and the Gods of the Copybook headings quoted Friedrich Hayek’s “to aim at the maximum of employment which can be achieved in the short run by means of monetary policy is essentially the policy of the desperado.”

Never mind. The smart set had laughed Milton Friedman to scorn in 1963 for “Inflation is always and everywhere a monetary phenomenon,” and naturally if the facts don’t fit the theory, “evidence-based decision-making” types chuck the evidence.

So to this day, when the gnomes of Wellington Street exude a press release to obscure their intentions, they murmur augustly, “economic growth stalled in the second half of last year and the economy moved into excess supply,” as though supply and demand were independent static aggregate variables, not forces dynamically determining market-clearing prices for specific goods and services.

Then, making the Delphic Oracle seem brutally frank, Bank of Canada Gov. Richard Tiffany “Tiff” Macklem burbled “We are getting closer” to cutting interest rates. As the CBC explained, “Economic growth has stalled, there’s an excess supply of goods, wage increases have stabilized and the labour market has cooled ‘from very overheated levels,’ which has helped to bring down prices, Macklem said.”

No crude printing-press prattle. Inflation results from “excess” growth, not excess money creation. The economy “overheated” and boffins must “cool” it down. A.k.a. you lose your job, but they don’t despite not seeing inflation coming.

When Social Credit mistook money for wealth, it was ignorant and vulgar. But when Keynesianism did, it was so wise and sophisticated that when it died, the magicians summoned its shade as Modern Monetary Theory, the coolest thing ever.

Remember “Interest rates are at historic lows, Glen,” uttered by Prime Minister Trudeau in June 2020? But Trudeau didn’t lock in a bunch of his irresponsible borrowing at those rates because everyone thought the Bank of Canada could spew wealth. And if at first you don’t succeed … they’re still waiting for it finally to convert its dreary counting house into a glorious cornucopia.

Instead, it should announce on June 5 that it’s cutting rates slightly to see what happens. If inflation holds steady, so will rates. If it gets worse, they’ll rise. If it slacks off, they’ll fall. Don’t talk to us about GDP. We only do price stability, through empirical improvisation.

Booooring. Unglamorous. But practical, vital, and long overdue.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.