It’s the central bank’s duty to “put money to work.”
Here’s The Economist on Canada’s slowdown:
In 2010 and 2011 Canada’s GDP grew by an average of 2.8% a year, more than America’s and than the economies of other rich commodity-dependent countries like Australia, New Zealand and Norway. The OECD now predicts it will grow by 1.9% in 2012, the same as New Zealand and less than the other three countries.
This slowdown is partly owing to lower prices for Canada’s resource exports, weak demand for its goods from Europe and a strong currency. But home-grown factors have also played a part.
First, the government launched a stimulus programme in 2009 to prop up the economy. In 2010-12 its deficit averaged 5.1% of GDP. It is now retrenching. Stephen Harper, the prime minister, has promised to close the gap by 2015 via spending cuts alone. Total public expenditure in 2012 is forecast to be 5% below its 2009 peak.
Meanwhile, consumer spending has been spurred by a housing boom that is often compared to America’s pre-crisis bubble. The central bank has kept its benchmark interest rate at 1% for two years, encouraging Canadians to pile up debt, particularly in mortgages. In Toronto house prices have risen by 8.3% in the past year. Mark Carney, the bank’s governor, has issued repeated warnings about these growing liabilities. Consumers’ ability to borrow and spend may be nearing its limit.
That leaves businesses as the last potential source of continued growth. Unfortunately, their penchant for accumulating rainy-day funds was only reinforced by the tumult of the recession. Their cash hoards now amount to 30% of GDP, three times the historical average. They have not stopped investing altogether””private-sector non-residential investment has almost recovered after falling by 21% in 2009″”but they are not spending nearly enough to compensate for declining consumption and government outlays.
Moreover, Canadian private investment is divided evenly between machinery and equipment, which boost productivity sharply, and structures that store and transport goods, which have less of an impact. In the United States structures account for a far smaller share. This discrepancy may simply be a result of Canada’s dependence on natural resources such as oil, which requires pipelines. But it means that the country’s investments yield fewer gains in productivity than those south of the border do.
The government is doing its best to talk firms into investing. Mr Carney has demanded they start spending their “dead money”, which earns little interest thanks to his low rates. “Their job is to put money to work,” he said recently, “and if they can’t think of what to do with it they should give it back to their shareholders.” Jim Flaherty, the finance minister, sounded almost plaintive when he reminded a group of executives last month that the government had reduced tax rates, cut red tape and increased tax incentives to encourage them to invest. “Ultimately, it is up to you in the private sector to take advantage of all of these strengths and to invest, to create jobs and to grow our economy,” he said. (Emphasis added.)
Mr. Carney is wrong. It’s the central bank’s job to put money to work, i.e. to control total spending (M*V). Once the central bank provides the optimal amount of NGDP, the labor market will return to equilibrium and Say’s Law will apply. Countries are never actually held back by the public’s ability to borrow and spend, but rather by the public’s ability to work and produce. A country may be temporarily held back by the public’s desire to spend, but that’s a failure of monetary policy, not the public. The central bank determines the total level of spending. No society can ever run out of the ability to manufacture more spending, unless the central bank runs out of paper and ink. Michael Holden gets it exactly right:
For now, however, their entreaties seem to be falling on deaf ears. Michael Holden, an economist at the Canada West Foundation, a think-tank, says that urging firms to move faster was like “people who honk at the car in front of them in a traffic jam”.
If everyone agrees to move their car forward at the exact same moment, a traffic jam might clear out. And if all members of the private sector decided to boost V at exactly the same moment, they might be able to “manufacture NGDP.” But of course they’d have no incentive to do so, which is why it’s the monetary authority’s job to control NGDP (and it’s the road authority’s job to institute the optimal congestion pricing charge.) Stable NGDP growth is a public good.
And this made me smile:
Officials could also push education reform to encourage schools to train bolder executives, though that has not been a priority so far. Bill Currie of Deloitte, a consultancy, says Canada could produce managers more comfortable with risk by making university courses for businesses and engineers broader and more creative, and by teaching more economics in secondary school. But Mr Carney and Mr Flaherty will be long gone by the time such projects bear fruit. Just now the bully pulpit is all they have got.
Surely this is one area where Canada lags far behind the US. Our risk-loving CEOs have generated three massive banking crises in the past 100 years, while the wimpy Canadians haven’t managed a single crisis. Maybe if the best Canadian students were sent down to the Harvard Business School they’d learn to generate some “velocity.”
