There was a time when Justin Trudeau’s Liberals swore by the advice of Lawrence Summers.
The former U.S. treasury secretary under Bill Clinton and top White House economic adviser under Barack Obama was the keynote speaker at the 2014 Liberal convention, where he was interviewed by his “friend” Chrystia Freeland about his ideas on how to reduce economic inequality. He provided the intellectual blessing for the 2015 Liberal campaign pledge to run “modest” deficits and increase infrastructure spending.
Since she became Finance Minister, however, Ms. Freeland no longer appears to be taking advice from Mr. Summers. That may be because, from his perch at Harvard University, Mr. Summers has become a fierce critic of the fiscal and monetary policies pursued by President Joe Biden and the U.S. Federal Reserve. He has accused the Fed of feeding a “dangerous complacency” in financial markets by playing down the risks of runaway inflation. Those risks, he warns, are being exacerbated by the massive government spending directed at boosting short-term consumption.
“The primary [economic] risks today involve overheating, asset price inflation and subsequent financial excessive leverage and subsequent financial instability,” Mr. Summers warned this month. “Not a downturn in the economy, excessive unemployment and excessive sluggishness.”
Mr. Summers thinks the Fed needs to signal an end to the unprecedented monetary stimulus that has sent stock and real estate markets into the stratosphere. Instead, central bankers promise to keep filling the punch bowl until unemployment declines to prepandemic levels. Investors, taking their cues from the Fed, party on.
In this country, the Liberal government and Bank of Canada have been using the same economic-policy template as the Biden administration and the Fed. With fiscal stimulus and extensive government bond buying by the central bank, the Canadian economy is facing the same inflation risks as the U.S. Yet, the Bank of Canada keeps insisting there is still too much slack in the economy to turn off the taps.
Central bankers are smarter than the rest of us. They deserve a large degree of deference from those on sidelines. Still, history shows they are not infallible and that, when they err, everyone suffers. The poor pay the heaviest price of all. Inflation erodes their already limited purchasing power and the restrictive monetary policies required to tame runaway prices inevitably lead to recession and high unemployment.
It is hard not to look at recent indicators without wondering whether large parts of the economy are out of whack. Lumber has become a scarce luxury and used cars are fetching premium prices. The Bank of Canada last week unveiled a new House Price Exuberance Indicator – a name so absurd it sounds like something out of a Monty Python sketch – to measure real estate frothiness.
Yet, central bankers still think unemployment is a bigger risk to the economy than asset price bubbles?
“We won’t fully heal the economy until we address these unequal impacts” of the pandemic on low-income workers, women, racialized Canadians, new immigrants and youth, Bank of Canada Governor Tiff Macklem said in a recent speech. “And rather than just trying to recover to where we were before the pandemic, maybe we can bring the economy to a better place for everyone.”
Well, that sounds like a laudable goal. The problem is, as Mr. Macklem himself conceded in his speech, “monetary policy is a broad macroeconomic instrument that can’t target specific groups.” So, suggesting the central bank’s current expansionary policies are geared toward undoing the unequal impacts of the pandemic stretches credulity. Such statements appear aimed, rather, at providing cover from criticism that the bank’s policies keep making the rich richer.
There was a time when central bankers readily admitted that the buying up of government bonds – a practice known as quantitative easing, or QE, in their jargon – was aimed at making the rich at least feel richer by fuelling a stock market boom the policy makers hoped would eventually lift all boats. “Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion,” former Fed chairman Ben Bernanke wrote in 2010 after the U.S. central bank resorted to QE in the wake of the 2008-09 financial crisis.
Critics warned then that QE risked stoking inflationary pressures. They proved to be wrong about that, which has made it easier for central banks to dismiss similar warnings now. The difference is that government spending in the U.S. and Canada has gone through the roof in the past year, and pent-up demand created during the pandemic is creating shortages of a host of everyday goods and services.
Now, more than ever, the Liberals might do well to listen to Mr. Summers.
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Konrad Yakabuski