Tiff Macklem has been Bank of Canada governor for only four months, but he must be feeling comfortable, because he is making a habit of entering dangerous territory.
Macklem’s latest speech was about income inequality, a societal problem that economic orthodoxy suggests should be off limits for a central banker since there’s little that monetary policy can do to correct it. Mark Carney, a previous Bank of Canada governor, once offended some for expressing sympathy for the Occupy movement, which made a cause of trying to claw back the outsized wealth of the one per cent.
But economic orthodoxy was cracked by the Great Recession, and is now being shattered by the coronavirus pandemic.
Macklem started his professional career at the Bank of Canada in the 1980s, fought the 2008-09 financial crisis as a senior official at the Finance Department, and then had a chance to reflect on all that he had observed when he became dean of the University of Toronto’s Rotman School of Management. No governor has been more prepared for extraordinary events, and Macklem appears set to lead the central bank in a new direction.
Last month, Macklem signalled an end to the Bank’s tradition of aloofness, using a virtual appearance at the annual Jackson Hole central banking conference to argue that central banks had made a mistake by relying on traders, economists and journalists to interpret monetary policy for the masses. “The best way to get our messages to the public is to deliver them ourselves,” he said on Aug. 27.
Macklem on Sept. 10 backed that up in remarks given at a virtual event hosted by the Canadian Chamber of Commerce, yet clearly directed to a far broader audience than the business community. He used the bulk of his speech to share an analysis of how the COVID-19 recession has taken a disproportionate toll on women and younger workers, pledging to take that into account when assessing the state of the economy.
“Our mandate is to maximize the economic well-being of Canadians,” Macklem said. “Very uneven recessions tend to be longer and have a larger impact on the labour market. So, uneven outcomes for some can lead to poorer outcomes for all.”
Most people will find those comments reassuring, others will simply see them as a statement of the obvious. But some will deem them controversial, since certain political parties have made a virtue of closing the income gap, and convention suggests the central bank governor should speak only about arcana such as the output gap and the neutral rate of interest.
Those people will be doubly displeased by Macklem’s assertion during the question-and-answer period that “we are going to need to accelerate our efforts” on dealing with climate change, a fact-based statement that nonetheless will be construed by some as political.
However, it’s 2020 and central bankers are learning how to live with the fame that was thrust upon them during the financial crisis, when they arrested the Great Recession with relatively little help from elected officials.
There have been missteps, to be sure. Carney, who also served as head of the Bank of England, and Raghuram Rajan, the former Reserve Bank of India governor, often strayed too far from monetary policy in their public remarks, making themselves partisan targets. Rajan, while celebrated in the Indian press, was effectively run out of his home country by the ruling political party. Carney allowed himself to become a lightning rod in the Brexit debate.
Yet central bankers would be doing the public a disservice if they retreated entirely, because voters would lose access to an important perspective. Macklem appears willing to speak frankly on important economic issues, while steering clear of offering prescriptive advice on what legislators should do about them. “Striving for equality of opportunity is simply the right thing to do,” he said in his speech to the Chamber of Commerce.
Striving for equality of opportunity is simply the right thing to do
Such an approach will invite slings and arrows.
You could argue that it’s a bit rich for a central bank to express concern about economic disparity, since monetary policy over the past decade probably made things worse. The most obvious beneficiaries of quantitative easing (QE), the policy of creating billions of dollars to buy bonds, have been equity investors, an already wealthy minority. Macklem acknowledged that possibility in his speech, while pointing out there is also research that suggests the opposite.
“Lower borrowing costs stimulate economic activity, which in turn boosts jobs and incomes, particularly for people with lower incomes,” he said. “Research on this topic is ongoing both internationally and here in Canada. We will continue to study and monitor all the effects of QE.”
Macklem was also fuzzy on how the Bank of Canada’s observations about the unbalanced nature of the COVID-19 recession would factor in policy going forward.
Before the pandemic, Jerome Powell, chair of the U.S. Federal Reserve, often boasted that the Fed’s decision to let the U.S. economy run past conventional limits associated with full employment resulted in more jobs for underprivileged groups without creating inflation. It seems likely the Bank of Canada will attempt to do the same, although Macklem declined to commit to that explicitly.
“It’s very important that we understand the dynamics of this recession,” he said on a conference call with reporters. “The unevenness affects the durability of the recovery and while we can’t target specific sectors or workers, the amount of stimulus we put in place will be calibrated to support the recovery, to support the durability of the recovery. That is how you get inflation back to target and keep it there.”
There will be chatter that Macklem’s Bank of Canada is letting itself get distracted by the latest fad in economics. So be it. At least the debate will be had out in the open.
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