We are exiting one of the most extreme economic crises of our lifetime, leaving central banks to strike a difficult balance between price control and a strong, sustained recovery.

This debate will be front and centre in the policy world for the foreseeable future. It will no doubt have major implications for public policy, including the role of central banks and the norms and expectations that we place on their objectives and actions.

The great financial crisis of 2008 had already put central bankers in the spotlight, but COVID-19 is an event of unparalleled economic magnitude. In the United States and Canada, both federal governments have pumped no less than 20 percent of their respective GDP into the economy since the beginning of the crisis.

But extraordinary policy actions haven’t been limited to fiscal policy. In a bold move last August, the Federal Reserve announced it would implement a new inflation framework. Calling full employment “a broad-based and inclusive goal,” the new policy statement pledges that the U.S. central bank will make policy decisions based on “shortfalls” from full employment.”

In doing so, it’s effectively putting more weight on bolstering the labour market and signalling it’s willing to tolerate higher inflation for longer than it normally would. It doesn’t mean of course it will be tolerating higher than 2 percent inflation permanently, however. The Bank of Canada has adopted a similar approach. But unlike the Fed, the Bank of Canada has since signalled it would start tapering some bond purchases on secondary markets. It has done so twice now.

When and how central banks will start winding down this unprecedented accommodative monetary support has become a central question. It comes with huge implications for fiscal policy but more importantly for consumers (think mortgages and prices) and taxpayers (think deficit financing).

The current assumption from the Fed’s new framework is that rates would not be raised until 2024. This looks like an eternity considering the current pace of the recovery. If there was a need to scale down monetary support sooner, these adjustments could cause potential damage to financial stability and trigger some unexpected damage to the economy. As others have noted, this new monetary framework is not without risk.

Just consider the volatility that could ensue in financial markets. “Anchored expectations” are always paramount in controlling inflation. Treasury Secretary (and former Fed chair) Janet Yellen has downplayed these risks on a consistent basis. So far, the markets have not budged either, although the Fed has had to clarify its intentions more than once in the last few months.

Measuring inflation post-COVID is already bound to be controversial. Surging input prices, spreading labour shortages, extremely loose fiscal policies, pervasive inventory shortfalls, and most importantly an outcome-based monetary policy (versus a forecast-based one) are creating real apprehensions on whether current inflation is in fact “transitory”, which it may well be. Secular stagnation has been with us for some time after all.

Modern economic analysis has come to rely (excessively in my view) on models. Models are only as good as their underlying assumptions. In a time like the one we are living through, one has to sympathize with the fact that policymakers are flying a bit blind.

The estimates that they’re relying on are highly complex and depend on a series of assumptions. In particular, they involve identifying a point in the past when the economy was at full capacity utilization and employment, along with an underlying trend growth rate, and then projecting output, employment and prices forward. As John Kemp recently observed: “Estimating the amount of cyclical slack in the economy as a result of the epidemic, lockdowns, trade wars and the general business cycle downturn, is more of an art than a science.”

Many other questions remain:

1. Output gap in a new labour market: last quarter, U.S GDP was back at pre-pandemic level ($19 trillion) but with 8.5 million fewer people in the labour force. This would mean considerable gains in labour productivity, or higher output per worker, during the pandemic. This could also imply a more permanent structural disruption of the labour market mainly due to technological adoption (accelerated by COVID). Given the new emphasis on linking monetary policy to labour market outcomes, this is an issue to watch closely.

2. Household savings: CIBC Economist Royce Mendes has recently observed household savings are somewhat of a wild card in the recovery. Household savings have risen across the country. In March, the Bank of Canada estimated that it amounted to $180 billion but it probably stands closer to a quarter of a trillion dollars now. What Canadians will decide to do with these savings will have an impact on the recovery and the conduct of monetary policy. It could lead to a more robust and faster surge of demand than some forecasts suggest.

3. Central banks tolerance to overshooting the inflation target: we know central banks have the tools to rein in inflation. What is less clear is how much overshooting they are willing to tolerate. If the central bank is determined to stimulate the economy until the production and employment gaps have been closed fully, it could have to accept a significant overshooting in prices.

As a colleague recently half-jokingly said to me: “Central bankers are under pressure these days to show that they care about things other than just inflation.”

And the situation isn’t bound to get any easier. One of the main challenges they face is that they have more or less boxed themselves into a new, more constrained framework that implies expansionary monetary policy will be there for a very long time.

John Kennedy’s book Profiles In Courage published in 1956 described the brave actions of eight US Senators willing to pay the political price for integrity.

