IN PRINT ARCHIVE CIR Summer 2000
|Is the Business Cycle Dead -- Again?|
Back in the mid 1960s, the Chairman of the U.S. Council of Economic Advisors declared the business cycle dead. That was four recessions ago! No self-respecting forecaster would dare to make such a pronouncement today, right? Even though the expansion has continued unbroken since 1992, the longest in post World War II history?
Actually, the fact that we are in the midst of the longest expansion in post-war history is irrelevant. For surely everyone knows that it would be easy to concoct a set of highly restrictive monetary and/or fiscal policies that would guarantee a recession outcome. That having been said, the structural changes that have been taking place in the economy all but guarantee that the unbroken expansion will continue for years, or even decades, into the future. That would appear to suggest that the business cycle could be dead for a long time this time!
The most important structural change? The changed attitudes of central bankers! This may sound strange, but consider this. Every single recession in the post World War II era has been caused by monetary policy. We know why: inflation had accelerated to worrisome levels; interest rates had to be driven high enough to ensure that everyone lost their pricing power -- i.e., high enough to bring the economy to its knees. By contrast, Central banks today are prepared to raise rates to remove any inflation threat; that can be accomplished by engineering a slowdown, not a recession. If successful, Central banks can be counted on to provide whatever liquidity is required to finance non-inflationary growth. Yes, there can be mistakes, but as long as we are dealing with only an inflation threat, not entrenched and accelerating inflation, policies can be easily reversed to correct those mistakes.
There is more. One of the huge benefits of the technology revolution has been better inventory management. By contributing to the dramatic decline in the inventory-to-sales ratio, this technology revolution has largely removed what historically has been the most important factor responsible for the amplitude of swings in overall economic activity. Remember your Economics 101 class that dealt with the "Inventory Cycle"?
Additionally, because of technology and the flattening of organizations, the shift of the workforce to the service side of the economy has been accelerated. Service sector employment being much more stable than goods employment further contributes to less pronounced swings in economic activity, because service sector income is more stable.
Finally, let's not forget about fiscal policy. A much less debt-constrained government sector could -- if sense prevailed -- use fiscal policy to offset undesirable swings in the economy.
Is the business cycle dead? No, but the body is likely to move only if there are accidents or policy mistakes.
by Lloyd C. Atkinson, Chief Investment Officer of Perigee Investment Counsel Inc. in Toronto.
The Canadian Greenback?
For Canada as a whole, it would not be beneficial to adopt the U.S. dollar as our national currency. Canada would have no influence in the conduct of monetary policy. The U.S. Federal Reserve would determine our monetary policy and Canada would pay the U.S. (in the form of seignorage) for the privilege of using its currency. Only in countries where there is little faith in the central bank to undertake a stable monetary policy (such as Panama or Liberia) does it make sense to adopt the U.S. dollar. This is not the case here, where the Bank of Canada is doing a good job in following a stable monetary policy.
In addition, our current floating exchange rate system allows, via exchange rate changes, for smooth adjustments to shocks (such as fall in commodity prices), which affect the Canadian economy to a greater extent than the U.S. economy. With a common currency, all the adjustment to differential shocks will fall on domestic prices and possibly domestic employment.
A common currency will definitely save on the transaction cost of exchanging Canadian dollars for U.S. dollars. Such savings will in total be small and furthermore, for many multinational firms exchange rate transactions are matters of bookkeeping and involve no significant money changing costs.
It has been argued that the Canadian dollar has fallen about 30% in the last 25 years and that the fall in the Canadian dollar has induced laziness on the part of Canadian manufacturers, resulting in reduced productivity in Canada vis-à-vis the U.S.
The argument that the falling Canadian dollar has provided a shelter behind which lazy manufacturers have been able to hide rather than take measures to improve productivity is based on the fallacious assumption that manufacturers are not profit maximizers. Both competitors and monopolists will engage in productivity improving investments provided the benefits exceed the costs.
Productivity is lower in Canada than the U.S. There are a large number of real factors that account for this difference. The floating dollar is not one of them. The floating dollar is not responsible for lower productivity in Canada, nor is it responsible for higher productivity in the U.S.
All things considered, a common currency would not be good for Canada.
by Jack Carr, Professor of Economics at the University of Toronto.
Top 10 Reasons Companies Fail to Get the
Most from a Merger
Source: Ernst & Young