There are two broad arguments used to defend the floating loonie: (1) its price is set in the capital markets and, therefore, is above politics and amateur discussion; (2) dropping it for the best alternative (US dollar) would immediately disrupt and permanently limit the Canadian government’s ability to maintain stable growth and pursue independent commercial policies. Both defenses have effectively gone unchallenged over 45 years of business cycles and swings in Canadian confidence and disdain for the elephant down there.
The first defense is probably the best. Our float, ladies and gentlemen, only performs at its best when those fidgety politicians and their wonks are perfectly still. Having agreed on all sides that complaining is bad form, it costs little politically to support it. The loonie’s devaluation (that nasty new 23% tax) does hurt us, of course. That hurt, however, is not something top performers at the Bank of Canada need feel for us, let alone address.
Last week, in the Report on Business section of the Globe and Mail, David Parkinson wrote a story entitled “Why the Bank Doesn’t Care About the Recent Inflation Numbers.” If he’d been writing about similar machinations in the Vatican, it would have been on the front page. Here’s Parkinson’s clean explanation on why it’s simply not discussable to worry that Canada’s core inflation rate, for the last 11 months, has been above the bank’s own 2% ceiling:
“In its closely watched quarterly Monetary Policy Report this week, the bank reiterated something it has been saying for a while now: That the core rate is overstating the true underlying inflation in the Canadian economy. It is being juiced by some temporary rises in a few isolated components of CPI, and, more importantly, by what it calls the ‘pass-through effects’ of the Canadian dollar’s depreciation over the past year or so.”
The bank and its accountable governor can "pass through" the pricing of the Canadian dollar to the capital markets, but Canadians cannot "pass through" the affects. They must absorb them.
Devaluation, nudged by bank-rate cuts and deprecating statements about the economy by the governor, is prized in private by Keynesians as the only civilized way to “adjust” costs (wages, salaries, and benefits) in industries that can’t seem to keep up when the dollar was strong. It tightens everyone’s belts—supposedly to give failing industry’s space to reorganize to meet competitive pressures. This gentle, opaque process leaves our politicians unscathed—and, unfortunately, the economy’s 20% productivity gap unscathed as well.
The second defense idles in the distance, like Napoleon’s fearsome reserves. Literally, Canada’s freedom to act as a G-7 power requires that we accept the inconveniences and uncertainties of a standalone, floating Canadian currency.
In 1927, American jurist Oliver Wendell Holmes well served tax collectors everywhere when he explained that we pay taxes for living in a civilized society. In 1971, President Richard Nixon floated the US dollar in order to give Washington more freedom to manage the US economy within a severely changing global context. Ottawa still thinks that Nixon’s medicine for America was meant for Canada too.
Ottawa’s economic policy professionals insist that Ottawa needs a bank of its own that’s free to execute a responsive monetary policy for a uniquely Canadian economy. This flattering assertion rests on equally flattering assumptions. Canada’s economic circumstances are unlike America’s; its material aspirations, demographics pressures, trade prospects, business culture, and commitment to low inflation and full employment targets deserve the obeisance of a dedicated, separate dollar.
The historical adjustment mechanism of internal migration by people and capital from low wage and declining regions to more dynamic industries and regions, apparently, won’t happen continent-wide unless we totally erase our border.
Are Germans learning French? Has their common currency—the euro—turned French workers into Prussians? Do New Yorkers send their kids en masse to live in Houston to bolster national unity? Do Californians vote en masse like voters in New Orleans, Louisiana or Fargo, North Dakota? Does either of our two currency areas have in place a fiscal mechanism to deal automatically with economic shocks and Greek-style state bankruptcies that might befall some regions and not others?
When Alberta is booming, is not Texas too? When Ontario is losing jobs to Mexico, does Michigan not as well? When jobs are scarce in Nova Scotia, are they not scarce in Maine? When real estate prices are white-hot in Toronto and Vancouver, are they not rising dangerously in booming US cities as well? Can you think of a year of depression in the US that didn’t depress most regions of Canada as well?
A Keynesian from Mars would see that our two currency areas are highly diversified and viable—and divided from each other unnecessarily.
That’s an assertion that Martians and individual Canadians can make without making matters worse for the battered dollar they’re still stuck with. Wouldn’t it be lovely if we could have an informal discussion on the subject while the politicians are wholly preoccupied with market-tested election clichés?