As an admirer of Kennedy, I was disappointed to learn that the book was probably ghost written by future Kennedy biographer Ted Sorensen without credit. While that fact didn’t diminish its significance, it made Kennedy’s receipt of the Pulitzer Prize for biography in 1957 less deserving. While the courage of the eight Senators Kennedy documented may be less impressive judged by today’s standards, the concept of courageously defending morality and integrity remain crucial today.

A John F. Kennedy Profile in Courage award was established in 1989 to recognize a public official who demonstrated the type of courage exemplified in Kennedy’s book. The award is made by a bipartisan committee and is administered by the John F. Kennedy Library Foundation.

There was no award made in the dark year of 2020, however the 2021 recipient is Senator Mitt Romney “for his consistent and courageous defence of democracy.” He risked his career and his standing with fellow Republicans to vigorously speak out about the lies of a “stolen election” and to vote to impeach President Trump for his role in the Jan. 6 storming of the U.S. Capitol. Representative Liz Cheney has taken a similar stand to speak the truth and has paid the price by being stripped of her leadership in the Republican Party.

Kennedy believed that “compromise need not mean cowardice” as long as it served a higher purpose. A number of his “courageous” senators took compromising positions on slavery for the greater good of preserving the union of the country, something we would consider unacceptable by today’s standards. Can we accept that courage in politics and in life today still may require compromise but not acquiescence to inappropriate decisions?

While both Mitt Romney and Liz Cheney courageously spoke the truth to lies, they were still harshly criticized by the left for having traditional Republican values of smaller government and fiscal restraint. Mitch McConnell had the courage to admit the U.S. election wasn’t stolen but not enough courage to ensure that Trump couldn’t run again. His courage and that of many others who initially criticized the role that Trump played in stirring the insurrection had an early expiry date.

More and more, decisions about the future health of our country are made with the goal of winning votes rather than doing what is best. Self interest trumps national interest. It is acceptable to lie as long as you don’t get caught. If you do then there is always someone to push under the bus to take the blame. In politics you have to protect the king.

Winston Churchill said that “courage is rightly esteemed the first of human qualities…because it is the quality which guarantees all others.” Courage involves being able to admit making a mistake, as Ontario Premier Doug Ford did about authorizing excessive police enforcement of potential lockdown restrictions that infringed on personal freedom.

Prime Minister Justin Trudeau can readily apologize for historic mistakes but not so easily for his own. While we struggle to identify courageous Canadian or American politicians, there are world figures that have shown what true courage really is.

Nelson Mandela during his Rivonia treason trial said in his statement to the Judge: “I have cherished the ideal of a democratic and free society in which all persons will live together in harmony and with equal opportunity. It is an ideal for which I hope to live for and see realized. But, My Lord, if it needs to be, it is an ideal for which I am prepared to die.” He was not sentenced to death, but rather was imprisoned for 27 years, always maintaining his dignity. After his release he led his country without bitterness to a remarkably peaceful end to Apartheid. He said that, “I learned that courage was not the absence of fear, but the triumph over it.”

Today’s most courageous politician is Alexei Navalny, a strident anti-corruption activist, who has been a vocal critic of the powerful Russian elite and of the riches accumulated by President Vladimir Putin. As a result he was poisoned with Novichok, a military grade, highly toxic nerve agent from which he narrowly escaped death after prolonged treatment in Germany. Despite huge risks, he bravely returned to Russia to face baseless charges and imprisonment in order to continue to fight for the truth.

Russia and China control their populations through fear and repression. Freedom of expression risks imprisonment and “re-education.” When Russian leader Nikita Khrushchev visited the U.S. he had a debate with President Kennedy about how both countries allowed freedom of expression. Kennedy said that anyone in Washington could stand at the steps of the Capitol and proclaim that Kennedy is an idiot. Khrushchev gleefully said things were exactly the same in Russia. Anyone could stand at the steps of the Kremlin and also proclaim that Kennedy is an idiot.

We need politicians who can uphold democratic principles and vigorously oppose foreign threats to our way of life. Individually, every Canadian needs to show the courage to stand up to restrictions on our freedom of speech and to preserve our ability to hold opinions not always in the mainstream. Opposing the restrictions to freedom of choice in Bill C-10 is such an opportunity.

Today more than ever each of us must understand the gift we have to live in a democracy that values freedom of thought, expression and movement. It can only be preserved if we maintain the courage to speak out against those at home and abroad who would curtail those freedoms.

As Thomas Jefferson said “the price of freedom is eternal vigilance.” We must remain vigilant and vigorously defend our freedoms at all costs.