Finance Committee on June 6th, 2013

[Scott Brison, Liberal, Kings—Hants, NS]

This morning you predicted that we will have an unusual recovery. You've compared it to the post-war reconstruction cycle. That one was driven by a conversion of war-time production to the manufacturing of consumer goods; that was a manufacturing-led recovery.

Why do you compare what you have just said will be a commodity-led recovery to the post-war reconstruction period, which was a manufacturing-led recovery?

[Stephen S. Poloz]

Thank you.

You may have stretched my metaphor a little too far.

[Scott Brison, Liberal, Kings—Hants, NS]

I never met a “phor” I didn't like.

[Stephen S. Poloz]

What I'm trying to capture in my reference to the post-war period is that there were companies that were there before and are not now. The recovery process requires the re-formation of companies and the development of brand new companies or the expansion of existing companies. This is not the same as your traditional textbook cycle. That's really all I was trying to say.

Whether it's manufacturing or commodities and so on—

[Scott Brison, Liberal, Kings—Hants, NS]

Do you agree, though, that the manufacturing jobs created post-war were quite different from many of the jobs being created today?

[Stephen S. Poloz]

That's absolutely the case, but I don't discount the manufacturing sector at all. I have many case studies that we could talk about in which the manufacturing sector is flourishing in Canada by finding exactly what the foreign customer wants and doing an efficient job of producing it.

[Scott Brison, Liberal, Kings—Hants, NS]

Sure.

In 2005 you referred to the Dutch disease as a debilitating illness for Canada.

Do you still believe that?

[Stephen S. Poloz]

That may be a bit of a quick summary of what I discussed at the time. At the time, what we were doing was identifying symptoms and wondering how long they might persist and where they might lead. Those symptoms were quite correlated with what Holland saw in that time period.

I certainly don't describe what we have today as anything remotely like that. It's actually what appears to be a permanent higher valuation on the commodities that Canada has to offer the world. It's an unambiguously good thing, and it gives us the adjustments that Mr. Jean and I were speaking of.

[Scott Brison, Liberal, Kings—Hants, NS]

Certainly.

You have an inspiring life story. You described one of your key breaks as being that job at the Bank of Canada early in life, as a student. You were paid for that job at that time?

[Stephen S. Poloz]

Yes.

[Scott Brison, Liberal, Kings—Hants, NS]

Yes. Well, today the phenomenon of unpaid internships has reached an unprecedented level.

As an economist, what do you believe are the potential economic consequences of this growth toward unpaid internships, and the effects on equality of opportunity? Wealthier families can afford to have their children taking these kinds of great job experiences, while poorer families require that their children take any job that pays.

Is there a threat, do you see, as an economist?

[Stephen S. Poloz]

Well, in reference to that—

[The Chair, Conservative, James Rajotte]

Can you make just a brief response, Governor, please?

[Stephen S. Poloz]

A brief response?

[The Chair, Conservative, James Rajotte]

Yes.

[Stephen S. Poloz]

With pleasure, Mr. Chair.

That's a very complicated question, and it's far outside the bounds of monetary policy. I would just observe that I saw it in action with my own children. The experiences they accumulated were very valuable to them once they started getting paid.

[The Chair, Conservative, James Rajotte]

Thank you.

Governor, I did want to follow up on one of the statements you made in your opening presentation. You talked about the United States and Japan.

Japan is a country that Governor Carney, in his last monetary policy report, and the bank's last policy report, referenced as one that we should be paying increasing attention to.

Given the fact that you did mention it in your opening statement and given the situation in recent times with our currency and other matters, can you just expand on the statements about Japan in your opening statement?

[Stephen S. Poloz]

Certainly. Thank you.

