In his loud and frequent criticism of the Bank of Canada, Pierre Poilievre has been getting a lot of mileage out of how the central bank started the COVID-19 crisis thinking deflation, not inflation, would be the country’s big worry. The Conservative Party leadership candidate recently called the bank’s brain trust “financially illiterate” for getting the inflation call so badly wrong.
His harsh charge received an even harsher dismissal from former Bank of Canada governor David Dodge in a nationally televised interview on Sunday.
“That’s bullshit, to be blunt,” Mr. Dodge told Evan Solomon on the CTV public affairs show Question Period.
Blunt, but true.
Mr. Poilievre’s repeated public disparagement of the Bank of Canada’s deflation worries represents a fundamental misunderstanding, or misrepresentation, of what the bank was actually talking about two years ago.
The bank’s concern about deflation risk wasn’t a horrendous mistake that set off today’s inflation problem. Rather, it informed policies that shielded the economy from a much worse fate, and enabled a remarkable recovery from one of the most severe and unpredictable economic shocks in history.
“Why would anyone think that the Bank of Canada’s worrying about deflation in the early days of the pandemic was a mistake?” Laval University economist Stephen Gordon said in a tweet this week.
Mr. Poilievre is certainly not the only critic who believes the Bank of Canada has stumbled in managing inflation threats during the pandemic. He’s capturing, and fanning, a mood of frustration about the country’s inflation woes and a desire to assign blame. The central bank, which is tasked with maintaining low and stable inflation, is the obvious target.
For some of the armchair economic sleuths populating social media, the bank’s public warnings in 2020 about the risk of deflation is the smoking gun. It’s the original sin in a string of mistakes on inflation that the bank has been making throughout the pandemic. It’s proof that the bank has been turned 180 degrees in the wrong direction.
But the entire premise is flawed. Contrary to what Mr. Poilievre has repeatedly claimed, the Bank of Canada never “predicted” or “promised” deflation.
When it talked about deflation at the onset of the pandemic, it was candidly warning about what was one of the most serious threats that the economy faced at the time. With public-health shutdowns grinding economic activity to a halt, with unemployment soaring, with businesses facing near-total revenue losses – indeed, with the inflation rate actually turning negative on a year-over-year basis for two months in the spring of 2020 – deflation looked like a very real danger, unless governments and central banks took strong measures to prevent it.
Sustained deflation is a notorious economy killer, associated with sending recessions into prolonged depressions. While the likelihood of a deflationary tailspin was hard to measure in the profound uncertainty of the spring of 2020, the Bank of Canada knew that among the risks it faced, this one absolutely took priority. It wasn’t predicting deflation, it was making the case for leaning monetary policy heavily against that deflationary risk, to make sure the country averted a major economic disaster.
It’s always more difficult to trace the cause-and-effect for things that didn’t happen than for things that did. But the fact that the economy didn’t sink into a deflationary depression, but rather rebounded much faster and healthier than anyone imagined from the massive pandemic downturn, suggests that the Bank of Canada’s actions were sound.
Whether those actions ultimately contributed the acceleration of the inflation we see today – whether they provided too much economic stimulus for too long – is an entirely different discussion. But it’s flat-out false to suggest that inflation is where it is today because the Bank of Canada believed that the economy would be mired in deflation by now, and sent its policy in the wrong direction. It believed and said nothing of the sort – and it made damned sure it wouldn’t happen.
Mr. Poilievre responded to Mr. Dodge’s salty comment with a statement on Twitter blaming the Bank of Canada’s policies, together with the huge deficits the federal government racked up in the pandemic (financed, Mr. Poilievre argues, with the central bank’s “money printing”), for the plight of Canadians who have been hurt by inflation.
“David Dodge says he’s offended. Good. You know who else is offended? The single mom who can’t afford food, the worker who can’t afford to fill his gas tank and the 32-year-old living in his mom’s basement because the government inflated the cost of living to generational highs,” Mr. Poilievre said.
But if the Bank of Canada had ignored the deflationary risks that Mr. Poilievre mocks, the depression that may well have ensued would have resulted in many, many more single moms struggling to make ends meet; many more unemployed workers with empty gas tanks; many more young adults who couldn’t find jobs to pay rent. Today’s high inflation also comes with plentiful jobs, rising wages and the lowest unemployment levels in 50 years.
“Warning about something bad that might happen, taking steps to make sure that the bad thing didn’t happen and then the bad thing not happening is a success story. It’s the opposite of a failure,” Dr. Gordon said.
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