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Report On Business Magazine Former Bank of Canada Governor David Dodge: I would’ve hiked rates faster

ROB Magazine

David Dodge

Economist. Former deputy finance minister, deficit-slayer and Bank of Canada Governor. Snow-bird and reformed pipe-smoker

The 1950s, when I grew up, was a period when the world was buoyant. You were not afraid of the future at all.

The Toronto stock market was a real bucket shop, and as a kid in Toronto, if you got interested in it, you took your paper route money and bought a 100 penny-stock shares.

I was interested in chemistry and economics. My first chemistry course at university was half organic chemistry, and I found it incredibly boring. And the economic side was very interesting, with the big fight between the finance minister, Don Fleming, and Bank of Canada Governor Jimmy Coyne. So I switched to economics.

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I'm a teacher by trade, and if people are going to accept policies that, at least in the short run, may not be favourable to them, they have got to understand why you're doing it and what you expect the long-term outcome to be.

In my time at the Department of Finance, we were carrying through the House maybe 35% or 40% of total legislation because of the serious fiscal sitation we were in. It was a pretty proud moment when we finally, in 1998, got that deficit down to zero.

We were lucky as a country that as we were taking away domestic demand by cutting federal budgets, mirrored by provinces cutting their budgets, we had an American consumer who was going crazy, creating almost enough demand to totally offset that which we were taking away.

Obviously you try to avoid mistakes, and the way you avoid them is by having a lot of very open, sometimes even abrasive, internal debate.

When the world fell apart in 2008, we suffered economically. And the asset-backed commercial paper problem took a while to resolve. It shouldn't have happened. We should have been wider awake, and I put a lot of blame on our security commissions. There was too much waving of hands, saying, "Sophisticated investors know what they're doing."

I'm a big fan of carbon pricing, in the sense that we should use economic instruments to cut carbon emissions, and I'd do it through carbon tax. It hits domestic consumption, and that is actually good policy.

We can have good policies that fail because of inadequate transition time. The speed of Ontario's minimum wage hike is tough to handle. On the labour side, the minimum wage is actually a fairly good instrument to use, but you should phase it in so it doesn't hit too rapidly.

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I'm an old guy. I worry about my grandchildren. We've got big changes coming in technology, big changes coming in the way life is organized, and they face challenges that certainly are very different than the ones my generation faced. I'm sure they'll cope with it, but I guess I'm glad I don't have to cope with it.

I've been quite clear, starting in 2016, that in both Canada and the U.S., the central banks should have been slowly raising rates and indicating they were going to have to continue to raise rates to whatever the new normal is—say, 3% – in a fairly consistent and predictable fashion.

I think Jerome Powell was a good appointment to the Fed. I thought Janet did a very good job, but was probably, by the time we got to mid-2016, a little too reluctant to move rates up.

Canadians who have taken on a lot of debt are going to have to expect more normal interest rates. So they'll have to make more room in their budgets to cover the interest on their debts. And that means domestic consumption really ought to come off a bit. So the economy will slow down.

We've been running above our longer-terms speed limit, so by the time we get to the second half of this year or into next year, we'll be running at something like normal capacity of 1.8% or 1.9% growth. And that's not bad. That's kinda where we are, given our demographics and our non-stellar productivity performance.

With marriage, my advice is to keep going. It's very hard to do things professionally if you don't have a home base to operate from.

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I'm trying to slow down. I keep going because the world keeps changing. I spend a lot of time thinking about the impact of technology on people's lives, not just on the labour side. Economics is interesting again.

I was very sad to give up my pipe. My doctor said, "You really should stop," so I stopped. I was 69, so almost six years now. I miss it.

This interview has been edited and condensed.

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