The Bank of Canada rarely sends messages through its deputies. By tradition, the junior members of the Governing Council say little in public that hasn’t already been said by their boss, the governor. That makes the speech this week by Timothy Lane significant, as he delivered an equivocal defense of Prime Minister Justin Trudeau’s plan to run deficits to boost economic growth. After remaining silent on the issue during Stephen Harper’s reign, the central bank now is providing intellectual cover for the government as it confronts doubters ahead of its first budget.
Lane, who joined the Bank of Canada’s policy committee more than four years before Stephen Poloz became governor in 2013, told an academic crowd in Montreal on February 8 that there are circumstances when fiscal policy is the most appropriate tool for managing the economy. He said one such circumstance is a period of “sustained weak aggregate demand” when any move to lower interest rates could risk a financial crisis and regulatory measures to constrain asset-price bubbles have been exhausted. Sound like any country you know? Canada, maybe? “In such circumstances, fiscal policy may be called upon to provide stimulus, particularly since it is likely to be more effective at low interest rates,” Lane said.
The Bank of Canada said nothing in public about the possible merits of deficit spending as it twice cut its benchmark interest rate last year to offset the collapse of oil prices. Poloz and his deputies were working in the shadow of a prime minister who was committed to balancing the budget. In October, that prime minister was replaced by one who campaigned on borrowing money to finance an infrastructure program. Poloz hinted in speeches in December and January that he supported the thrust of Trudeau’s plan. Lane’s comments this week leave little doubt that the central bank thinks it could use some help keeping Canada’s economy out of recession.
As Canadian Business columnist and Ivey School of Business economist Mike Moffatt noted last month, a few widely read economists this year have used their associations with various publications to stridently assert that fiscal stimulus won’t work. Moffatt reminded his brethren that the models on which their assertions were based were shown by the crisis to be faulty. The timing of Lane’s remarks suggests that he too disliked the tenor of the debate around the role of fiscal policy in helping achieve faster economic growth.
Lane challenged those who make debt reduction a virtue. He acknowledged that there are “limits” to fiscal stimulus. If a country’s debt grows too large, it only risks neutralizing the spending by triggering inflation and higher debt payments. “We saw that in Canada in the 1990s,” he said. But these aren’t the 1990s. “These costs need to be set against concerns that prolonged monetary policy stimulus may result in an excessive buildup of private sector vulnerabilities,” Lane said. “These issues are relevant to the renewed discussion of fiscal policy that is now taking place in Canada.”
Some will say the central bank has no business commenting so explicitly on fiscal policy. I disagree with that, so long as the monetary authority paints with broad strokes. This will help the public assess whether fiscal policy is rooted in contemporary economic thinking or ideology. We all should welcome Timothy Lane and everyone else at the Bank of Canada to a debate the election didn’t settle.
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