PS. I didn’t see the debates, but noticed this:
There have been two debates and no mention of the Federal Reserve? How is that possible?
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12. October 2012 at 07:26
Nah, it’s in the Canadians’ genes. They’re the ones who stuck with The Crown. Americans were rebels.
12. October 2012 at 09:16
[…] Scott Sumner says: The central bank determines the total level of spending. No society can ever run out of the […]
12. October 2012 at 10:15
Scott
Maybe the Eccles Building is surrounded by one of those magnetic fields that we used to see in Sci movies!
12. October 2012 at 10:45
Ryan Avent has an important new post on Jeremy Stein’s speech at Brookings: http://www.economist.com/blogs/freeexchange/2012/10/monetary-policy-3
And in other news, the Economist advocates raising taxes on capital: http://www.economist.com/node/21564556?spc=scode&spv=xm&ah=9d7f7ab945510a56fa6d37c30b6f1709
Also, there is this: http://www.economist.com/blogs/freeexchange/2012/10/polling-experts-3
& see the others in the series as well. My favorite part was this: “Romney might appoint John Taylor, which would be catastrophic”
12. October 2012 at 11:15
Mr. Carney is wrong. It’s the central bank’s job to put money to work, i.e. to control total spending (M*V). Once the central bank provides the optimal amount of NGDP, the labor market will return to equilibrium and Say’s Law will apply. Countries are never actually held back by the public’s ability to borrow and spend, but rather by the public’s ability to work and produce. A country may be temporarily held back by the public’s desire to spend, but that’s a failure of monetary policy, not the public. The central bank determines the total level of spending. No society can ever run out of the ability to manufacture more spending, unless the central bank runs out of paper and ink.
It is not the Bank of Canada’s responsibility to determine the total level of Canadian spending. Their official policy is that of price inflation targeting.
Why is NGDP being analyzed as if it if the official policy of central banks?
It would be like saying, in an NGDP targeting world, that whenever unemployment rises, that “It’s the central bank’s responsibility to ensure unemployment doesn’t rise. The central bank determines the total level of employment. They will never run out of paper and ink to pay laborers to dig holes in the ground. Market monetarists are wrong to say it’s not the central bank’s job to worry about total employment.”
If everyone agrees to move their car forward at the exact same moment, a traffic jam might clear out. And if all members of the private sector decided to boost V at exactly the same moment, they might be able to “manufacture NGDP.” But of course they’d have no incentive to do so, which is why it’s the monetary authority’s job to control NGDP (and it’s the road authority’s job to institute the optimal congestion pricing charge.) Stable NGDP growth is a public good.
Stable food growth is a public good, therefore should the production of food be anything less than X% growth per year, food production should be monopolized by the state.
Stable potable water growth is a public good, therefore should the production of potable water be anything less than X% growth per year, potable water production should be monopolized by the state.
Stable shelter and clothing and medicine growth are public goods, therefore should the production of these goods be anything less than X% growth per year, the production of these goods should be monopolized by the state.
Or, there is no such thing as a “public good”, and if individuals do not have any desire for good X, then good X should not be forced on anyone via coercive central planning of some banking cartel.
The very fact that nobody in the market has any incentive to ensure NGDP is X% growth per year, such that only initiating coercion and violence against innocent people would get them to behave in a way that results in X% NGDP growth, should have been a clue to market monetarists that they are wrong, that they have to reconsider, re-evaluate, and RETREAT from their aggressive agenda.
“Public goods” is an ideology that arises from the fact that some people are necessarily harmed in the process of imposing it, and so when faced with people who are benefited and people who are harmed, every individual gets lumped into some organic blob, and the claim is that there is an “overall” benefit, and we are to ignore the victims and pretend they don’t exist. You know, being “pragmatic.”
12. October 2012 at 12:00
Major Freedom,
One point I’d make is that inflation in Canada is much less responsive to central bank policy than people like to think. Since Crow dropped the hammer, the public ‘knows’ that inflation will be 2%. I think the Bank could purse much more stimulative policy, particularly in light of current government retrenchment, and inflation expectations wouldn’t waver much from 2%.
