“Where’s the Beef?” Living Standards and Inflation Victories in Canada 1981-2007
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“Where’s the Beef?”Living Standards and Inflation Victories in Canada 1981-2007
Lars OsbergEconomics DepartmentDalhousie UniversityTwenty Years of Monetary Policy in
Canada: A Symposium on the Edmonton Manifesto
Edmonton, February 4, 2008
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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
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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?
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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
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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 !!
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Little change in real median household income 1980-2005CANSIM Table 202-0411 - Median total income, by economic family type, 2005 constant dollars, annual
Median Income by Household type ($2005): 1980-2005
0
10000
20000
30000
40000
50000
60000
70000
80000
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
All family units
Economic families, two persons or more
Non-elderly families
Female lone-parent families
Unattached individuals
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1980 – 2007: a ‘new normal’ in CanadaCANSIM1 I603501 1961-2000; URQUHART 1914-1960
Real (2000 $) Hourly Wage in Canada1914-2000
0
5
10
15
20
25
year
ho
url
y w
ag
e (
20
00
$)
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Real Average Hourly Wages1991 – 2006
v1806037 & v1807573 Canada; Including overtime; Industrial aggregate excluding unclassified
Real Average Hourly Wages - Canada 1991-2006
0.00
5.00
10.00
15.00
20.00
25.00
30.00
2006
$ C
dn
hourly paid
salaried
hourly paid 18.46 18.75 18.74 18.96 18.74 18.96 18.80 18.84 18.84 18.86 18.71 18.67 18.30 18.48 18.48 18.55
salaried 24.65 25.35 25.40 25.87 25.99 26.00 25.85 26.18 26.18 26.09 25.66 25.53 25.34 25.48 25.78 26.08
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
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“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
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Average Household IncomeCANSIM v1546478 Canada; All family units; After-tax income; Average income (2005 Dollars); Total of quintiles
Average After-Tax Household Income
38000
40000
42000
44000
46000
48000
50000
52000
54000
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
2005
Cdn
$
Series1
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
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Real Income in Canada by Quintile1980 - 2005
CANSIM v21188957-v21188962 ; After-tax income; Adjusted average (2005 Dollars)
0
10000
20000
30000
40000
50000
60000
70000
80000
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
2005
$
Average
bottom 20%
quintile 2
quintile 3
quintile 4
top 20%
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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 2 quintile 3 quintile 4
top 20%
1989 13400 27800 42000 58500 96800
2005 12200 27600 42800 62800 114300
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Changes in real income- largest in top percentiles
Percentage Change in Real Income 1982 to 2004
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
90.00%
20%to
25%
25%to
30%
30%to
35%
35%to
40%
40%to
45%
45%to
50%
50%to
55%
55%to
60%
60%to
65%
65%to
70%
70%to
75%
75%to
80%
80%to
85%
85%to
90%
90%to
95%
95 to99%
top 1%
Individual % change
Family % change
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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
Real GDP per capita1989 -2006
0.000
0.200
0.400
0.600
0.800
1.000
1.200
1.400
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Canada
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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.org/dataonline/
Real GDP per capita1989-2006
0.000
0.200
0.400
0.600
0.800
1.000
1.200
1.400
1.600
1.800
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Canada
Turkey
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“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
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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 !
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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?
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Density of log hourly wages of employees aged 25-64, 1981-2004
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Family-size Adjusted Household Income Canada 1989-2005
0
10000
20000
30000
40000
50000
60000
70000
80000
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
2005
$ Cd
n
average
bottom 20%
Quintile 2
Quintile 3
Quintile 4
Top 20%
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Trends in Average Income by Quintile1989 – 2005 CANSIM V1546479 – V1546483
After Tax Household Income by QuintileCanada 1989 - 2005
0
20000
40000
60000
80000
100000
120000
140000
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
average all
bottom 20%
quintile 2
quintile 3
quintile 4
top 20%