As he launched into a spirited defence of the massive economic stimulus the Bank of Canada and the federal government have provided during the COVID-19 pandemic, Stephen Poloz leaned on two of his favourite weapons.
The metaphor – an explanatory tool for which he became famous during his seven years as Bank of Canada governor, from 2013 to 2020.
And the photon torpedo.
“When you’re using your photon torpedoes to counter the black hole that’s drawing the Enterprise in, you don’t send out one or two. You use as many as you think will, for sure, get it done,” Mr. Poloz said. It’s not the first time the unabashed Star Trek fan has snuck a reference to the sci-fi franchise into an economic analogy.
“When it’s done, you say, ‘There, we’re out of it, we’re good now. Let’s get back on course.’”
In this case, the black hole was the pandemic, and the photon torpedoes were hundreds of billions of dollars in government supports, as well as the Bank of Canada’s near-zero interest rates and more than $300-billion in government bond purchases under its quantitative easing program. Mr. Poloz, who retired from the bank in mid-2020 when his seven-year term ended, gave the order to launch the central bank’s massive actions.
Some critics say all that monetary and fiscal firepower, along with similar actions by other major governments, has fuelled the inflation problem we have today. Mr. Poloz argued that without all the stimulus we would have had much bigger problems.
“We should be celebrating that we didn’t have deflation. We didn’t have a depression. It could have been a vastly worse outcome,” he said.
“If, today, inflation risks seem slightly skewed, that’s a small price to pay.”
I spoke with Mr. Poloz in mid-December in what amounted to a continuation of a tradition we started while he was governor: his year-end interview with The Globe and Mail. In each of his final four Decembers on the job, he sat down with The Globe to discuss the year past, and the challenges ahead.
We decided to take the opportunity to renew the tradition – albeit via Zoom, and with less formality than in the past, when I carefully addressed him as “Governor” (at least in front of his staff). These days, he’s “Steve” – which, frankly, he always preferred anyway.
Mr. Poloz, now 66 years old, isn’t exactly retired. Between a few corporate board appointments and a special-adviser post at law firm Osler, Hoskin and Harcourt, he figures he’s working “about 50 per cent of my time” – which, he wisecracks, is down from 150 per cent during his time as governor. He has also written a book, called The Next Age of Uncertainty (a riff off the title of John Kenneth Galbraith’s book from the mid-1970s), which is scheduled to be released in February.
“It offers an explanation for the rising tide of volatility that [began] long before COVID,” Mr. Poloz said.
“Some of the forces that [Galbraith] was wrestling with are present again, and some of them are reversed – the big one being demographics,” he added. “One of the big things that was disrupting the 1970s was the arrival of people like me into the work force, from the baby boom. Now, one of the things that will disrupt it is our exit. This sort of 50-year experiment – economic growth and interest rates and so on were boosted for 50 years. Most of us think of that as normal, that 50-year period, but actually, it was quite abnormal, in the broad sweep of history.”
Mr. Poloz is still in demand for economic commentary – recently, around the topic of inflation, the chief concern for the central bank. His late-November interview with CTV’s Evan Solomon, in which he disputed the notion that fiscal and monetary stimulus were responsible for the inflation problem, was cited by Deputy Prime Minister and Finance Minister Chrystia Freeland as she defended her government’s record at a parliamentary finance committee hearing.
Mr. Poloz said he’s disappointed in the tenor of the political debate surrounding inflation, which too often has diverged from the honest and productive discussion that he believes policy makers should be having.
“It’s surprising that we can’t have a more thoughtful debate about whether the supply side of the economy is ready for all the demand we’re giving it or not, as opposed to just yelling at each other about whether inflation is this much or that much.”
Those supply side questions, he believes, are the key ones as we enter what he described as a “risky” period for inflation-fighting central bankers.
“We’re in a zone where the risks around the whole forecast of inflation, and what policy will do about it, are higher than they’ve been for quite a long time.”
Normally, policy makers look to raise interest rates when they see the economy closing its output gap – that is, when the amount of demand approaches or even exceeds the economy’s productive capacity to meet it. But we’ve already witnessed surging demand and many cases of supply shortages – and, of course, related price surges – in an economy that still, by many recognized measures, looks short of its full capacity. It’s a puzzle that policy makers are racing to solve as we enter 2022.
“There are risks that the economy will not be able to stay up with all the demand. So that means that there is a risk of inflation,” Mr. Poloz said. “It’s a risky analysis at this stage, given that there are so many things moving, in terms of the actual capacity of the economy.”
“Is it possible to make a mistake? Of course it is. In either direction.”
The tipping point for inflation, Mr. Poloz figures, is when expectations of higher inflation “become embedded in decision-making” of workers and their employers.
It will be critical, then, for policy makers to watch for evidence that employees are demanding higher wage settlements – and that firms are passing those rising labour costs to their customers – if they want to snuff out the inflation threat.
“You only get one chance to prevent that,” Mr. Poloz said.
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