voteAs we enter this election time in Canada and the United States, we need to see the political system taking a greater responsibility for economic policy.  This is in contrast to the increasing trend of having monetary authorities assume this responsibility.  In this election year, ensure government is the architect of economic growth.

One of the challenges of having the monetary authorities as the principle and prominent architects for economic policy is that their sphere of influence, and their constituent audience, is too narrow.  That audience includes the banking community (with a focus on its health and stability, effectiveness, competitiveness, and day-to-day functioning) and government financing (currency issuing, government banking, and debt management).

To a much lesser extent, a monetary authority’s influence extends to trade (through its moderate influence on the exchange rate), housing (through interest rate policy), consumer spending and saving (again, through interest rates), and general economic activity (through residual effects stemming from the core functions noted above).   Each of these is ancillary to its principle roles cited earlier.  In this respect, the monetary authority should see its role as a junior partner (though important one) to a country’s overall economic policy.  Government needs to the leader.

Let’s use the 2008 financial crisis as an example.  The monetary authorities’ response throughout the world was to materially increase money supply and reduce bank cost-of-borrowing to improve the liquidity crisis of the time – a correct, and effective, policy given the circumstances, and the fact of no inflationary pressures at the time.

However, this monetary policy did not feed through to an improvement in the real economy per se – the increased liquidity and lower cost of capital provided by the central bankers stayed in the banking sector itself (improving its health via improved balance sheets), but led to no ‘trickle-down’ effect in terms of credit available to business and consumers, which is necessary to affect production and employment markets.  This is why the global economies are still struggling eight years later, Canada included.  (In fact, any real stimulus to global economies during this time has come, for example, from China through its increased economic activity, the demand for resources, and its provision of lower priced goods due to lower cost of production – but that is another story).

The real economy’s improvement comes by way of a coordinated policy established and managed by government through broader policies directed at consumer spending, infrastructure investment, social welfare policies, tax policies, and so on.  Monetary policy is, of course, part of the mix – but only part.  Nevertheless, the world is increasingly relying on monetary authorities to take on the role of principle architects of economic policy.  This is a dangerous situation – after all, the foundation of monetary policy is confidence and trust, and 2008 showed how quickly that can disappear.

Government needs to reassert its role as the architect of economic growth, and politicians need to be asked to do this during this election period.