The most important lesson history teaches, to those to whom it teaches anything, is that ideas matter more than anything else because if you don’t know where you’re going, you’ll probably end up somewhere else. Does appeasement or strength prevent aggression? Is the traditional family oppressive or invaluable? And yes, though superficially boring, what makes the general price level rise?
Without a reliable general theory of money, our specific policies might lead to, say, inflation around 7 percent (where prices double in 10 years due to compounding, and your savings lose half their value) when your mandate was to keep it to 2 percent. And since Macklem’s #onejob is to prevent inflation, or so you’d think, he really ought to have an answer that is both ready and steady, one he doesn’t have to think hard to remember and that doesn’t change over time.
Speaking of general theories, Macklem’s default position appears to be that of John Maynard Keynes, whose highly influential if highly unreadable “General Theory of Employment Interest and Money” argued back in 1936 that if government handed out claims on wealth in hard times it would cause that wealth to spring up in ways markets could not match. It had enormous appeal despite its highly dubious theoretical foundations, because it apparently confirmed the instincts of interventionist intellectuals, seemed to work economically for two decades, and certainly flourished politically as handouts even of borrowed or freshly printed money caused votes to spring up in ways austerity could not match.
Unfortunately, by the late 1960s it became clear that Keynes’ crucial trade-off between inflation and unemployment, where compassionate politicians guided by brilliant bureaucrats “fine-tuned” the economic machine so it purred along generating good jobs without “overheating,” simply didn’t exist. Unemployment and inflation rose together as government expanded, and even desperate measures reduced the former only briefly while boosting the latter relentlessly.
Eventually, something of an intellectual counterrevolution saw the Nobel Prize in economics go to Milton Friedman (“Inflation is always and everywhere a monetary phenomenon”) and Friedrich Hayek (“to aim at the maximum of employment which can be achieved in the short run by means of monetary policy is essentially the policy of the desperado who has nothing to lose and everything to gain from a short breathing space”).
Alas, Henry Hazlitt had warned decades earlier in a thinly veiled jab at Keynes’ flippant “in the long run we are all dead,” that “Today is already the tomorrow which the bad economist yesterday urged us to ignore.” Certainly it is in Canada today. And because the welfare state is a political winner despite being an economic loser, it’s extremely hard to get out of the hole we’ve dug and filled with banknotes in hope of promoting prosperity.
No, really. Keynes literally said such a thing would work. And our biggest problem is that we’re still in that hole intellectually.
In his remarks in Halifax, Macklem flitted from “cost-push” inflation (“Higher prices for energy, food and tradable goods explain most of the surge in inflation we’re experiencing”) to psychology (“inflation expectations can become unmoored and high inflation can become self-fulfilling”) to Keynesian (“we need to slow spending in the economy so supply can catch up with demand”). This inconsistency even made high and low inflation both sound bad (“High inflation is making life more difficult for Canadians, especially those with low or fixed incomes” and “creates a sense of helplessness,” yet “By raising interest rates, we are making it more expensive for households and businesses to borrow and therefore to spend”). But at bottom he’s a Keynesian mechanical tinkerer convinced “we can use monetary policy to influence the balance between demand and supply in the Canadian economy.”
So, to return to my original question in quest of consistent, concise clarity, what do you think causes inflation? And if you’re so smart, how did your theory lead you to botch it so badly?
