Finance Committee on Nov. 15th, 2011

[Prof. Mario Seccareccia]

First, very quickly about Saudi Arabia and all of that, I mentioned that simply because the Canadian dollar largely has become a petro-currency. That's not to suggest that we are like Saudi Arabia in terms of processing end, of course.

However, with regard to the issue of how we deal with matters to do with, in this case, the fiscal side of things, I'm one of those who believes very strongly in functional finance here. That is the principle that it is up to the fiscal authorities to run deficits when we're plunging into a recession, when we see growth slowing down--

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

So you agree with what our government has done in relation to that?

[Prof. Mario Seccareccia]

Absolutely, except that I don't agree in the recent one right now. I mean since 2010--

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

I understand. My one question is--

[Prof. Mario Seccareccia]

What we did immediately after--

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

I'm sorry. I'm looking for ideas and fiscal ideas in relation to those two points, and I'm limited in time, so if I may...?

[Craig Alexander]

Very quickly, I just addressed the question about what we should be doing about debt. I think you have to set interest rates for the entire economy. If you have concerns about debt, they're not going to be on corporate debt. The issue is going to be around consumer debt.

When we look at the growth of debt on the consumer front, we see that the vast majority has been debt related to real estate. The debt-to-income ratio in Canada is now higher than it is in the United States, at 147% in Canada and 146% in the United States. By my estimation, if the government had not tightened up the mortgage insurance rules, we would have a debt-to-income ratio of 160%. We would be at the peak that the United States hit.

In my opinion, if we see household debt accelerate, it would be appropriate to look once again at whether we need to tighten mortgage insurance rules to dampen the acquisition of debt. If we have consumers over-responding to the continued low interest rate environment, then I think that you would start to consider that.

However, I would not recommend doing such actions in the current environment, when there's so much uncertainty related to what's going on in Europe and the United States. That could pose a new external shock. But you might want to consider policies to act if the external risks don't play out.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

Very briefly, are there any other comments, in point form, in relation to what I've asked?

[Prof. Christopher Ragan]

Well, when you said “fiscal policy to reduce debt”, it wasn't clear to me whose debt you were worried about.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

Consumer debt: that's the real issue.

[Prof. Christopher Ragan]

Then I'll add nothing to what Craig said.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Jean.

We'll go to Ms. Glover, please.

[Shelly Glover, Conservative, Saint Boniface, MB]

Thank you, Mr. Chair.

Welcome to all our witnesses.

I kind of feel bad for Mr. Sumner. He hasn't had much of an opportunity to respond.

[Scott Sumner]

I'm still here.

[Shelly Glover, Conservative, Saint Boniface, MB]

Yes, I see you there. Thank you for joining us, sir.

I am going to ask Mr. Ragan a question, because every once in a while we get a witness who comes before committee and who leaves a lasting impression or says something that sticks. When you said “anchor the expectations”, that is ultimately the key to our recovery, the key to making sure that we as a country stay in a fiscal advantage. We are in an advantage right now; we need to maintain that. Mr. Alexander also touched on it when he talked about confidence.

When you refer to the anchoring of expectations, I want you to address what you mean by that exactly. Also, how important is that, should we be negatively impacted again by what's going on in Europe or the United States?

[Prof. Christopher Ragan]

Thank you. That's an excellent question.

I think one thing that economists and monetary policy-makers have learned over the past 30 years is that an important part of keeping inflation on target, whatever that target is, is about keeping expectations anchored. This is why the communication of monetary policy is so important.

If you look at the evolution of Canadian monetary policy or that of other countries, you'll see that communication, which used to be intentionally obfuscating, is now intentionally transparent, because they're trying to make it very clear what their goals are and they're trying to make it very clear what actions they're going to take to achieve those goals.

What I mean by anchored expectations--and you can see this if you look at inflationary survey data about future inflation expectations--is that those expectations don't seem to change much in response to shocks. So you have a big positive shock to the economy or a big negative shock to the economy, and those expectations for inflation two years or five or more years down the road are not perfectly constant, but they are remarkably stable, more stable than they were in the past and more stable than they are in other countries that do not have inflation targeting. This is one of the big benefits of inflation targeting.

As I think I said earlier, one of the huge advantages of having well-anchored expectations is that when a shock happens and the central bank wants to respond aggressively, it can do so and still maintain its credibility and its credible commitment to that target. Financial market participants believe that they will come back to that target--that's why those expectations aren't moving--and it gives the central bank the latitude in the short run to take more aggressive actions than it could otherwise take.

