Forget the Calgary School. The maverick campus in southern Alberta may still influence policy among Stephen Harper’s Conservatives, but the economists holding the levers at the powerful Bank of Canada are products of the Mustang campus in Southern Ontario.
Last week’s appointment of Carolyn Wilkins to the No. 2 position at the central bank – senior deputy governor – puts yet another Western University economics graduate in the upper echelons of the country’s monetary-policy brain trust, joining Governor Stephen Poloz and deputy governor Timothy Lane. Together, they account for half of the policy-setting Governing Council. The man she succeeds, Tiff Macklem, is another Western economics grad.
All four are products of a golden era of economics at Western in the late 1970s and 1980s that made the sleepy London, Ont., campus a global hotbed for monetary theory and inflation research. A fortuitous combination of a young, energetic and talented faculty, an influx of exceptional graduate students and the burning real-world economic questions of the period came together to create a rich atmosphere for debate and discovery that produced exceptional work, launching a generation of Canadian economic leaders and building the intellectual base on which the central bank sits today.
“In retrospect, I think the department did catch lightning in a bottle,” said Bank of Montreal chief economist Douglas Porter, who earned his master’s degree in the program in 1984.
And the spark for this lightning came from two talented and ambitious British economists named David Laidler and Michael Parkin – who might have never ended up in Canada, but for an inflation crisis an ocean away.
In 1975, Mr. Laidler and Mr. Parkin, both in their mid-30s, were working together at the University of Manchester, and were rising stars on the global economics scene. Their passion was inflation, which by that time had ballooned into the world’s most critical economic issue. They had established the Manchester Inflation Workshop in the early 1970s, which gained international attention for ground-breaking research. The young academics were routinely rubbing shoulders with the luminaries of their profession.
But their professional passion was also their personal problem. The inflation rate in Britain surged above 25 per cent in 1975; strikes were rampant and budget deficits were soaring. Britain’s government sought to rein in wages – including freezing those of university professors. As a result, Mr. Parkin and Mr. Laidler were seeing their real income dropping by 25 per cent a year. At the same time, funding for universities, and their research, was drying up. They began looking for greener pastures.
“We were definitely pushed,” Mr. Parkin said in a recent interview.
Meanwhile, Grant Reuber – the provost at Western who had been the head of the economics department (and would later become federal deputy minister of finance and then chief operating officer at Bank of Montreal) – was on a mission to turn Western into a leading school for economics, not just in Canada but the world. He and Mr. Laidler had crossed paths at the University of Chicago in the early 1960s; he made an offer.
And when Harry Johnson, the legendary Canadian economist who was a friend and mentor to Mr. Parkin and Mr. Laidler, convinced them that Western would be a strong fit for their talents, that cemented the move.
They came to a department that was a powder keg of young talent; Mr. Laidler and Mr. Parkin, at 35, were the elder statesmen on faculty. The arrival of the two internationally known inflation researchers propelled the school to the global stage, and the two new stars quickly became a draw for top-notch graduate students and researchers.
“Economics was very exciting at that time,” Mr. Laidler said. “The inflation of the 1960s and early 1970s had generated a whole passel of new research problems for people to work on. There was Milton [Friedman] and his whole monetarism counter-revolution. This was generating controversy. The subject was wide open. A lot of bright people were attracted to economics.”
The economics department thrived on a youthful exuberance and collegiality that would be near impossible to duplicate today. There was little age gap between the students and the mentors – they were a group of peers, both at work and at play. Mr. Porter recalled that on the department’s intramural basketball team, three of the five starters were professors.
“There was only sort of 10 years between us and the graduate students,” Mr. Laidler said. “There were lots of parties, and lots of sitting in the bar until one in the morning. We all had lots of energy.”
At the core of Mr. Laidler and Mr. Parkin’s inflation work were ideas that over the past two decades have become widely accepted, and today form the heart of policy at the Bank of Canada and many other central banks. They helped popularize the notion that inflation was a monetary matter – that by influencing the growth of money supply, via interest rates, central bankers could tame inflation. They explored the concept that specific inflation targets could be a stabilizing basis for monetary policy.
It all sounds obvious now; indeed, the Bank of Canada has operated with an inflation target since 1991. But in the mid- to late 1970s, all this was pretty radical thinking. Elected officials and public policy makers saw inflation as “a sociological phenomenon that might be contained through direct controls on wages and prices,” Mr. Parkin said.
“About three months after I got to Canada, Pierre Trudeau was on my television telling me that inflation was being caused by trade unions and aggressive firms’ pricing,” Mr. Laidler recalled. “I don’t think he mentioned monetary policy at all. I had a purple fit!”
Mr. Parkin and Mr. Laidler’s proteges at the Bank of Canada face a different problem today; rather than runaway inflation, they are wrestling with unusually low inflation levels. Still, the country’s ongoing lack of business investment is, at its root, a money-supply issue; Mr. Poloz’s concern about low inflation boils down to the stability of price expectations. The issues debated at Western three decades ago remain central to Canada’s current monetary policy discussion.
“Bottom line is that inflation needs to be well anticipated to deliver strong growth and low unemployment,” Mr. Parkin said. “If Steve remembers properly the lessons of [Milton Friedman’s 1963 book] A Monetary History of the United States and follows its advice, we’ll be fine.”