Earlier this week, Reserve Bank of India Governor Raghuram Rajan reflected on the wide gap between the ease of identifying the right economic policies and enacting them. Politicians know what they need to do, they just don’t know how to get re-elected after they have done them, Rajan said at an event in Mumbai, borrowing the quip of Jean-Claude Juncker, the former prime minister of Luxembourg who now is the president of the European Commission.
There now is a counterpoint to the notion that sound economics makes for poor politics: Canada’s election. Justin Trudeau’s Liberal Party entered the campaign in third place in both Parliament and opinion polls. They ended with a majority government by daring to go where no other politician would. Trudeau pledged budget deficits, a third-rail issue in Canada since the mid-1990s. The country’s political commitment to sound fiscal policy created the foundation for solid economic growth for nearly two decades. But the financial crisis changed things. Canada’s exports of goods and services didn’t recover with the rest of the economy. The collapse of oil prices exposed this fact to a larger public. There was nothing to offset the retreat in resource investment. Households were tapped out, with their debt-to-income ratios at record levels. The Bank of Canada cut interest rates twice in 2015, dropping its target to a quarter point above its lower bound.
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