Evidence of meeting #29 for Finance in the 41st Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was target.
A recording is available from Parliament.
12:10 p.m.
Conservative
The Chair Conservative James Rajotte
Thank you.
Unfortunately, we do have to move on. We're going to move on to Mr. Van Kesteren, please.
12:10 p.m.
Conservative
Dave Van Kesteren Conservative Chatham-Kent—Essex, ON
Thank you, Chair.
From the sixties, I think you'd all agree, we've had a dramatic shift. Back in the sixties there was one wage earner, not both parents working. The demographics today are 1.7 compared to heaven knows what, and we have an aging population. We have a different world today.
Taking that into consideration, it's been said, I've heard, that the perfect inflation rate would be 1%, but wouldn't you agree that 0% is the perfect rate? Aren't a lot of these problems a result of pressures on non-market decisions? For instance, we do a lot of things today, right or wrong. We have the ramifications of energy production. That's not driven by market forces any more. You could even argue something like minimum wages. They're all social issues. We've put a whole mess of different things into the porridge. As a result, what should be a very simple subject, economics, now becomes one of the most complex.
I have to tell you that the more I listen to you, the more complicated it gets. I remember one time reading a book by Goodman, Paper Money. He was asking a banker about the policies of lending between banks and he asked how many people understood this. They said a handful of senators and one or two congressmen. I don't know if it's that bad today, but the fact of the matter is it's complicated.
Wouldn't you agree that the reason we are having a lot of these problems is that we've decided to just mix in a whole mess of things that aren't really what we'd call traditionally economics? I'd like to have your thoughts on that.
12:15 p.m.
Senior Vice-President and Chief Economist, TD Bank Financial Group
That's a very broad observation.
Let me just start with 0% as the ideal target. It might be the ideal target, but the problem is inflation fluctuates, and that would mean you would be spending part of your time with deflation, and deflation is extremely corrosive, because--
12:15 p.m.
Conservative
Dave Van Kesteren Conservative Chatham-Kent—Essex, ON
But we have those things. I guess what I'm trying to say is that we're having this discussion about whether or not this is the right policy, and it seems to me that this is the best of an imperfect world.
12:15 p.m.
Senior Vice-President and Chief Economist, TD Bank Financial Group
If we had a perfect theoretical world where we had complete stability, then you could have inflation running at 0%. But in the practical world that exists today, you can't target 0% because of the damage that you could create by creating deflation. That was why I was saying that from a point of view of lowering the target to 1%, you start to run the risk that because of the way we measure inflation and some of the imperfections of the measurement, you actually could be creating a deflationary style of environment.
On your other observation, I actually don't think economics is rocket science. I actually think most of this is pretty simple.
12:15 p.m.
Senior Vice-President and Chief Economist, TD Bank Financial Group
Part of the problem is the language we use. And unfortunately, in this context we're talking about things like full employment, NAIRU. Really what we're trying to talk about is trying to create price stability that creates an environment of economic growth that then creates a better standard of living for Canadians.
Also, you made a good point: monetary policy doesn't work in a vacuum. In actual fact, fiscal policy is terribly important in terms of setting out the structure, the competitiveness of the economy. And the structure of the economy matters in a very big way. Monetary policy can only change the cost of borrowing or the supply of money, and then what impact that has on the domestic economy. I think people give the Bank of Canada too much credit in terms of being able to micromanage the economy, just as I think markets and many people think that the government has more control over the exchange rate than it will ever have.
12:15 p.m.
Conservative
12:15 p.m.
Prof. Christopher Ragan
On the 0% inflation idea, there is a compelling argument, actually, or at least a compelling benefit from having 0% inflation, and that is that the money we use would retain its value. I worry less actually than Craig about periods of deflation followed by periods of inflation. My concern is if we actually have a target of 0% inflation, there are potential costs that come possibly from the 0% lower bound, possibly from the inability of labour markets to fully adjust. There is a reasonable debate among economists about whether there would be net benefits going from 2% down to 1% down to 0%, but there is certainly a gross benefit of being at 0%. The question is whether there are also costs that would offset that.
Let me stop there.
12:15 p.m.
Conservative
The Chair Conservative James Rajotte
Thank you, Mr. Van Kesteren.
Mr. Giguère, you have five minutes.
12:15 p.m.
NDP
Alain Giguère NDP Marc-Aurèle-Fortin, QC
I just wanted to let all the witnesses know that the Bank of Canada is equipped with a number of tools including the exchange rate, the value of the Canadian dollar, the inflation target of 2% and special drawing rights.
I think there is a problem with the simultaneous interpretation.
12:15 p.m.
Conservative
The Chair Conservative James Rajotte
You can switch between English and French on the mike, and adjust the volume as well.
12:20 p.m.
NDP
Alain Giguère NDP Marc-Aurèle-Fortin, QC
It sure seems like the Bank of Canada is equipped with some tools, including the exchange rate, the inflation target and special drawing rights.
