1. “Where’s the Beef?” Living Standards and Inflation Victories in Canada 1981-2007 Lars Osberg Economics Department Dalhousie University Twenty Years of Monetary Policy in Canada: A Symposium on the Edmonton Manifesto Edmonton, February 4, 2008

2. Context  Intellectual and Institutional Inflation Targeting – Increased International popularity since 1991  Benign Global Economic Environment for Canadian inflation targets Low inflation – global & US Strong US growth over most of period Recently  Oil & Commodity prices up strongly  Worries about US recession  Consistent Victories in Inflation Targets Expectations of “low & stable” inflation embedded

3. Assessing Canada’s Monetary Policy Experiment – What Criteria matter?  “Monetary policy shares the same bottom line as other broad economic policies – to contribute to raising our living standards”  (Crowe:1988)  Is there evidence of appreciable improvement in the living standards of most Canadians, subsequent to monetary policy regime shift?

4. 1988 – “The year of the second shoe”  Hard to imagine 1988 Hansen lecture without prior disinflation 1982-84 Annual CPI Inflation  averaged 8.1% 1976-80  11/80 –7/82 – 10%+  June 1981 – 12%  1984 – 1988: average 3.81%  1981 to present “The goal of monetary policy is to contribute to solid economic performance and rising living standards for Canadians by keeping inflation low, stable, and predictable.” http://www.bank-banque-canada.ca/en/about/do.html

5. Have living standards increased for most Canadians?  1935-1979/80 – Bank of Canada Act (1934) Balancing of objectives  "to regulate credit and currency in the best interest of the economic life of the nation, to control and protect the external value of the national monetary unit and to mitigate by its influence fluctuations in the general level of production, trade, prices and employment”  1981 – Regime shift to disinflation dominance “whatever it takes” – TBill rate = 20.85% Aug. 1981  1988-2007: "a path that leads towards underlying price stability“  monetary tightening 1989/90 + Associated Recession + Public Debt Crisis  1991+ commitment to explicit inflation targets  1981-2007 OR 1988-2007 OR 1992-2007?? Flat is flat  But we should count the costs of disinflation !!

6. Little change in real median household income 1980-2005 CANSIM Table 202-0411 - Median total income, by economic family type, 2005 constant dollars, annual

7. 1980 – 2007: a ‘new normal’ in Canada CANSIM1 I603501 1961-2000; URQUHART 1914-1960

8. Real Average Hourly Wages 1991 – 2006 v1806037 & v1807573 Canada; Including overtime; Industrial aggregate excluding unclassified

9. “Well-Being” depends on more than just money income  “Happiness” & Subjective Indicators A large literature 1997-2007  “Unemployment appears to be more costly than inflation in terms of its impact on wellbeing.”  Blanchflower NBER WP 13505 Oct. 2007  “Index of Economic Well-Being”  Osberg & Sharpe RIW (2005,2002) Decline in Economic Security drives downward trend in 1990s in Canada  Both reinforce message of $ income trends

10. Average Household Income CANSIM v1546478 Canada; All family units; After-tax income; Average income (2005 Dollars); Total of quintiles  1989 – 2005 $ Cdn 1989 - $47,700 1993 - $43,800 (MIN) 2005 - $51,900 AVERAGE = $47,065  Net (undiscounted) average loss over period  1989 average $ income not reached again until 2000

12. Income Gains – only at the top!  1989 – 2005: comparison endpoints ignores: Intervening years of $ income losses Increased labour supply by households Decreased “social wage” in government services Increased insecurity from UI/EI cuts  All the same – little gain for most Canadians !! bottom 20%quintile 2quintile 3quintile 4 top 20% 19891340027800420005850096800 200512200276004280062800114300

13. Changes in real income - largest in top percentiles

14. Mono-causality ? - Probably more to it than that!  Real GDP per Capita 1989-2006 Canada + 30.9%  Average CPI inflation Canada 1.9%  1992-2006

15. Mono-causality ? “price stability - a basic condition of good economic performance” Crowe 1988:24  Real GDP per Capita 1989-2006 Canada + 30.9% Turkey + 53.2%  Average CPI inflation Canada 1.9% Turkey 56.8% Range 8% - 106% 1992-2006  http://devdata.worldbank.or g/dataonline/

16. “HOW THE WORLD ACHIEVED CONSENSUS ON MONETARY POLICY” Goodfriend NBER WP 13580 11/07  Contested literature on inflation targeting Inflation performance, variability  “Improved performance” – Mishkin NBER 12876 1/07 “results highly dependent on choice control group”  “Window-dressing” – Lin & Ye JME 07 But no reference to improvement in living standards or other criteria with general welfare significance

17. Just Suppose…… Median Living Standards had increased  We could debate % due to: Real Inputs  Substantial Increase Education Levels  Baby Boomers aged into most productive years  Increased Capital/Labour ratio  Technological Change Market Efficiency Reforms  De-regulation  Free Trade – FTA & NAFTA & WTO  Privatization  Low and Stable Inflation performance  But median living standards stagnated !

18. Time for Truth in Advertising ?  Bank of Canada website still says : “improve living standards” But no evidence thereof – for most Canadians  20+ years of anti-inflation victories Transparency – Isn’t it time for the Bank of Canada just to drop the claim?

20. Density of log hourly wages of employees aged 25-64, 1981-2004

22. Trends in Average Income by Quintile 1989 – 2005 CANSIM V1546479 – V1546483