Stephen Poloz is a Keynesian now.
For the the second time in as many speeches, Canada’s central bank governor last week referenced the appropriateness of using fiscal policy to save an economy suffering from a dramatic decline in business investment and confidence. Poloz told an audience in Ottawa on January 7 that a weaker dollar would not be a panacea for the country’s economic woes, and that other treatments also should be administered.
“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,” Poloz said. And a month earlier, Poloz said this in Toronto: “It may sound ironic, but the circumstances under which it may be appropriate to consider unconventional monetary policies are also those under which fiscal policy tends to be most effective.”
That Toronto speech was Poloz’s first since the October election that saw the champion of limited deficit spending conquer the forces of premature austerity. Poloz, it seems, has decided it now is safe to come out of the closet. He said nothing publicly that could be construed as supportive of running deficits to offset economic decline while former prime minister Stephen Harper was in power. Poloz grew up in an institution marked by the “Coyne Affair,” a public clash of ideas between Bank of Canada Governor James Coyne and Prime Minister John Diefenbaker that led to the former’s resignation in 1961. The incident actually enshrined the central bank’s quasi-independence—latitude that Poloz’s two immediate predecessors, Mark Carney and David Dodge, chose to regularly exploit. Poloz has proven to be more a traditionalist, limiting his commentary to matters related to the achievement of the central bank’s inflation target. As Poloz last year fought the collapse in oil prices virtually alone, he said nothing about how Harper could offer a hand. The Bank of Canada took fiscal policy as a given, the governor said on numerous occasions.
And he still would say that. Only now that he works for a government that plans to run deficits to finance the construction of infrastructure, Poloz seems willing to help Prime Minister Justin Trudeau and Finance Minister Bill Morneau establish the intellectual foundation for their economic program. As someone who has been urging Canadian policy makers to get over their balanced budget obsession for almost exactly a year now, I can only say to Poloz, “Welcome.” (Historians take note: We now can safely assume Harper ignored the advice of the country’s most respected economic institution to pursue his 2015 balanced-budget election strategy.)
But enough with history. Canada’s stagnating economy is primarily Trudeau’s and Morneau’s problem now. With international oil prices near US$30 per barrel, there is growing sentiment in financial markets that Poloz will cut interest rates yet again, perhaps as early as next week, when the Bank of Canada concludes its latest round of deliberations on policy. The central bank’s final quarterly survey of business intentions in 2015 was bleak.
“Overall, responses to the winter Business Outlook Survey indicate that business sentiment has deteriorated as the negative effects of the commodity price shock continue to unfold and spread beyond the resource sector,” the central bank said in its assessment of the results, which were released January 11. Only 26% of respondents said they intended to increase investment over the next 12 months, while almost as many said they planned to cut spending and 45% said they planned no change. It was the first time since the heart of the financial crisis in 2009 that more companies said they planned to reduce investment than said they planned increases.
The only entity that can fill that void is the federal government, and, to a lesser degree, the provinces. Morneau has been quiet on his budget intentions. That’s acceptable, provided he has been conducting a careful assessment of how to most productively deploy the government’s resources. Canada’s economy is in a delicate spot, but it isn’t caught it what Poloz last week described as the “most synchronized worldwide economic downturn in history.” Trudeau created a bit of difficulty for himself by characterizing his infrastructure program as “stimulus.” That word now creates the impression of shoveling money as quickly as possible, simply to generate any amount of economic growth. To keep Canada’s debt under control, Trudeau’s infrastructure program must make the country’s economy more competitive, putting it in a position to generate higher levels of growth than currently is the case. That takes more planning.
Still, confidence is important too. Therefore, Morneau shouldn’t dally. Dark clouds are starting to fill Trudeau’s sunny skies.
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