Polozogistics: Nine Thoughts About the Choice of the New Bank of Canada Governor

 

1. He’s Number Two: Stephen Poloz was widely acknowledged in economic and political circles as the second-best choice for the top job at the Bank of Canada. So the surprise was not that he was chosen. The surprise was, Why Not Tiff Macklem? Will someone please find out and tell the rest of us?

2. Doctrinaire [or not?] on Inflation Targeting: He thinks it’s “sacrosanct.” Having studied with monetary policy guru David Laidler at the University of Western Ontario, and been part of the Bank of Canada team that brought inflation targeting to a neighbourhood near you, he got the religion all right. Believers are more inclined to see a “rising inflation” problem that isn’t there. The hazard: Pulling the rising-interest-rate trigger too soon and choking off recovery.

But, like his predecessor Mark Carney, he thinks the central bank should continue being “flexible” on inflation targets. Which are “sacrosanct.” It’s a fine and fuzzy line, unknowable in advance – even to Mr. Poloz.

3. Willing to Commit Stimulus: A “stay the course” assurance is appropriate for Day One. The question is: For how long? For whose benefit? There is legitimate debate over what is more important guidance for setting interest rates – grease the wheels of commerce, or help steer away from over-reliance on borrowing? Raising interest rates have equivalently conflicting impacts: Helps savers and reduces pension liabilities, but slows economic expansion and job creation. Up, down or sideways, clear objectives for interest rate setting are helpful. (See the recent “dual mandate” clarity in the U.S. – unemployment has to fall below 6.5 per cent before the central bank stops stimulating the economy).

4. Not Willing to Commit Noise: “Great,” says Finance Minister Jim Flaherty. This may not last. Even Mr. Carney’s cross-talk with the government over pesky issues like “dead money,” soaring household debt and inequality came later in his mandate.

5. Hasn’t Committed Monetary Policy Lately: Mr. Poloz was part of the braintrust at the Bank of Canada that brought in inflation targeting (circa 1990). Since he left in 1994, monetary policy has become significantly more critical to global economic health – and more complicated. Quantitative Easing (QE) helps create inflation expectations in a system that is dogged by business’s ongoing “crisis of confidence,” a result of spluttering aggregate demand around the world. QE has hosed the global economy with a jaw-dropping $8.9-trillion, aimed at getting business to do more business. We’re told it can be “unwound” if it becomes inflationary. How and when, nobody knows for sure.

There’s something to be said for outsider thinking, and it’s true he is just one person in a vast machine of expertise. But Mr. Poloz has a lot of catching up to do. Or does he? Monetary policy isn’t just about what you do. It’s partly about what you say. The governor sets the tone. And the tone has just changed.

6. Trade, Not Aid: The mandate of the Bank of Canada is to stabilize the domestic economy. There are about 2.5 million businesses in Canada. Roughly 20,000 of them have multinational dealings. The Canadian economy relies on Canadians’ purchasing power, which drives 56 per cent of gross domestic product.

The Harper government has focused on trade as the way to save our collective economic bacon, rather than bolstering the domestic economy and consumer-led recovery. The Harper government also prefers trade over aidin international relations. Mr. Poloz’s background emphasizes trade and export-oriented businesses as the primary engine of the economy. Business isn’t the only thing that makes the world go round, but the government’s choice of Mr. Poloz strengthens this powerful message track.

7. Don’t Do Policy. Do Business: The Harper government keeps walking away from international policy initiatives on taxation, climate change,security, global health; the list goes on. Mr. Macklem was well connected to the international policy community through the G20 and Financial Stabilization Board. But Mr. Poloz brings a big Rolodex of powerful international business contacts to the game.

8. Too Much Focus on Business? Maybe. Time will tell. The bigger concern is maintaining an arm’s length from the concerns of the governmentdu jour. Independence and expertise is what’s really sacrosanct in central banking. There is an ocean of know-how at the Bank of Canada. This appointment makes that seem irrelevant. The antipathy to technocrats and expertise is a leitmotif with the Harper government. The concern is that this sidelining of the best and brightest at the central bank (and elsewhere) may trigger a brain-drain that hobbles the public service. Maybe that’s the point.

9. We Don’t Do Optimism, We Don’t Do Pessimism, We Do [Sur?]Realism: Mr. Carney was known for quip, but not spin. He didn’t shy away from naming the challenges facing Canada’s economy. From census cutbacks to silencing our scientists, there is a troubling trend to simply not reference problematic issues. Markets may be just as emotional as they are rational, but message control on thorny economic indicators like jobs, incomes and uneven growth won’t help decision-making.

Good luck Mr. Poloz. You’ve got a tough act to follow, and the role of your life to play. It will define an awful lot of stories along the way.

 

This piece was first published in the Globe and Mail’s Economy Lab