Why it’s time to put a stop to tag-team stimulus

Federal government and Bank of Canada's continued pandemic response invites another economic emergency, says CD Howe chief

Why it’s time to put a stop to tag-team stimulus

More than a year after they announced tandem measures to stimulate the COVID-hit economy, Canada’s federal government and central bank must now pull their respective policy levers back to avoid another economic catastrophe.

That’s the message William B.P. Robson, president and CEO of the CD Howe Institute, issued in an open letter.

“Governments in the advanced economies mounted a massive fiscal response to the COVID crisis. … Central banks also responded on a massive scale,” he wrote. “These responses undoubtedly cushioned the COVID blow to our economies. But, more than a year later, especially in the United States and Canada, both fiscal and monetary policy are still in overdrive.”

On the fiscal front, he said the U.S. and Canadian governments’ emergency spending ended up outweighing the income losses from the pandemic, as indicated by record levels of savings last spring and the strong outpouring of pent-up demand today amid eased-up restrictions.

On the monetary side, the Federal Reserve and the Bank of Canada have supplied so much liquidity that, more than rebounding from their initial sag, prices are now rising at a pace faster than before the pandemic.

“The US CPI rose 5 percent over the year to last May, and the Canadian CPI rose 3.6 percent over the same period – well above the Bank of Canada’s target of 2 percent,” Robson said.

Acknowledging that hindsight is 20/20, he noted that many commentators in spring 2020 were projecting far worse economic consequences from the pandemic’s impact, which might have justified the overshoots in fiscal and monetary response at the time. But today as the virus retreats and economic activity resumes, political leaders on both sides of the border have still not turned off their respective taps, and are keeping their interest rates at emergency levels.

“Look at fiscal and monetary policy together, moreover, and there’s a hint of something more than independent over-reactions to a crisis,” he said. “It’s as though stimulus tag-teams are at work.”

Since the start of last year, he noted, the U.S. federal government has accumulated roughly US$4 trillion in debt and the Fed has grow its balance sheet by about US$3.8 trillion. Canada has proceeded on a parallel track, running up about US$480 billion in debt and enabling a $360-billion increase in its central bank’s balance sheet.

Robson also expressed concern at the central banks’ continued bond-buying aimed at containing long-term interest rates, when monetary policy usually focuses on the short-term policy rate. By putting a hand on longer-term rate moves, he said, central banks are inching closer toward committing to keep borrowing costs low for governments to continue issuing debt.

“That undermines their independence and moves us a step toward printing money to cover spending that governments can’t or won’t finance with taxes,” he said. “Canadians need more reassurance that a fiscal-monetary tag-team will not inflate away the value of their money.”


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