Poloz book skirts the most interesting policy questions
Stephen Poloz, former governor of the Bank of Canada, has followed a recent trend among central bankers by writing a book after leaving office. The Next Age of Uncertainty is part memoir and part discussion of long-term trends. Unfortunately, it shortchanges monetary policy, which is what most people want in books from former central bankers.
Much of The Next Age of Uncertainty analyzes issues Poloz has raised in the past, including an aging population, uncertainty (about which he wrote a long paper in 2014), digitization, and automation. The book offers little that is new on these subjects, either from him or for the world. Rather than rehashing familiar subjects, Poloz could have drawn on his experience as the head of a G7 central bank to provide unique insights into monetary policy.
Instead, he scrupulously avoids the many interesting questions surrounding monetary policy today, for instance: did Bank of Canada purchases of federal government bonds during the pandemic monetize the debt and fuel inflation? Or does it matter more if the bank buys new or existing government debt? Or if the economy’s nosedive during the pandemic’s onset was less like a typical recession and more like a natural disaster, from which economies typically recover quickly, why was extraordinary monetary stimulus maintained for so long? And what is the outlook for inflation after the massive fiscal and monetary stimulus of the pandemic? Is Canada’s housing market a bubble? There is even a long-standing debate about how to measure inflation — is it just the CPI, or should asset prices also be factored in? In sum, there is no shortage of interesting questions about monetary policy these days.
More fundamentally, Poloz completely ignores concerns about monetary stimulus raised by his onetime mentor, former deputy governor of the bank, William White, one of the few economists to predict the 2008 financial crisis. For years, first at the Bank for International Settlements and then OECD, White has warned about the risks of ultra-easy monetary policy undermining financial stability and lowering longterm potential growth. Poloz clearly was aware of these issues, yet never in his tenure as governor nor in this book does he discuss them. Did he disagree with White or was resistance from the Bank of Canada’s bureaucracy too great? That Poloz doesn’t mention White strongly suggests he disagrees with him, but he never articulates the case for relentless monetary stimulus.
In public statements, Poloz is clearly unperturbed by the current surge of prices, predicting it is transitory and will revert to the bank’s two per cent target by year-end. Of course, the model Poloz uses to forecast inflation utterly failed to spot its resurgence in 2021. His stance on inflation is so dovish he has been quoted approvingly by the Green Party’s Elizabeth May, which should give pause to any serious person. In his book, Poloz does acknowledge the possibility inflation could become entrenched, as a result of forces such as the phasing-out of fossil fuels and (continuing on the theme of fossils) rapid population aging. He speculates that higher inflation could be tolerated by heavily-indebted households, an idea clearly at odds with the public’s virulent response to the recent upturn in prices. Most Canadians evidently are more hawkish on inflation than the two former heads of the Bank of Canada — which is not at all good for the bank’s credibility or ability to control inflationary expectations.
Poloz blames rising inequality on technological change, which favours those who innovate. While correctly noting that Canada has avoided the trend to more inequality, he does not draw the obvious conclusion that Canada’s faltering record on innovation helps explain why inequality is not rising. It could easily be argued Canada would benefit from more inequality, if it meant our entrepreneurs were creating the world-beating products American tech companies excel at inventing. A Steve Jobs or Bill Gates or two would do our economy wonders without stoking class warfare.
Poloz does venture into controversial areas outside of monetary policy. He is refreshingly optimistic about the future of the oilsands. The heavy oil the oilsands produce is ideally suited to the industrial uses that may come to dominate oil demand if transportation and heating convert to non-fossil fuel sources. He convincingly refutes the idea that firms hoarding cash represents “dead money,” a boneheaded idea popularized by his predecessor, Mark Carney. Cash reserves are important, he argues, in an age of heightened uncertainty. Still, he cannot resist admonishing firms for having too high a “hurdle rate” for evaluating the rate of return needed to proceed with an investment, which echoes Carney’s basic criticism that firms are not spending enough.
Maybe The Next Age of Uncertainty’s lack of substance about monetary policy is not such a surprise. Poloz admits to first aspiring to head the Bank of Canada as an undergraduate. Ambition seems to have fuelled his dream of becoming governor, not the desire to implement a specific policy agenda. That puts him in the same boat as Justin Trudeau, who also seems motivated by personal, not policy goals — unlike his father, who was driven by a vision of a new constitutional arrangement. At a time when monetary policy and inflation are of great concern to average Canadians, it’s disappointing that a central banker’s book spends so little time on policy.