You talk about the fiscal advantage. I think expectations play a role in the fiscal advantage as well. I don't think we want to get into a discussion--I don't think--about whether we are on the appropriate fiscal track, but I do think that expectations play a key role. In the extreme cases that we're now observing in parts of Europe, expectations are driving the fiscal crisis.

[Shelly Glover, Conservative, Saint Boniface, MB]

I'm leading you down a path here, because now I'm going to ask you for a comparison. When Mr. Sumner talks about using nominal GDP as an alternate, or if we talk about full employment targeting as an alternate, tell me how that affects your anchoring of expectations. Does it affect it?

[Prof. Christopher Ragan]

Thank you. I'm happy to be led down that path.

In my view, what enhances the anchoring of inflation expectations is a very simple, easily understood objective, and today and for the past 20 years there has been absolute clarity in that objective: the inflation target was 2%, period. There was a particular measure of inflation: headline inflation. The bank uses core inflation in an operational sense over the short run, but it's absolutely clear that the target is 2%. In a world of nominal income targeting, that clarity would be lost. There would be a target on nominal GDP--

[Shelly Glover, Conservative, Saint Boniface, MB]

Agreed.

[Prof. Christopher Ragan]

--but there would no longer be a target on inflation or real GDP. It would be the sum of the two.

In a world of full employment targeting, as full employment.... And Mario suggests quite rightly that in fact our measures of full employment or NAIRU move over time. Of course they move over time. All kinds of real variables move over time in response to changes in labour market policies, productivity growth, technological change, etc.

As those things change over time, does that mean we're going to have a shifting target from the central bank? That mobility in such a target, if that happened, would be not a simple thing to communicate. To me, the big advantage.... I mean, if you buy the argument that anchoring expectations is important, then it's only a hop, skip, and a jump to buying the idea that inflation targeting is also very valuable, because it has those simple communications.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Ms. Glover.

We'll go to Mr. Julian, please.

[Peter Julian, NDP, Burnaby—New Westminster, BC]

Thanks very much, Mr. Chair.

This is a very interesting discussion. I come from British Columbia, of course, and I often find the discussions we have up here in Ottawa don't really relate to how people are feeling on the ground and in communities across the country. The reality is the job figures we talked about earlier in the month of October have been pretty disastrous. We've seen an erosion of good-quality manufacturing jobs--and I know Mr. Stanford's aware of this--and about half a million have been lost over the last few years. There have been only about 200,000 new jobs, even though the labour market has grown to be much larger since May 2008. On average, those new jobs pay about $10,000 less than the jobs they replaced did. A lot of families in my area of the country are really struggling. They're struggling with record debt loads. They're struggling with the increasing income inequality we're seeing in this country.

I want to ask Mr. Stanford and Mr. Seccareccia whether they feel there's a role for monetary policy in addressing some of those issues or whether this is just primarily a fiscal failure, that governments have not put in place the fiscal policies to address all of those issues the middle class are living through.

[Prof. Mario Seccareccia]

Maybe I could answer very quickly.

I think it's primarily a fiscal policy issue, needless to say. How do we deal with being able to meet a certain income level so you can reduce your debt load, etc.? As a household you should be de-leveraging somewhat at this point, given the current environment. In that regard, as I said, it's primarily a fiscal issue--how you want to generate incomes for individuals out there. You do it through fiscal policy in a time of recession, as we've witnessed over the last while.

Having said that, I think there's also a role for a monetary policy. It's kind of interesting that here we were emphasizing all this stuff about anchoring expectations about inflation, but we should also be trying to anchor expectations about employment down the line. Because again that's what households are concerned about in terms of their own state of finances. Why is it that we're so concerned about one issue, which I think is of less concern to many people, when they're struggling to make ends meet or if they lose their job? There are more and more of them, as we're seeing down the line here.

My point here is that there's also a role for monetary policy, but it should deal with employment or unemployment issues. Those are things that should be on its radar screen directly and officially rather than merely implicitly. In that regard, I think there is, but it's kind of a macro issue in a sense. Fiscal policy could deal at the level of individuals and could deal with how we could provide transfers for those who are in need, in a sense, and how we could generate jobs through fiscal measures here, as we did through the fiscal stimulus kinds of packages that we implemented, going back a couple of years.

[Peter Julian, NDP, Burnaby—New Westminster, BC]

Thank you.

I'll let Mr. Stanford answer as well.