Central bankers can’t be expected to stay silent in a post-crisis era
David Tkachuk, a Conservative senator from Saskatchewan, thinks the man who Stephen Harper appointed to lead the central bank in 2013 has too much good to say about the policies of the current master of the Prime Minister’s Office.
In an extraordinary exchange at the Senate banking committee on April 25, Tkachuk accused Bank of Canada Governor Stephen Poloz of issuing an “implicit endorsement” of Justin Trudeau’s economic policy by using a recent speech to describe how Quebec had narrowed the gender gap in the labour force by subsidizing daycare, among other things.
The senator didn’t stop there. He told Poloz that, “you have been heard to endorse this government’s spending outside of a recession, saying roughly we don’t need to worry about deficits at this time,” and then stated the leader of the central bank had “endorsed” Trudeau’s infrastructure program.
“The people have to have confidence that you are an independent governor,” Tkachuk said. “I think you may be straying a little bit beyond your mandate with these statements and creating a perception that you are a little too close to the government in power.”
I’ve never seen Poloz angrier and it’s easy to understand why. Central banking as we know it in Canada is based on the premise that whoever is in charge will be left alone to raise interest rates as he or she sees fit.
The idea is that if households and businesses believe monetary policy is made without political interference, then they will get behind what the central bank is trying to achieve. In Canada’s case, that’s annual inflation of about 2 per cent. If Canadians thought the PMO was pulling the strings, they might doubt that the central bank could be trusted to make the potentially controversial decisions necessary to achieve that goal. Instead of asking for a 2 per cent raise, or adjusting prices only marginally higher, labour and companies might set their expectations higher. That would would make controlling inflation that much harder.
This approach to monetary policy has been working quite well for more than two decades now. But there’s another side to the understanding about independence. In return for freedom to operate, central bankers are supposed to stay quiet on matters of a political nature.
That’s become extremely hard to do in the post-crisis era. Debt, climate change and the uncertainty created by the rise of populism all have outsized influence on the economic outlook, and therefore the trajectory of inflation. And yet many purists — and lots of partisans — still want central bankers to avoid these subjects entirely and stick to technocratic issues such as how the unemployment rate is affecting prices.
It’s not realistic, as Poloz coldly told Tkachuk.
“It would be bizarre for me to ignore fiscal policy, for example, in trying to understand how the economy will behave over the next two years relative to our inflation target,” he said. “When you say that I’ve endorsed a government plan; rather what I’ve done is done the arithmetic around what the government plan will have as an impact on the economy and therefore how it figures into our calculation of the risks up or down on the inflation target.”
The current debate around central bank independence would seem strange to most people. It features academics and journalists arguing that a powerful institution should err on the side of providing less information to the public, not more. And the entire notion depends on the assumption that a cabinet appointee who won an obscure hiring competition is somehow immune from political influence. Harper left behind visual evidence of why that is unlikely the case by summoning the newly appointed Poloz to his office for a photo-op. The message was clear: Don’t forget who’s boss.
So when I listen to Tkachuk’s attack on Poloz’s credibility, I hear a note of betrayal. If he was objectively concerned that the governor had compromised his independence, the senator would have asked Poloz why he avoided talking about fiscal policy when Harper was in power. For example, during testimony at the House finance committee in April 2015, Conservative member of Parliament Andrew Saxton asked the governor if he would, “explain the benefits of a balanced budget for the Canadian economy?” Poloz declined, saying “it’s not really our role to comment on fiscal policy.”
We know now that if Poloz had answered that question, he probably would have said that by constricting spending while the economy was weak, the federal government would force the central bank to keep interest rates low, which would in turn cause households to take on more debt. That’s the argument Poloz made in a paper he published in June 2016 and Exhibit A in the case that he is running cover for Trudeau and other deficit spenders.
Randall Bartlett, chief economist at the University of Ottawa’s Institute of Fiscal Studies and Democracy, says Poloz should be consistent; if he opted to bite his tongue before the election, he should continue to do so now. Bartlett doesn’t think the governor is a Liberal flunky; his point is that the inconsistency from one prime minister to the next has created an opening for those who do think Poloz is apologizing for Trudeau to attack the central bank’s neutrality.
I’m unconvinced that asking central bankers to live like monks is the answer. The financial crisis forced them into the public’s consciousness. Traders obsess over every word a central banker utters, and media companies have built business plans around catering to that obsession. Traditionalists can lament the fact that central bankers have become rock stars, but they should accept that Poloz and his peers are like the Rolling Stones — they won’t be leaving the stage anytime soon.
So rather than encourage the central bank to protect its independence by being less transparent, critics such as Tkachuk should demand a more rigorous selection process that includes a role for the Finance Committee. This would dilute the perception that the central bank governor is a puppet of whoever is in power.
And the rest of us need to stop overreacting every time a central banker talks about something other than the Phillips curve. All Poloz has been doing is offering neutral assessments of the economy as he sees it. Some of what he has to say supports government policy, but not always. Another Conservative senator, Betty Unger, asked Poloz to comment on the perception in the oil industry that Canada had become a country that, “can’t get anything done.” It was a direct reference to the Trudeau government’s inability to overcome provincial resistance to pipelines. Poloz’s response: “What I can report is companies are saying things like that to us.”
The Bank of Canada governor didn’t sound all that close to the government at that moment.
• Email: kcarmichael@nationalpost.com | Twitter: carmichaelkevin