William Robson is president and chief executive officer of the C.D. Howe Institute.
Bank of Canada Governor Stephen Poloz's speech in Ottawa on Thursday got lots of attention. As usual, analysts and traders parsed it for clues about short-term interest rates. Economists noted the Governor's compelling arguments for letting the Canadian dollar's external value move as circumstances change. Less happy, however, is the intense focus on Mr. Poloz – and other central bankers – as masters of economic growth. Engineering sustainable increases in living standards is a task for which he and his counterparts around the world could really use some help.
On interest rates, the Governor's speech highlighted the divergence between the U.S. Federal Reserve Board, responding to economic expansion by tightening, and other central banks fending off deflation by easing. The key takeaway: The Bank of Canada will set its overnight rate target according to Canada's circumstances, with the goal of hitting the 2-per-cent inflation target.
On the foreign exchange rate, the message was how a freely floating currency helps Canada adapt to changing terms of trade. How high energy prices boosted our exports, investment and incomes until 2014, how lower prices since then reversed those advantages, and how letting the loonie rise and fall eased the adjustment on the way up, and is doing so again on the way down. Resisting the decline by raising interest rates would have further dampened demand and forced prices and wages down.
So on both interest rates and the exchange rate, Mr. Poloz explained how monetary policy can keep inflation on track. So far, so good – but what most Canadians care about is growth, jobs and living standards. When and how much will things improve?
Mr. Poloz said less about that. He took us through the effects of lower oil prices on energy exports and investment, and commented on the speed and strength of offsetting growth in non-energy exports and energy-using sectors. But all he could safely say was that the adjustments have to happen.
The Governor has good reason to be circumspect about how fast Canada's economy might grow in 2016 and beyond. Not just because he doesn't know – no forecaster does for sure, and events abroad beyond our control are always critical. But also because how fast the economy can grow with inflation stable at 2 per cent depends on what other Canadian policy-makers do. And a smart central banker, not wanting finance ministers and others muscling in on monetary policy, stays off their turf.
So on helping growth, Thursday's speech said only: "A flexible exchange rate is not a policy panacea. Other complementary policies can be deployed to offer a broader array of buffers while still encouraging the necessary longer-term adjustments, including fiscal policies and policies that make labour markets more flexible."
We do not know what Mr. Poloz might say if he spoke more freely on those subjects, but he'd have plenty to choose from.
Demography is a fundamental constraint to future growth: Canada needs young, middle-aged, and – especially – older workers to leave dead-end jobs and regions and find new and more rewarding work. When federal and provincial governments employ people unproductively, tax work and subsidize waste, or encourage people to retire when they still have much to offer, they hurt growth now and in the future.
Saving and investment are also critical. Consuming is fun, but sustainable growth requires saving – for public infrastructure and private investment in new equipment and technology. When federal and provincial deficits divert saving into consumption, they subtract from the wealth that boosts our living standards over time.
If the Governor of the Bank of Canada struggles to please an audience eager for an upbeat message – and has to resist criticizing people who make his job harder – he has plenty of company around the world. The Fed has laboured eight years to clean up the mess the U.S. government created by encouraging mortgage lending to people who couldn't afford it, while the housing bubble's waste of resources, and massive government deficits ever since, continue to depress U.S. growth. The European Central Bank runs a currency area riddled with insolvent governments and periodically panicking investors. The Bank of Japan has run policy too tight for years – but with government debt approaching 250 per cent of Japanese gross domestic product, its fears that printing more money would foster even more fiscal profligacy have a real foundation.
To the extent that misguided government policies are holding growth back, central banks can only do so much. They can use the tools of monetary policy well or badly – happily for us, the Bank of Canada has used them well. We want faster growth. But for that, Mr. Poloz – as other central bankers around the world – needs help.