12. October 2012 at 12:42
There seem to be communities large and small which have zero incentive to clear the traffic jam. I used to think primarily of Internet Austrians and recalcitrant bankers, but there are plenty of “growth nimbys” as well in the female population, who do not always like the idea of newcomers if it upsets the local applecart in any way. While I’ve recently observed a small town block a much needed RV park (to house workers for local refinery upgrades), Yglesias provides a great example with this oh-so-apt headline today “What Good Is A Sustainable City if Nobody Gets to Live There?” Looks like we may have to build new cities instead of clearing traffic jams. Cities for open growth and open minds!
12. October 2012 at 12:46
“There have been two debates and no mention of the Federal Reserve? How is that possible?”
That made me smile. In political terms, one may as well be talking about quantum mechanics. This is not to say the public is stupid—-rather that monetary policy is very difficult—read your own comment section (myself included of course). And we actually read your stuff and care about the issues.
Its a path no one wants to go down. Candidates have no feel at all—plus there is nothing they can do about the Fed anyway until the next 6 year cycle begins—at which point they also can do nothing but pick a guy. So why go there?
Unless the Fed can be directly and obviously implicated in some direct political and comprehensible negative action(NGDP failure and QE3 does not cut it) candidates should be as vanilla as possible. Personally, I would advise them to only speak in tautologies!
When candidates wade into that end of the pool, they end up looking like they do not know what they are talking about—and even risk looking like conspiracy nuts.
I am not saying this is as it ought to be. But attacking the Fed or complimenting the Fed is like kicking (or petting) your neighbors dog. You either look strange and angry or you get bit.
12. October 2012 at 13:01
One more thing. Politicians can use the Fed as a prop. For example—“the Fed announcing QE3 proves Obama’s policies have not worked”.
12. October 2012 at 13:35
Mark:
I think I see your point, but I will say that without the Bank of Canada actually making good on monetary inflation, then even if people expected 2% consumer price inflation, they won’t be able to get it. By the same token, if the Bank of Canada drastically raises monetary inflation, then even if consumer price inflation expectations remains at 2%, they also won’t be able to get it.
Expectations are subsidiary to reality, not the other way around.
Maybe what you say is true in the very short run.
12. October 2012 at 14:45
Scott: Perhaps we get better NGDP next year as confidence (highest level since the recovery began reported Friday!) lifts V and the Fed assists with a bump in M (QE3): http://research.stlouisfed.org/fredgraph.png?g=bL4
Thoughts?
12. October 2012 at 16:01
“There have been two debates and no mention of the Federal Reserve?”
I could not stomach the first debate for more than a minute and didn’t watch any of the VP debate for this reason. When the two candidates argue over the economy, they are basically arguing whether the Black Plague was caused by witchcraft or the Jews. Neither side has any evidence to support their version of what caused the recession, but they argue points of view without any evidence because the voters don’t know better.
12. October 2012 at 16:10
More stupidity: the Swiss exchange rate floor and current-account surplus are partly responsible for Euro Zone unemployment:
http://voxeu.org/article/overlooked-currency-war-europe
It says a lot that Felix Salmon linked to this approvingly. In fact, Switzerland has been in deflation for much of the past three years.
http://www.tradingeconomics.com/switzerland/inflation-cpi
If people focused on the exchange rate that matter, the exchange rate of currencies vs. basket of goods, it would put these “currency wars” in a whole new light. The global unemployment crisis is due to a global deflation crisis and all first-world currencies need to inflate to previous inflation trends.
12. October 2012 at 16:44
“When the two candidates argue over the economy, they are basically arguing whether the Black Plague was caused by witchcraft or the Jews.”
Brilliant!
But then again, removing all of the fleas (or rats) in the city was beyond the abiblity of a 15th century man of influence to influence. But, scapegoating the Jews or starting a witch hunt, that he could do! So, maybe he was smart to steer the debate to witches. And, maybe the Republicans are smart to steer the debate to taxes!
12. October 2012 at 18:14
Saturos, The Avent post is worth a post. The capital taxation argument is moronic. Anyone who talks about a “gap” between wage taxes and capital taxes doesn’t understand that any tax on capital is already double taxation of wages.
Tommy, I hope you are right, but I’d expect just so so growth next year.
Matt. Good find. And good line about the debates.
13. October 2012 at 12:07
I’m way more cynical than Matt. I don’t think either side is trying to trick voters into what caused the recession. I think both sides completely and SINCERELY misunderstand what caused the recession. I pity my republic.