Analysis

On the economy, politicians debate, central bankers decide

The idea that a prime minister, or even a president, is the "steward of the economy" is a convenient bit of fiction, Neil Macdonald writes. These days, central bankers like Janet Yellen and Canada's Stephen Poloz are the ones calling the shots.

Bank of Canada pushing stimulus; Conservatives, NDP talking austerity. Go figure

The three main party leaders at Thursday night's debate on the economy. Three different approaches. (Canadian Press)

The idea that a prime minister is the "steward of the economy" is a convenient bit of fiction, co-created by politicians and the journalists who cover them.

It was an explicit theme of last night's leaders' debate; at one point, the moderator actually asked NDP leader Tom Mulcair "why should the electorate hand the national economy over to you?"

This notion is convenient to prime ministers because of their need to appear in charge of everything; convenient to opposition leaders, who need to assign blame for everything; and convenient to those journalists who thrive on reductive, easily digestible notions that smell like truisms.

In reality, though, a prime minister gets to decide how federal spending is allocated, and federal spending accounts for roughly 15 per cent of the $1.8-trillion Canadian economy.

Actually, even that is too sweeping: the prime minister decides how a portion of that 15 per cent is spent.
Most federal spending is structurally entrenched (entitlement programs, equalization payments, transfers to provinces, etc.) or politically entrenched.

Enter Stephen Poloz

Still, there is one Canadian official who probably does deserve the steward-of-the-economy title. It's almost his job description, but you won't hear much about him during this campaign, because he isn't running for election, and because most people have only a dim understanding of what he does. He went unmentioned in last night's economic debate.

But Bank of Canada governor Stephen Poloz not only has the unilateral power to change the financial circumstances of almost every Canadian tomorrow, he is almost certainly considering at the moment whether he should use it.

That's because the real stewards of the American economy, Federal Reserve chairwoman Janet Yellen and her band of secretive fellow governors, have made it clear they will, by the end of this year, change the financial circumstances of not just Americans, but the rest of the world.

Federal Reserve chairwoman Janet Yellen and Bank of Canada governor Stephen Poloz are the ones really steering their respective economies. In Yellen's case, she is probably steering the world's. (Canadian Press)

Long story short, the Fed — not the White House —saved the American economy after what amounted to a vast conspiracy among lenders and investment bankers that nearly destroyed everything in 2008.

Led by Yellen's predecessor, Ben Bernanke, the Fed began printing money and buying government debt on a scale never before seen. The aim was to depress interest rates, and encourage then terrified investors to take more risks. And it worked.

But by the time it stopped printing last October, the Fed had created more than $3.5 trillion US. That's the entire economic output of Germany; an almost incomprehensible sum of money. There is no question: stock markets and real estate are overinflated right now as a result.

Now, though, the American economy is recovering, and the central bank must at some point start reeling that money back in — by raising interest rates in a country, a world, in fact, that's addicted to cheap money — or risk an overheated economy and inflation.

Out of step

Normally, Canada's central bank moves in tandem with the Fed, given our interlaced economies. But this time it's different.

Canada is not enjoying the sort of recovery going on in the States. Unemployment is much higher here.
By the most common definition, Canada went into recession this year, though growth is uneven as you move across the country.

At the same time, if anyone is more addicted to cheap money than Americans, it's Canadians.

Canadian personal debt is at nosebleed levels, and people are stretched to the very limit to make mortgage payments in the madness of the Vancouver and Toronto housing markets. Even a mild uptick in rates could be ruinous for many.

If Poloz does not match any rise in U.S. rates, the Canadian dollar would likely tank even further, inevitably making life more expensive for Canadians.

Low interest rates help borrowers, yes. But endless low rates rob senior citizens and retirees, many of whom are done borrowing, of a decent return on their savings.

It's a tough call. But so far, Poloz has stuck to a stimulative policy, the classic solution in a time of sluggish growth and excess capacity.

Not the current federal government, though.

'Lapsed spending'

In order to be able to declare that he has finally run a surplus, which it turns out he did last fiscal year, Harper has effectively begun a government austerity program.

It's known as "lapsed spending." The government discourages federal departments from spending the money it allocated to them in the budget, obliging them instead to return $9 billion last year to general revenues.

Susan Ormiston and Adrienne Arsenault fact-check statements made by party leaders at the Globe and Mail leaders debate 4:54

In other words, the Conservative government has cut government spending during a stagnant, if not recessionary economy.

In fact, Harper's obsession with running surpluses (perhaps understandable after six consecutive deficits) is probably at least one reason Poloz has to keep interest rates where they are.

"Poloz has his foot on the accelerator, because Harper has his foot on the brake," says Prof. Christopher Ragan, a specialist in monetary policy at McGill University.

"From an economic point of view," says Ragan, running a surplus at a time like this in order to make a political statement "is exactly the wrong thing to be doing."

Different directions

The leader of the NDP, by the way, says he would pursue exactly the same endgame as Harper: running a surplus, even if the economy doesn't pick up.

Pulling in the other direction from the Bank of Canada, which is legally mandated to keep inflation low and the economy stable, wouldn't appear to make much sense for our would-be political leaders.

It would have been interesting to hear Harper and Mulcair explain last night why they think that is good policy. But it went undiscussed. (To be fair, no one asked them.)

It would also have been good to hear what the three main party leaders think about where interest rates ought to go in this country, given how crucial the question is to so many Canadians.

The decision won't be up to any of them, and that is maybe a good thing. But you'd think a federal government should be working in tandem with its central bank.

About the Author

Neil Macdonald

Opinion Columnist

Neil Macdonald is an opinion columnist for CBC News, based in Ottawa. Prior to that he was the CBC's Washington correspondent for 12 years, and before that he spent five years reporting from the Middle East. He also had a previous career in newspapers, and speaks English and French fluently, and some Arabic.