The bank operates in a country that is vast geographically, but that is even more so economically. There are great regional economic disparities, there are different economies. In addition, there is a serious lack of investment whereas, ironically, $500 billion on the credit side are tied up.
We also suffer from the so-called Dutch disease. The Dutch disease is basically what happens when a country that exports natural resources, such as oil, sees a major drop in its manufacturing jobs. There is also the influence of other countries.
When we factor in all those aspects, there is always an explanation for an inflation target of 2%. But with an inflation controlled at 2%, how can we overcome the Dutch disease? How can we overcome the lack of investment and regional economic disparities?
I am not happy with what you are telling me because you are explaining what you are doing at the moment, but I want to know where the Canadian economy will be heading in 10 to 15 years. The Governor of the Bank of Canada told us to forget the American market and go elsewhere. I have a problem with that.
In 15 years, what is the Canadian economy going to be like if we continue to lose our manufacturing jobs by 35,000 positions per month? That's my question. How will Canada be able to maintain its status as a thriving industrial nation? I do not want an Iranian model or a Saudi model.
What is being done for Canada to keep its status of an industrial nation in the next 15 years, if its daily inflation is controlled at 2%?
These questions are for all the witnesses.
12:20 p.m.
Prof. Mario Seccareccia
Thank you for your questions. I am going to answer quickly.
First of all, I am very familiar with the Dutch disease. We actually have a problem. We have a flexible exchange rate that essentially reacts to what is happening, since the Canadian dollar has become a type of oil currency, the way it is in Saudi Arabia. That's because of the successful increase in our exports, not only in raw materials in general, but also in oil specifically.
It is a very specific problem, but I don't think the monetary policy can really make a difference directly. If not, another possibility would be to try and control the exchange rate just to try to make us more competitive in the manufacturing sector, to the extent possible. We might be able to play with that, but other problems might also ensue.
And if we look at other countries that have had fixed exchange rates—it is not Europe's case at the moment, but it has been historically—we can see that there have been specific crises. I personally don't think this is the way to get us out of the slump the manufacturing sector is in. We should first do something about the tax side of things.
12:20 p.m.
Conservative
The Chair Conservative James Rajotte
We have time for one more person to comment.
Mr. Ragan, I think you wanted to comment.
12:20 p.m.
Prof. Christopher Ragan
Actually, I'm in uncharacteristic agreement with Mario. There are many problems, many challenges ahead. Most of them do not relate to monetary policy. Monetary policy has to be recognized as a blunt instrument that cannot be used to solve a large set of problems. It can really be targeted at one, which is where the price level is going over the long run. I agree with everything Mario just said.
12:20 p.m.
Senior Vice-President and Chief Economist, TD Bank Financial Group
Just very quickly--
12:20 p.m.
Senior Vice-President and Chief Economist, TD Bank Financial Group
--I think one of the core issues we have right now is that there is every reason, every incentive, for businesses to invest and expand; the problem is confidence. The lack of confidence relates to the external environment we're operating in, with worries about a European banking crisis and worries about the U.S. economy.
So if we think about the ability of companies to invest and hire in Canada, they have the ability to do so. The real issue is that you need confidence, and you're not going to have that confidence until you get greater clarity over what's happening to the external risks we don't have any control over.
12:25 p.m.
Conservative
November 15th, 2011 / 12:25 p.m.
Conservative
Brian Jean Conservative Fort McMurray—Athabasca, AB
Thank you, Mr. Chair.
Thank you for attending today.
My first comment is in relation to Monsieur Seccareccia. I just wanted to make a comment. I disagree with you in relation to the success of our economy right now. I agree that it's in relation to oil, but it's also in relation to the oil sands, which are in my riding, and it's in regard to innovation, to patents. More patents come out of that area than all the rest of Canada combined.
So it's about persistence and hard work in a resource that really is a manufacturing resource; it's not just a pump-out like Saudi Arabia. I think that makes a big difference. As you can tell by the cost to produce it, it costs about 10 times or up to 15 times more than it does in Saudi Arabia. So I think it's about Canadian persistence and a real success story.
I want to ask a question in relation to the inflation-targeting system, keeping in mind two specific questions.
First of all, what fiscal policy can we adopt to reduce debt for Canadians? That's obviously ignoring the first one, which is increasing interest rates, which will encourage people to pay it off quicker but of course will encourage their debt.
Secondly, the fiscal policy to balance.... Keeping in mind that I'm from Fort McMurray, if we have 3% unemployment, I can't find that 3% of the people. There are fiscal and unemployment differences regionally across this country. How do you set fiscal policy, especially regarding the inflation-targeting system, keeping in mind the differences across the country?
In Saskatchewan, where Mr. Hoback is from, and in Alberta, where I'm from, we don't have problems with people being unemployed. Finding labour is just about impossible. I've been running businesses there for 30 years and I can assure you that with those bonuses to work in car washes, like I have to give--about $10,000 to keep one employee--it's very difficult indeed. How do we balance that fiscal policy, keeping in mind the inflation-targeting system of the central bank?