This failure by the Bank of Canada likely made inflation worse


Debate over how to confront inflation would have been richer had an outsider like Carolyn Rogers arrived sooner

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Bank of Canada senior deputy governor Carolyn Rogers marked her first year on the job on Dec. 15.

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It’s hard for a No. 2 to stand out at the central bank because the governor tends to attract all of the attention. So, it’s still unclear whether her natural inclination is towards tighter or looser monetary policy, although Rogers has demonstrated that she’s a top-notch communicator, like when she knocked down a #metoo question at the House finance committee last month.

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Daniel Blaikie, a New Democratic member of the committee, raised a Global News report that said the Bank of Canada had investigated six harassment complaints over two years. Blaikie took issue with the central bank’s decision to say little about the matter, citing its desire to protect the complainants’ privacy. Rogers was having none of it.

“We are an organization of 2,000 people. You’re talking about a two-year period. I would be concerned if we had nobody coming forward. That would suggest to me that we haven’t created the kind of environment where people can step forward,” Rogers said.

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She continued: “As a woman who has worked in the financial sector, I did my due diligence. I would not work at this place if I thought we were an environment that tolerated harassment. In fact, I wouldn’t work at this place if I thought it wasn’t an organization that was actively seeking diversity. I’m quite proud of our track record.”

Rogers kept a nebulous idea from hardening into something more dangerous. It makes you wonder what would have happened if Finance Minister Chrystia Freeland and the Prime Minister’s Office hadn’t wait so long to replace the previous senior deputy governor, Carolyn Wilkins, who left the Bank of Canada at the end of the 2020 after being passed over for the top job.

Bank of Canada governor Tiff Macklem and senior deputy governor Carolyn Rogers appear before the House finance committee in April.
Bank of Canada governor Tiff Macklem and senior deputy governor Carolyn Rogers appear before the House finance committee in April. Photo by Sean Kilpatrick/The Canadian Press

Maybe an outsider’s perspective would have kept governor Tiff Macklem from leaving the benchmark borrowing rate near zero through the second half of 2021 even though inflation was taking off. We’ll never know, but it’s a worthwhile thought experiment because there’s reason to conclude that groupthink set in at the Bank of Canada and other central banks that year, as they vowed in unison to do whatever it took to reverse the COVID-19 recession before extreme long-term unemployment set in.

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They succeeded, albeit at the cost of stoking the most dangerous outbreak of inflation since the early 1980s. Macklem acknowledged at the finance committee in April 2022 that he had misjudged price pressures, but it was Rogers, in her first speech as senior deputy governor, who was tapped to deliver the first official mea culpa. “We know we’re not getting it perfect,” she told the Financial Post‘s Stephanie Hughes and me after her remarks. “We have a big team of really smart economists who have a bunch of really complex models, many of which were not designed for some of the really strange things that are happening in the economy right now.”

More on those complex models in the second, but they are exactly why Macklem needed someone like Rogers on Governing Council in 2021. The faith elite economists like Macklem have in the ability of math to explain complex human interactions is at the root of much of the trouble the world has found itself in since the introduction of the supercomputer. Crunching historical data to predict the future works until something that hasn’t happened before changes everything.

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The models that central banks were using before the Great Recession were based on a world where big global financial institutions didn’t take on massive piles of debt to maximize short-term profits from trading risky assets back and forth. The models that central banks were using before the COVID crisis didn’t have formulas to cover the global spread of a deadly virus that governments would respond to by shutting their economies for the better part of a year, nor did they foresee governments that had been more-or-less committed to austerity for decades suddenly opening the taps simultaneously.

“Averages can obscure inflationary pressures,” Macklem said in his year-end speech on Dec. 12. “The inflationary impact of excess demand for goods was larger than the disinflationary forces in close-contact services. As a result, our inflation models that focus on average or aggregate imbalance between demand and supply in the economy had a hard time predicting the rise in inflation.”

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It sounds like the Governing Council might have benefited from the perspective of someone who hadn’t spent the first decade of adulthood earning a PhD in economics during the late 1970s and early 1980s, a time when the profession had become enthralled by the power of math, turning away from theory, human behaviour and real-world observation.

Diverse and inclusive groups make better decisions

Tiff Macklem

Rogers’ background is in accounting and she worked in the private sector before being appointed to run British Columbia’s financial regulator in 2010, starting on a path that would take her to the federal banking regular in 2016 and the top management job at the Basel Committee on Banking Supervision in 2019. It’s safe to say she sees the world differently than her fellow deputies, all of whom are graduates of North America’s best economics programs. The debate over how to confront inflation would have been richer had she arrived at the Bank of Canada sooner.

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Macklem, who was dean of the University of Toronto’s Rotman School of Management when he was selected to lead the Bank of Canada in the spring of 2020, knew he was running a suboptimal decision-making body. Each individual was qualified, but he inherited a group that reinforced his strengths and did nothing to correct his blindspots. In May 2021, Macklem delivered a speech on the value of diversity, while leading an interest-rate setting body made up of five white men, three of them graduates of the same university.

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“Diverse and inclusive groups make better decisions,” Macklem said. Because it took Freeland so long to replace Wilkins, each of the Bank of Canada’s eight policy decisions in 2021 were made by one of the least diverse groups of central bankers in the developed world.

Macklem promoted Sharon Kozicki, who had been serving as an adviser since 2013, to the role of deputy governor in August 2021. And earlier this year, when former deputy governor Timothy Lane announced his retirement, the Bank of Canada said he would be replaced by an external, non-executive deputy who will have no direct connection to the institution so the Governing Council can receive more “fresh and diverse perspectives.”

The Bank of Canada’s emphasis on the importance of governance in the aftermath of the COVID crisis makes you wonder what might have been if these matters had been taken more seriously years ago. The recession and its aftermath taught many lessons. The danger of complacency is surely one.

• Email: | Twitter: carmichaelkevin



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