Don’t Make Monetary Policy on Twitter

The Bank of Canada has been under attack from all sides for its actions (or, in some critics’ eyes, inaction) in response to rising inflation. To reinforce public support for its actions, the Bank has launched a communications offensive to explain – and justify – its actions. The Bank even posted a lengthy thread on Twitter arguing that since inflation hurts “all Canadians,” its efforts to bring inflation down through rapid interest rate hikes will benefit us all. This attempt to dumb-down monetary policy making was not just ineffective in its tone. It inadvertently revealed major flaws in the Bank’s economic reasoning.

In this commentary, originally published in the Toronto Star, Centre for Future Work Director Jim Stanford deconstructs the Bank’s thread, and argues for a more honest and balanced approach to controlling inflation.

Social Media is no Place to Make Monetary Policy

by Jim Stanford

You have to feel for the communications department at the Bank of Canada: their institution is getting heat from all sides. Financial traders are angry the Bank underestimated the strength and persistence of inflation. Pierre Poilievre wants to fire the Governor. And now millions of Canadians, facing higher costs for everything from mortgages to credit cards, are complaining about escalating interest rates.

So to convince Canadians of the merits of its crusade, the Bank has launched a PR offensive: with speeches, TV appearances, and op-eds. They hope if more Canadians believe the Bank will wrestle inflation back to its 2% target, it will happen. Call it ‘Field of Dreams’ economics: simply convincing Canadians inflation will fall, will make it fall.

While expectations play some role in influencing the course of inflation, they are not the main force behind current price increases. Oil companies didn’t jack up gas prices because Canadians expected it: they did it because they have power to make us pay. And workers’ expectations of inflation hardly ensure they’ll get equal raises: just ask health care workers in Ontario, their pay capped at 1% by government dictate.

Last week the Bank even jumped onto social media, with a six-part Twitter message. It explained in lay terms why the Bank is jacking up interest rates – arguing it’s actually good for everyone who’s complaining about it.

The thread, however, was unintentionally illuminating. It made several claims to justify the Bank’s actions that are simply not true. The pseudo-folksy tone was patronizing: “Gosh golly, we know this hurts, but trust us, it’s good for you.” Most worrisome, lurking behind the message was a serious threat that should concern Canadians.

Consider just some of the falsehoods in the Bank’s Twitter foray:

“High inflation hurts all Canadians.” No, it doesn’t: some powerful Canadians (like the owners of supermarket chains and energy conglomerates) have never done better. After-tax corporate profits are a record high relative to GDP. Businesses are increasing prices far more than required to offset higher input costs.

Pretending we’re all in this together is blatant whitewashing. And the Bank’s willful blindness to the distributional conflict behind current inflation distorts and discredits its policy response. For example, its latest Monetary Policy Report warns darkly of a wage spiral – but doesn’t mention profits once. And Governor Tiff Macklem recently urged employers not to boost wages. He was speaking to businesses whose pricing decisions literally make inflation happen. Why didn’t he tell them not to raise prices?

“Prices go up when the demand for goods and services is more than the economy can supply.” That’s one reason for inflation. But there are many others: like supply shocks or oligopolistic pricing power. Domestic demand is clearly not the main cause of current inflation. This simplistic formulation blames the victims of inflation, rather than illuminating its true causes.

“The best thing we can do for everyone is to bring inflation down again.” This outrageous claim elevates inflation control over all other economic objectives. It also violates the spirit of the Bank’s 2021 framework agreement with the federal government, which formally requires it to pursue maximum employment as well as targeting inflation. Low inflation is not the only goal of economic policy, nor even the most important.

We’d have much lower inflation today if policy-makers (initially including the Bank itself) had not prevented a much worse downturn during the pandemic. They made the right choices. Ultimately, keeping people working and producing is what underwrites prosperity.

“And we will.” Here the Bank takes off the velvet glove to reveal an iron fist behind it. This is code language for “we’ll do whatever it takes to get inflation down.” The Bank’s Deputy Governor Paul Beaudry said this explicitly in a recent speech. They hope tough talk will scare workers to abandon hope their wages can keep up with prices, and simply accept a permanent reduction in their living standards.

The Bank’s Twitter thread was both tone deaf and economically incoherent. Its phony, folksy delivery disguises a menacing threat to the livelihoods of millions. In reality, the Bank knows current inflation is more complex, and was not caused by Canadian wages. But the Bank’s simplistic formulation, and the threat lurking behind it, portends tough times ahead for workers.