The Governor meets the Sado-Monetarists

Bank of Canada a world leader in its obsession for policies that promote unemployment

By: Linda McQuaig

  Bank of Canada governors are not known for being overly concerned about the problem of unemployment. So it's interesting that the new governor, David Dodge, once sent a memo estimating that unemployment cost the Canadian economy about $45 billion a year. Lest this be taken as evidence of concern about unemployment, it's important to note that the whole purpose of Dodge's memo, written when he was deputy minister of Finance, was to discount claims that the cost of unemployment was actually much higher. Dodge's point was that the cost of unemployment to the Canadian economy was only $45 billion a year. Whew! What a relief! Now we can get back to working on economic problems that matter!
  That was back in 1993, when unemployment was above 11 per cent, but Dodge didn't seem terribly concerned - or particularly sensitive to the feelings of the unemployed. In fact, when his memo became public, he tried to explain to reporters that having all those people out of work wasn't such a loss because many of them weren't that productive anyway. The more he explained, the worse it sounded. As he told Southam news: "It's not saying that at 8.5 per cent [unemployment], every unemployed worker out there's stupid, lazy or doesn't have a leg or something..."
 

Since John Crow's experiment in what has been dubbed "sado-monetarism", the cause has been kept alive by a coterie of anti-inflation devotees

  Dodge's apparent comfort with high levels of unemployment should prepare him well for his stint at the Bank of Canada, where the issue of unemployment has never really made it onto the radar screen. Former Bank governor John Crow used to get downright irritable when people complained to him about high levels of unemployment. He insisted that that had nothing to do with him. (The only connection was that he caused much of that unemployment. By relentlessly raising interest rates in his fierce battle against the demon inflation in the late '80s and early '90s, Crow pushed the economy into recession and workers into unemployment. Other than that, though, I guess you could say there was no connection.)
  But then Crow had come from inside the culture of central banking - a world all its own, quite obsessed with inflation control and quite unconnected with the real world. Dodge, by comparison, has had experience working at least in different parts of government, including most recently as deputy health minister. So there may be reason to hope for a slightly more balanced perspective. All this should be tested soon. With the economy slumping and concerns we may soon face rising unemployment, sensible people have been calling for interest rate cuts much deeper than the Bank's timid quarter of a percentage point cut last month.
  But the spirit of John Crow still haunts the Bank - and stalks the land. Indeed, since Crow's experiment in what has been dubbed "sado-monetarism," the cause has been kept alive by a coterie of anti-inflation devotees. In the basement of the Bank, at the C.D. Howe Institute and inside the economics department at the University of Western Ontario, these anti-inflation enthusiasts painstakingly write op-ed pieces for the Post and draw charts detailing minute differences in various measures of inflation.
  Their goal, from which they have never wavered, goes beyond simply keeping the Bank's focus on fighting inflation. It is to eliminate inflation. "Zero inflation" or "price stability," they call it. And if that sounds harmless, it's not.
  Reducing inflation is a painful process, since it generally involves wringing the life out of the economy through higher interest rates. (The side effect of this draining of the economy's lifeblood is that many people get thrown out of work - but that's nothing to do with John Crow.) Reducing inflation to zero is particularly painful, since wringing the last bits of life out of the economy seem to involve an especially zestful tightening of the screws. Even larger numbers of people end up out of work.
 

The quest for zero inflation is peculiarly Canadian - as Canadian as the compulsion to exaggerate the brain drain

  But, deep inside the Bank of Canada, there is a theory that achieving zero inflation is so beneficial that it justifies all the pain (which will be exclusively experienced by others, in any event). On the basis of one "study" done by Bank staff, it was estimated that the benefits of achieving a permanent one percentage point reduction in inflation are in the range of $11 trillion! Whatever these boys are smoking, we should all have some. No wonder those all-night Bank of Canada parties are so much fun.
  Interestingly, this quest for zero inflation is a peculiarly Canadian thing; indeed it seems to be as Canadian as the compulsion to exaggerate the brain drain. There are zero-inflation adherents elsewhere, but their claims are more modest.
  The zero-inflation cult suffered a setback a few years ago when MIT economist Paul Krugman wrote a devastating critique in the Economist, charging that there was little evidence of the benefits of price stability, lots of evidence of the costs, and that those who advocated it did so largely on "faith." (Recent comments by Dodge suggest he may share some of this skepticism.)
  The internationally-known Krugman went on to single out Canada for its ahderence to this strange creed, adding that the "Bank of Canada's anti-inflationary zeal... is costing [Canadians] hundreds of thousands of jobs."
  Shortly after that, a group of the committed - including John Crow - gathered at the C.D. Howe offices in Toronto to reaffirm their faith. There were confessions of lack of evidence to support their claims. But in the end, economist Michael Parkin summed up the feeling of the meeting by insisting that "our biggest challenge" is to find a way "to ensure that price stability continues to be the Bank's primary concern." Amen.
  So welcome to the Bank, Mr. Governor. The party's in the basement.

Linda McQuaig is an author and journalist. This column, reposted with permission, appeared in the National Post.

Posted: February 19, 2001

[ Front Page ]