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Steven Globerman: Central bank ‘equity’ quest raises questions about non-traditional monetary tools

Commentary

Earlier this month at a conference on “diversity and inclusion” organized jointly by the Bank of Canada, the U.S. Federal Reserve, the Bank of England, and the European Central Bank, Tiff Macklem (governor of the Bank of Canada) said that creating an inclusive recovery was fundamental to the central bank’s role in helping manage the economy and that ignoring entrenched inequalities holds back some people—and some economies—from realizing their full potential. His comments echoed those earlier in the conference by Jerome Powell, head of the Federal Reserve.

Macklem’s comments triggered criticism from several quarters including from Conservative Party Leader Erin O’Toole who said the central bank should focus on inflation-targeting and nothing more. In response, Macklem said that creating an inclusive economic recovery from the pandemic was already part of the Bank of Canada’s mandate. Indeed, Macklem delivered speeches earlier this year about how diversity and inclusion were critical to the central bank’s success and expressed concern that the bank’s policy of quantitative easing (when the bank buys government debt to increase the money supply) might contribute to an uneven distribution of wealth. 

And he’s basically correct. Monetary policy can affect the distribution of wealth and income. For example, negative real interest rates benefit borrowers at the expense of lenders, and homeowners with mortgages relative to renters. To the extent that homeowners have higher incomes and greater wealth (on average) than renters, and to the extent that the wealthy can borrow money more easily and cheaply than the less wealthy, expansionary monetary policy can contribute to greater income and wealth inequality in society.

Monetary policy can affect the distribution of wealth and income.

In their quest for greater “equality,” advocates for more equitable central bank policies argue that the bank should be more willing to tolerate prolonged periods of strong domestic economic growth—without raising interest rates—to ensure that less-educated and relatively unskilled workers enjoy more employment opportunities and rising wages.

Finally, Lael Brainard, governor of the Federal Reserve, has said that despite the bank’s previous strategy to minimize deviations from “maximum” employment (that is, the lowest unemployment rate an economy can sustain while maintaining a stable inflation rate), monetary policy will now seek to eliminate shortfalls from maximum employment. This new monetary policy framework effectively eliminates the Federal Reserve’s numerical estimation of the long-run normal unemployment rate and instead sets a maximum level of employment target using a broad-based range of indicators of economic growth.

On the surface, it would seem the U.S. central bank has simply substituted the target of “maximum employment” for the target of “normal unemployment” as a guide to monetary policy. Since both metrics arguably change over time and are difficult to measure precisely, it’s unclear why the Bank of Canada embracing a similar change would reflect a significant departure from its long-standing inflation-targeting framework.

Put differently, if the goal is to keep inflation at 2 percent per year (essentially, the Bank of Canada’s goal), is it better for the bank to use the normal unemployment rate as a guideline for monetary policy, or to use maximum employment? Perhaps central banks are more likely to overestimate the non-inflationary potential output of their economies on a systematic basis using the maximum employment target, although there’s no obvious explanation for why this should be the case. A different and possibly more relevant concern is that (whatever guideline is used) central banks will increasingly implement non-traditional policy instruments to redistribute income and wealth, and that any such change will harm economic efficiency and therefore reduce the growth rate of non-inflationary potential output.

For example, in pursuit of greater equality of income and wealth, central banks might rely more on their regulatory prerogatives and, for example, direct chartered banks to increase lending to commercial borrowers from underrepresented communities rather than use traditional open market operations to lower interest rates more generally. Similarly, central banks might encourage banks to do more mortgage lending to lower-income borrowers by making capital requirements for banks less-stringent on such mortgages, which may stir memories of the 2008 financial crisis. 

Going forward, as central banks muse about implementing non-traditional monetary tools to promote greater social equity, key questions must be answered about whether such tools are the most cost-effective way to address wealth and income inequalities in society.

Shal Marriott: The election is over: Let’s continue to disagree

Commentary

Parliament is back in session, and before it even began parties were already calling for unity. After any election and especially when the result is a minority government, there are familiar refrains of “joining together” to move forward. Erin O’Toole even expelled a senator from caucus last week, citing the need for his party to be on the same page to hold the Trudeau Liberals to account in the House of Commons.