Yes, Japan is a pretty significant trading partner for Canada. It always has been. It's become habitual, in fact, for economists to say, “Oh, and Japan has continued not to grow for 20 years or so.” But what seems to be happening now, and we're certainly watching this with intense interest, is that the new monetary policy there is directly aimed at breaking what I would call a logjam—people who've been stuck in deflation for most of their adult lives, people in their forties who have not purchased a home or something like that, just because of the way the market is dysfunctional there.

Moving that model forward could have significant implications for the world, including ourselves.

[The Chair, Conservative, James Rajotte]

So you're satisfied that they are addressing the issues with respect to their currency, their monetary policy? You're seeing greater growth there. I think you're more hopeful today than Governor Carney was at his second-last presentation before this committee.

Am I fair in characterizing it that way?

[Stephen S. Poloz]

Thanks for reminding me of the rest of your question, Chair, which is that, yes, of course when you change your monetary policy, as they have, one of the implications with a flexible currency is that it's very likely to depreciate. And it has.

So for other countries, one has to look at the full picture, which is that there's an exchange rate effect that may affect exporters in some way. But the most important effect will be the rise in incomes and demand from Japan, which we'll all share in—what economists call the “income effect”. That's unambiguously positive for the world if Japan is a growing economy as opposed to a stagnant economy.

[The Chair, Conservative, James Rajotte]

Okay.

I did want to follow up on another topic, which is core CPI inflation and all-items CPI inflation. Can you just explain why the Bank of Canada uses core CPI inflation as its operational target?

Some have suggested that it's not obviously as complete a picture as all-items, and therefore the bank should look at using all-items CPI inflation in terms of its operational limits.

[Stephen S. Poloz]

As I was mentioning earlier, there's a wide range of possible measures of inflation in Canada. On a longer-term basis, they all kind of settle in the same sort of area, but in the short term, they can be quite different.

In particular, the CPI can be heavily influenced by major movements in, let's say, gasoline prices, or food prices. Those are the classics. We used to just exclude food and energy; now we exclude the eight or nine most volatile components to give us a better guide as to whether the trend in inflation has changed, as opposed to volatile components of it, to give it more signal and less noise.

That just helps us appreciate whether the trend is still on track. It gives us a little more insight into whether we're being deluded by a major move in just one or two items. It's as simple as that.

But we do pay attention. Our target is about the whole thing.

[The Chair, Conservative, James Rajotte]

Okay. I appreciate that.

I will go now to Monsieur Caron, s'il vous plaît.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Thank you very much, Mr. Chair.

Governor, your predecessor is clearly still very active at the Bank of England, but also as the head of the Financial Stability Board.

There is a lot of talk about our attempts to get out of the crisis we find ourselves in at the moment—a number of countries are in an even worse situation than we are—but we must also not forget the reasons that got us into that situation. The Financial Stability Board is supposed to come to grips with those issues. With Mr. Carney, things were clear because he was the governor of the Bank of Canada. But he is out of the country now.

I would like to know your vision of the role you want to play. What role do you want the Bank of Canada to play within the Financial Stability Board in order to deal with the systemic causes of the crisis that we are trying to get out of?

[Stephen S. Poloz]

Thank you for the question.

As I mentioned earlier, the Bank of Canada is a team player. Other team members are the Department of Finance, the Office of the Superintendent of Financial Institutions and the Canada Deposit Insurance Corporation. As part of that team, the Bank of Canada has two roles to play.

First, we have to make sure that the macroeconomic environment is as stable as possible. Specifically, that means that prices are stable.

Second, we must become a kind of advisor, and we must conduct basic, long-term research in order to provide useful material for our discussions. The research has to be very serious.

Our role is to make sure that discussions are based on the best information. That is actually the role that Canada has been playing internationally. We did the same thing with our experience in Canada. Our system was, in a sense, clearly superior to, more robust than, other systems.

Our research indeed helped to make sure that the discussions were based on the best information. That is why Canada's contribution was greater than our size would indicate. The fact that Mr. Carney was appointed to head that organization shows that.

I hope I have answered your question.