If he’d been playing hockey, it would have been an elbow to the face of an opponent on his way to the bench.
Stephen Poloz, the Bank of Canada governor, had been speaking to the Empire Club of Toronto for about 25 minutes on Dec. 12. He had delivered roughly 2,500 words of his 3,000-word speech and he had just completed making the fourth of his four points.
But on his way to the conclusion, Poloz pulled a veteran’s move, throwing a rhetorical sucker punch at a group of upstarts who would rewrite the rules of monetary policy.
“As usual, the bank will be working on many more issues in 2020 than I have been able to summarize here,” Poloz said. “Before I conclude, though, let me mention one topic that has garnered a lot of interest lately: Modern Monetary Theory.”
You probably have heard of MMT. You certainly will have seen mention of it if you are one of New York congresswoman Alexandria Ocasio-Cortez’s six million Twitter followers. The face of Democratic Party socialism is a fan of the idea, which, essentially, submits that a country that controls its currency can effectively print as much money as it needs and use fiscal policy to control inflation. Hedge-fund billionaire Ray Dalio said earlier this year that he thinks something like MMT is “inevitable.”
MMT hasn’t jumped the border in a noticeable way. Often, after I’ve written something about deficits, I get an annotated letter from someone called Larry Kazdan, who created a website devoted to the subject. Stephanie Kelton, the academic and Bloomberg columnist who has emerged as the biggest champion of MMT, spoke at a gathering hosted by the Canadian Association for Business Economics in Kingston, Ont., earlier this year. But the New Democratic Party didn’t talk about it in the election campaign, and the chattering classes are mostly quiet, even though MMT has become something of a sensation south of the border.
Poloz apparently wants to keep it that way. He used his last lookahead speech as governor to stomp on MMT on his way out the door. Poloz said the theory was neither “monetary,” since government spending is a fiscal decision, nor “modern,” since similar policies have been tried before. The governor cited the rapid money creation that followed the deficits the U.S. government ran in order to finance the Vietnam War. The aftermath in the 1970s brought a surge in global inflation and the collapse of the Bretton Woods system of managed exchange rates.
It “sounds like Modern Monetary Theory is offering a free lunch, and most of us know there is no such thing,” Poloz said. “There are far better means of avoiding slow growth and deflation — promoting innovation, providing infrastructure, removing impediments to international and intra-national trade, eliminating red tape — just to cite a few obvious examples,” he added.
Sounds like Modern Monetary Theory is offering a free lunch, and most of us know there is no such thing
Easy for Poloz to say. He’s a respected economist with nearly five decades of professional experience, including almost seven years at the helm of a Group of Seven central bank. And he has no reason to be sensitive to politics, since he’s decided to leave the Bank of Canada when his term ends in June.
Assuming relative stability is desirable, will the next governor possess the the same combination of authority and independence that Poloz showed by going on the offensive against MMT? The answer is, “probably yes.” But try saying it. When I think it through, I’m unable to convince myself that a new leadership group at the Bank of Canada couldn’t be pushed off centre by political winds with enough force.
The central bank is a vocal supporter of the stress test on mortgage borrowers, which is unpopular with the real-estate lobby. The re-election of Justin Trudeau looked like evidence that the forces seeking to weaken the policy had been defeated, since the Liberals, unlike the Conservatives, hadn’t promised to consider changes. And then these words appeared in Finance Minister Bill Morneau’s mandate letter on Dec. 13: “Review and consider recommendations from financial agencies related to making the borrower stress test more dynamic.”
Keep that in mind in 2020 and 2021. Poloz’s comments on MMT were arguably prejudicial. Earlier in his remarks, he had reminded his audience that the Bank of Canada was in the middle of a review of how it goes about controlling inflation. That’s normal. The central bank always conducts research ahead of the renewal of its five-year agreement with the Finance Department, which was last issued in 2016. But this time, the Bank of Canada said it is conducting a “horse race,” pitting the many approaches to monetary policy against one another to discover which produces the best results. MMT clearly isn’t part of the contest.
But it could be if the public insists on it.
To the central bank’s credit, it is making an extra effort to involve interested parties in the policy review. In 2020, Poloz promised “a number of round tables with civil society stakeholders to deepen our understanding of the economy across sectors and regions.” He also said there will be an “open, public consultation process” on the central bank’s website. “As an accountable public institution, we are eager to hear your views,” Poloz said.
MMT or some other revolutionary notion could yet come to Canada. The next governor should possess the ability — or the fortitude — to tell us and the people that we elect that there are no free lunches.