Jobs—and their accelerating disappearance—once again were the top issue across the land, but at Toronto’s Canadian Club last week there was not so much as a ripple of surprise when central bank Gov. Gerald Bouey broke some other news. In sombre tones he told the assembled luncheon guests that the Bank of Canada was formally abandoning the use of the M1—a measurement of cash in circulation and in chequing accounts as a means of setting target levels for the country’s money supply. The equanimity with which observers greeted the announcement was understandable. Bouey had been dropping hints for months that the instrument, which had been used since 1975, was outdated and no longer useful. As well, he was at pains to stress last week that the bank’s constrictive monetary policy remained unchanged. The bank, he declared, would persevere in its fight against inflation since success on this front is essential if Canada is to pass through its economic ordeal.
If Bouey’s statement on Ml evoked little consternation, his reaffirmation of the monetarist creed created more of a stir, coming, as it did, amidst the latest report on unemployment of 12.7 per cent and a stormy debate among econo-
mists over the bank’s unflinching commitment to a tight money strategy. In one camp, a growing number of influential analysts argue that the time has come to stimulate, not suffocate, the economy. Taking the opposing view are economists who support Bouey’s policy and insist that expansionary policies would only rejuvenate a still-troubling inflation rate of 10 per cent. Caught in the cross fire are consumers, businessmen and, most particularly, the unemployed, long battered by the effects of the worst recession in the postwar period.
For Bouey’s increasingly vocal critics, his remarks last week only provided disheartening confirmation that their warnings were not being heeded. The dropping of Ml was only a small retuning of a policy that some predict may lead the country into a full-scale depression. According to a central bank spokesman, Ml’s demise came because it was no longer a reliable indicator of the money supply. The reason: increasing amounts of cash have been flowing from chequing accounts into more lucrative areas. Corporations, for instance, have adopted the practice of taking their cash
balances out of chequing accounts at the end of the day and socking them into one-day term deposits overnight to collect maximum interest. As well, consumers are being enticed by new chequingsavings and daily interest accounts, which lead to a further distortion of Ml figures. Central bank officials spent months looking for a way to adjust the Ml, but their efforts proved futile. Now, a number of other indicators will be used in its place.
But, if the central bank remains committed to its course, albeit using different tools, the effects on the economy are becoming almost unbearably painful. If any confirmation was needed of that fact, it was provided last week in the latest barrage of gloomy figures from Statistics Canada. It reported that the country’s gross national product— the value of goods and services—had dropped for the fifth consecutive quarter. That followed earlier news that the actual number of unemployed rose from
1.388.000 in October to 1,438,000 in November, although in percentage terms the rate remained constant. Fully
33.000 were put out of work in manufacturing alone. As well, Statistics Canada revealed, corporate profits dropped by 50 per cent from 1981 levels in the third quarter of 1982.
A leading spokesman of those calling for urgent measures to remedy the situation is Michael McCracken, president of Informetrica, an Ottawa-based forecasting firm. He advocates broader money supply targets and a stimulative fiscal policy. Says McCracken: “By reducing personal income tax by $3 billion, increasing government expenditures on infrastructure by $1 billion this year and next, and increasing transfer payments to the poor by $1 billion, we can get people to spend.” In addition, McCracken advocates an easing of interest rates, by setting them at no more than two percentage points above the rate of inflation. What is more, he disputes the view that his recommendations would only rekindle inflation. Says he: “With high unemployment, excess capacity and a substantial slowdown of wage rate increases, it is not likely that this stimulus package would push up inflation.”
Another critic of the central bank’s game plan is Pierre Fortin, a professor of economics at Laval University and a member of Finance Minister Marc Lalonde’s new board of economic advisers. He argues that Bouey’s policy is “painfully rigid” and that it is chiefly responsible for Canada’s record unemployment rate, its widespread bankruptcies and the dismal level of business and consumer confidence. Warns Fortin: “If the recovery doesn’t come up strong in 1983, there will be a cascade of big financial failures.” Like McCracken, Fortin recommends that all levels of government should be prepared to bail out the economy by offering major stimuli, even if it means increasing the budget deficit, which already stands at $23.6 billion.
Equally concerned is Abraham Rotstein, a University of Toronto economist who joined with a group of 80 colleagues earlier this year in calling for a change of economic gears. One solution, he says, is to stop trying to prop up the dollar as a means of fighting inflation. Bouey has focused on this strategy because a drop in the exchange rate increases the cost of imports and thereby pushes up prices. But Rotstein believes it is time for this fixation to end. “If we let the dollar find its own level,” he says, “Canadian interest rates would level off.” Among the alternatives recommended by his group are wage and price controls in the private sector
and more government spending on housing.
Still, Bouey is not alone in espousing fidelity to the monetarist cause. A substantial number of experts applaud his steely determination to stay on course until there is convincing evidence that inflationary pressures have been contained. They point out that, while inflation has dropped in recent months, this progress is not enough. The gap between the Canadian and U.S. rate,
which is now five per cent, they argue, is still uncomfortably wide. Michael Walker, director of the Vancouverbased Fraser Institute, says current policies are working, as the declining inflation rate shows. But, he warns, “if the Bank of Canada expands the money supply, it could screw up the whole works by driving up inflation again.” Such views provide Bouey with welcome moral support as he navigates the central bank through one of the economy’s stormiest periods. At the same time, he has little patience with his critics. Says Bouey: “Some commentators
imply that the time has come to forget about the problem of inflation and concern ourselves only with expansionary policies.” But, he adds, “no economic advice is more seductive, none is easier to follow for a time, none has been tried more often, and none has failed more completely.” For now, despite the growing assault on monetarism, the burgeoning army of unemployed across tne country can only hope, in desperation, that Bouey’s course is correct and that their sacrifices will soon end.
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