Macklem ready to let economy RUN HOT
Sadie Tanner Mossell Alexander, the first African-american to earn a PHD in economics, in 1944 observed that Black workers would be the “last to be hired and the first to be fired” unless the economy was at full employment.
The economics profession is finally catching up, as policy-makers such as Bank of Canada governor Tiff Macklem and U.S. Federal Reserve chair Jerome Powell are as focused on levelling the playing field for marginalized groups as they are on traditional worries such as inflation.
Systemic racism still blocks ethnic minorities from fully participating in the economy unless white bosses are forced to choose between either confronting their prejudices or missing an order due to a lack of staff. Ancient gender roles force women to choose between careers and children. The long-term unemployed become victims of both atrophy and those managers who are conditioned to prefer poaching active workers to fill open positions, rather than taking a chance on someone who has been on the sidelines for six months.
History and our own stupid human behaviour mean we continue to leave considerable talent on the bench — or in the stands. As a result, the economy is less productive than it could be, which makes balancing budgets, closing output gaps and hitting inflation targets that much harder.
Macklem, who took over as Bank of Canada governor in June, is making inequality the focus of policy, as Powell in the United States and Christine Lagarde at the European Central Bank have also done. On Feb. 23, Macklem made it clear that he intends to let the economy run hotter for longer than most mainstream economists would have thought safe only a few years ago, reinforcing both the likelihood that interest rates will remain extremely low for at least another couple of years and that more people will potentially get to participate in the recovery.
The reason: to test the bounds of full employment in order to crowd more people into the workforce.
Macklem noted that the unemployment rate had been unusually low for an extended period of time before the pandemic, and yet inflation never took off. It could have been a fluke. But in case it wasn’t, Macklem indicated that he and his deputies on the Governing Council agreed to probe the limits of their previous understanding of the relationship between employment and inflation. The pre-pandemic experience suggests the central bank needn’t fear inflation quite as much as it has in the past, which would allow policy-makers a freer hand to stoke economic growth.
“Based on past economic cycles, we would have expected inflationary pressure to begin to rise,” the governor said in a virtual speech hosted by the Calgary and Edmonton chambers of commerce. “But inflation wasn’t threatening to take off. As the pandemic recedes and the recovery continues, we will keep that experience in mind.”
The unemployment rate dropped below six per cent at the end of 2017 and averaged 5.8 per cent until the governments shut down most of the economy in March 2020 to fight COVID-19.
That level is essentially full employment, according to the Bank of Canada’s understanding of how the economy works. That is, when the jobless rate drops that low, economists at the central bank have long assumed that everyone who wants a job would have one and, therefore, growth would be such that inflationary pressures start to build.
But inflation never became a major concern during that entire period. The Consumer Price Index (CPI) averaged annual growth rates of about two per cent, what the Bank of Canada is obligated to achieve. The relationship between the unemployment rate and prices appears to have changed, so why not try for fuller employment?
“There’s a shared responsibility and monetary policy has a role to play,” Macklem said on a call with reporters after his remarks. “If we can all play that part, we can get Canadians back to work, we can grow the labour force and we can achieve a complete, shared recovery. If we don’t do that, it’s going to be an even more protracted recovery. It won’t be as shared, and there will be less potential to grow going forward.”
The Bank of Canada is benefiting from a path cleared by the Fed. The American central bank cut interest rates three times in 2019, even as the economy continued to grow. Powell was accused of courting trouble, and he may yet have to contend with a collapse of the stock-market bubble. But the jobless rate had dropped to 3.5 per cent by the eve of the pandemic, the lowest since the late 1960s. Millions of Blacks and other marginalized workers found jobs, and inflation remained dormant.
Inequality isn’t as acute in Canada, but it’s still an issue. “Some measures suggest that Canada is among the top jurisdictions for inclusion and equity in the distribution of education and skills attainment,” a new report by the Brookfield Institute for Innovation and Entrepreneurship said, “but troubling inequities persist, and many face barriers to the use of their skills in the labour market, leading to stubbornly high levels of income and wealth inequality.”
Women in Canada are 17.5 percentage points more likely to have a post-secondary credential than men, and yet the gender-pay gap has barely changed in decades, according to Brookfield’s study. Some 71 per cent of non-indigenous Canadians aged 25 to 34 have earned a certificate or a degree beyond high school, compared with 29 per cent for Blacks and 40 per cent for First Nations.
Macklem’s latest remarks suggest policy-makers are prepared to take these sorts of divisions at least as seriously as inflation. The jobless rate was 9.4 per cent in January, a long way from full employment, no matter how you measure it. “The economy will need support for quite some time, and the bank will continue to do its part,” he said.