Canada's Policy: Sometimes the Grass Really is Greener

     Stephen Gordon has so few things to complain about regarding Canadian monetary and fiscal policy that he plays a counterfactual game very unlike what we're used to-even less the UK and EU. When we play it what we ask is how could we have averted the disaster, or what could we have done to make things not as bad as they ended up being.

    Gordon instead wonders what possible mistakes Canada could have made if things hadn't worked out so well. I'm currently reading a book by Robert Conquest "The Great Terror" about the Stalinist 30s. He drops the comment that 'British don't have to go through our own revolutions so we can take the time to examine others."

    Evidently that's the Canadians in regard to economic crises. They don't have too much of their own which gives them time to examine the US and Europe.  Indeed, Nick Rowe seems envious that we have such grave problems to deal with and has sympathy pains. Listen to his comment to Gordon's post:

    "We dodged a bullet. We won't always do so."

      "Things could have been worse for the BoC. Yes, I think you are right that they would have responded even more aggressively, if it had been needed, to get inflation back up to the 2% target. But we still had a recession. And looking at the graphs of the CPI and NGDP you did for my old post strongly suggests that NGDP targeting would have been better, because we can clearly see the recession when we look at NGDP, but can hardly see any recession when we look at CPI.
We might not always dodge the bullet. And with the Eurozone seeming to be falling apart and entering a second recessions, we still aren't really out of the woods. We are too complacent. I think we should switch to NGDPLPT now."

         http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/06/counterfactuals.html#comments

       Yeah we dodged the bullet but we might not always do so. Yet when was the last great Canadian economic crisis-I ask this not rhetorically, I really don't know. From what I understand even in the 30s they did a lot better. It is true that the contagion from Europe could at some point get them though you expect that even here they will probably be the last to get it and probably it will be shorter.

       Here's Gordon:

       "There's a lot for econobloggers in the US and Europe to get exercised about. They are facing serious problems, and their policy makers have demonstrated an alarming inability to deal with them. It's harder for Canadian econobloggers - okay, for this particular econoblogger - to put together arguments documenting how Canadian policy makers got things terribly wrong and what should be done to get us back on track."

      "So instead, I'm going to consider two "what ifs?" where Canadian policy-makers could have - but happily did not - get things terribly wrong."

      See what I mean?

       "The first scenario is: what if the Bank of Canada's 'conditional commitment' to hold interest rates low had not been enough? In retrospect, it looks as though the Bank dealt with the recession as well as could be expected. In March 2008, the first interest rate decision made while Mark Carney was Governor was to cut the overnight rate target by 50 basis points, in the expectation that the US economy was in for a rough ride. And when the Bank hit the zero lower bound, it moved on to unconventional measures, starting with the the 'conditional commitment' in April 2009 to hold the policy rate at the lower bound for at least one year. This turned out to be all that was necessary; the Bank moved away from the lower bound in 2010."

       "Output and employment started recovering in mid-2009. But what if they hadn't? Would the Bank of Canada have followed the now well-worn path set out by the Bank of Japan and the Federal Reserve?"

       "My own guess is no: the Bank was clearly preparing itself for a round of quantitative easing in the spring of 2009, and the necessary legislation that would have permitted it to widen the range of assets that it could purchase was passed. I don't think they really knew exactly what assets they were going to have to buy or in what quantity - who did? - but they had something the other central banks didn't: an explicit political mandate. If the Bank thought that the only way to reach its inflation target was to use its steamroller to flatten the yield curve, it had - in principle - a free hand to do so."

       So the Canadian CB probably would have responded effectively. How about fiscal policy?

       "The other scenario involves fiscal policy. The Economic and Fiscal Statement of November 28, 2008 is best remembered for its provision to cut the subsidies to political parties, and this provoked the 2008 prorogation crisis. But it is less well-remembered that the initial instinct of the Conservative government in the face of the crisis was fiscal austerity."

        So the premise is that the other parties forced the Conservatives hand because of  "the Conservatives' inability to resist the temptation to kick their opponents when they were down."

        If it weren't for this he thinks the Conservatives may have had a free hand to impose austerity:

        "My what-if question here is: what if the Conservatives hadn't thrown in that provision to eliminate the subsidy to political parties? If the opposition parties weren't so concerned with their own finances, would they have still joined forces and obliged the newly re-elected Conservatives to back down from its austerity program? I'm not so sure they would have."

       Some commentators even disputed that this was the case, that the Conservatives were going to do fiscal policy regardless. Then you add the fact that in Canada the Central Bank has no "independence" and you realize the grass really is greener in Canada.