As seemingly sweet as this rhetoric is, the call for unity either within parties or between parties, or even in the public sphere, should make us uncomfortable. To be on the same page or in complete agreeance about legislation or public policy strikes against exactly what democracy and the Westminster system are designed to do: foster debate and disagreement.

It also belies the country’s basic pluralism. In a country as diverse as Canada – one marked by ethnic, religious, socio-economic, and other differences – so-called “political unity” or a “shared vision” is not only improbable, but it’s also undesirable. It invariably means that different voices and perspectives have been marginalized in the name of ridding ourselves the perceived divisiveness of debate and disagreement.

Consider the House of Commons, which is an active space of contestation. There is a reason why the opposition parties and the government literally face off against one another during session. It is not for the petty squabbles which commentators love to get their soundbites from, but rather that Parliament by its nature asks politicians to constantly engage in debate about complicated topics which usually invoke competing principles and values. This ensures different opinions are heard and considered on the most fundamental political questions the government is tasked to address before legislation is ultimately voted on and passed into law.

The House of Commons provides a place where there is meaningful deliberation about what the government ought to do (or not do). Members of Parliament hear and confront the voices of those they disagree with and are asked to consider what they have to say. Whether or not they listen is beside the point. What is significant is how essential these disagreements are to our political system. It is why we elect candidates from different political parties with different values and beliefs.

These differences and disagreements should be celebrated as a strength, not viewed as weakness.

These calls for unity set aside how crucial these fundamental debates are out of a desire to reflect a shared vision. They aspire to a monolithic political community which belies the country’s diversity. Yet we know that a shared vision of the Conservative party, which is fundamentally a coalition of various political ideologies, isn’t fully possible. Just as a shared vision of Parliament, which is comprised of different political parties representing constituencies from across Canada, isn’t achievable. There cannot be meaningful differences or constructive arguments if everyone is expected to fall into line with the same vision of what Canadian politics should look like. Nor is it realistic to expect a vision that encompasses the unique perspectives and positions of the entire public.

These differences and disagreements should be celebrated as a strength, not viewed as weakness. It allows for more perspectives to be heard and considered. It is a sign that our politicians value opposing views, and more importantly that Canadians have opposing views that do not disappear after an election has been called. Disagreements about what is best for a political party and what is best for a government to do should be encouraged, with the hope that ultimately the best arguments will be victorious.

Not only is dissent an important value for the politicians on Parliament Hill, but it is also a crucial part of the broader public sphere. Surely not everyone is watching C-SPAN, but the spirit of these debates is one we should aspire to. The idea of the public sphere as a space of contestation itself goes back to Aristotle and is one of the reasons why democracy as a type of government works. The public sphere fosters, or should foster, constant disagreement about the affairs of political life. We shouldn’t shy away from these discussions or be tempted to forget the relevance of where we disagree in an attempt to have more productive conversations.

In his book The Death of Politics, the author and former presidential speechwriter Peter Wehner argued that the ability to have these kinds of disagreements is a sign of a society’s strength.

“The task of politics is to live peaceably with our differences and for people to find appropriate outlets for their views to be heard and represented,” writes Wehner. “A healthy politics has as its goal not a civic nirvana where we all just get along, but a nation with enough sense of unity and common purpose to accept and overcome our differences – and where deep differences do exist, to debate them with words rather than fists or billy clubs or bullets, in ways that are characterized by intellectual rather than physical conflict.”

Debates are easy to observe during election seasons. Parties hold conventions before the writ drops where they contest planks of their platform. People wear different coloured pins, they vote for different candidates, they might even debate at the bar who they think the next Prime Minister should be. Yet after an election is over, there is a temptation to want to stop disagreeing. To say that for the sake of the party or the country, there needs to be a shared vision of political life moving forward. What these calls obscure is the value of these debates in the first place and why they are important for the country.

Canadians will always disagree about politics. This is a feature of the system we have, not a bug. The goal should not be to agree or to aspire towards a utopian vision of politics where everyone shares the same views. We should hold firm to our beliefs, genuinely hear the opposing positions of others, and continue to have meaningful conversations about the different directions the government should take. Canadians should strive to embrace disagreement, recognizing that it allows us to share different ideas about political life and helps to create a discourse where more voices are able to be heard.