The federal election campaign is now well under way. People who have been following my views will know that I am broadly in favour of the public policy response that Canada (and the Western World) has used to combat COVID-19, but that there have been a number of so-called ‘unintended consequences’ to that response. These consequences include increased income inequality and an “everything bubble”. To me, these are outcomes that, while unfortunate, could not be avoided without destroying the economy. The policies were appropriate. The consequences were essentially unavoidable.
The problem, as many commentators have noted, is that we (through our central banks) have painted ourselves into a corner. Specifically, interest rates cannot go lower than the current de facto 0%. Keeping rates unchanged might cause inflation to persist at rates that are higher than we would like and for longer than we would like. Raising those rates would almost certainly destroy the tenuous recovery we are now seeing. Monetary policy is a reverse beauty contest. The options compete with one another to determine which is least ugly.
It might be surprising to learn of the kerfuffle that was caused last week when the press asked Liberal leader Justin Trudeau to weigh in on the subject. In his reply, he claimed to spend no time thinking about monetary policy. Critics say this shows his ignorance on economic issues in general and on monetary policy, in particular. I have a different perspective. My take is that he was simply being a politician who chose to give an evasive answer to a question that would garner a negative spin no matter what he says if he is clear. This is a shrewd (and altogether predictable) tactic. I also note that the same critics of his response have not pressed Erin O’Toole or Jagmeet Singh to offer their thoughts on the subject. The question is like the schoolyard logic puzzle about how you ’ll die…
In the puzzle, a guy is captured by a tribe in darkest Africa and is told he has contravened a sacred tribal rule. The punishment is death and the only concession they will allow him is in deciding how he will die. If the person’s next statement is true, he will die by drowning. If it is false, he will die by fire. The thought exercise is to devise a question that will save the life of the unwitting traveler. The answer, as you may have divined by reading the title, is that he says: “I will die by fire”. If they drown him, his statement will be false. However, if they burn him, the statement will be true, thus making burning (the punishment for saying something false) impossible. Either way, the rules of the game that the tribe had devised would be breached, so the traveler is grudgingly freed.
In essence, Justin Trudeau’s “I don’t spend my time thinking about monetary policy” response was the political equivalent of “I will die by fire”. My take is that Trudeau elected to look a bit naive to avoid being painted into a corner with no escape. There is no ‘right answer’ to the question. It should have been saved for the leader’s debates and then put to all the leaders at once. I’m not suggesting the question was unfair, but it certainly was a trap. The only unfairness was that it was put to one party leader and not all of them. To the extent that the answer is relevant, we should expect to hear from all of them. Indeed, if Trudeau was so unclear and there were political points to be scored, why haven’t the other leaders proactively offered their views on the subject since?