Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce

Issue No. 4 - Evidence - April 20, 2016

OTTAWA, Wednesday, April 20, 2016

The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:16 p.m. to study the present state of the domestic and international financial system.

Senator David Tkachuk (Chair) in the chair.


The Chair: Good afternoon, colleagues, and welcome to the Standing Senate Committee on Banking, Trade and Commerce. My name is David Tkachuk and I'm chair of this committee. I'm pleased to welcome Governor Poloz before the committee, especially since we haven't heard from him since October 2014 due to the elections and other matters. I'm also pleased to welcome Senior Deputy Governor, Carolyn Wilkins, in her second appearance before us.

Thank you both for being with us today to brief us on your recently released Bank of Canada Monetary Policy Report ± April 2016, and your projections for the Canadian economy.

Governor, the floor is yours.

Stephen S. Poloz, Governor, Bank of Canada: Thank you, Mr. Chair. Good afternoon, everyone. Senior Deputy Governor Wilkins and I are happy to be back to discuss the bank's Monetary Policy Report. As mentioned, it was published just a week ago.

It has been 18 months since we were last here, for a couple of reasons, but 18 months ago, the fall of 2014, was about when the Canadian economy first began to feel the effects of a massive shock to our terms of trade brought about by the sharp drop in the price of oil and other commodities.


Because Canada is such an important producer of oil resources, this shock was a major setback. It set in motion a difficult adjustment process that has been very disruptive for many Canadians. Investments and output in resource industries have fallen precipitously, the decline in national income has curbed household spending and the resource sector has seen significant job losses. These negatives have clearly outweighed the benefits of lower energy costs for households and businesses.

From a monetary policy perspective, the shock posed a two-sided threat to our economy last year. First, it was a clear downside risk to our ability to reach our inflation target. Second, by cutting into national income, it worsened the vulnerability posed by household imbalances as seen in our elevated debt-to-income ratio. To address both threats and to help facilitate the necessary economic adjustments, we lowered our policy interest rate twice last year, bringing it to 0.5 per cent.


While we recognized the possibility that this reduction could, at the margin, exacerbate the vulnerability posed by household imbalances, the more important effect of lowering the policy rate last year was to cushion the drop in income and employment caused by lower resource prices.

Another natural consequence of the shock to our terms of trade has been a decline in the Canadian dollar exchange rate. It is important to note that this is not unique to Canada. Indeed, many resource-reliant countries have seen similar depreciations in their currencies.

Both our policy moves and the lower currency have been helping to facilitate the economic adjustments that have been playing out over two tracks. While weakness has been concentrated in the resource sector, the non-resource economy continues to grow at a moderate pace. Within that, non-resource exports are clearly gathering momentum.

By the time we reached the new year, this year, there was a clear sense of anxiety among many financial market participants. The outlook for global growth was being downgraded again, and commodity prices were plumbing new lows.

At the bank, we had new intelligence that Canadian energy companies would be cutting investment this year even more than previously thought. In this context, we said that we entered deliberations for our January interest rate decision with a bias to easing policy further, but we decided to wait to see the details of the government's fiscal plan.

Since January, we've seen a number of negative developments:

First, projected global economic growth has once again been taken down a notch for 2016 and 2017. This includes the U.S. economy, where the new profiles for investment and housing mean a mix of demand that is less favourable for Canadian exports.

Second, investment intentions in Canada's energy sector have been downgraded even further. It's true that oil prices have recovered significantly from their extreme lows, but Canadian companies have told us that even if prices remain around current levels there will be significant further cuts beyond what we foresaw in January. By convention, we incorporate the average oil price from the few weeks before we make our forecast, letting us look through all this variability in markets. Because of this, our oil price assumptions are only $2-$3 per barrel higher today than they were in January.

Third, the Canadian dollar has also increased from its lows. Our assumption in the current projection is U.S.76 cents, which is four cents higher than the assumption we were using in January. While there are many factors at play, including, of course, oil prices, most of the increase appears to be due to shifts in expectations about monetary policy in both the U.S. and Canada. This higher assumed level of the dollar in our projection contributes to a lower profile for non-resource exports, as does the lower demand from the U.S. and elsewhere.

As the bank's governing council began its deliberations for this month's interest rate announcement, we saw that these three developments would have meant a lower projected growth profile for the Canadian economy than we had in January. This may sound counterintuitive, given the range of monthly economic indicators that started the year strongly. However, some of the strength represents a catch-up after temporary weakness in some areas during the fourth quarter; and some of it also reflects temporary factors in the first quarter that will unwind in the second quarter.

The other new factor that we had to take into account, of course, was the federal budget. For the purposes of our MPR and the interest rate announcement, we took a close look at the Finance Department's projections of the multiplier effect of the fiscal shock. Our analysis is that the department's projections are reasonable in that they are within the range of estimates you would find in the economic literature as well as in our own staff research.

There is, of course, greater uncertainty as to how the budget measures will affect growth longer term, particularly since they need to work their way through the household sector. In our report, we outlined the risk that households may be more inclined to save than historical experience would suggest in this situation.


Taking all of these changes on board, our projected growth profile is generally higher than it was in January. We are now projecting real GDP growth of 1.7 per cent this year, 2.3 per cent next year and 2 per cent in 2018.

Our forecast suggests that the economy will likely use up its excess capacity somewhat earlier than we predicted in January, sometime in the second half of 2017. However, there is more than the usual degree of uncertainty around that timing. It is always tricky to estimate an economy's potential output, and the difficulty is compounded when the economy is going through a major structural adjustment, as Canada is right now. We know that the collapse in investment in the commodity sector will mean a slowdown in the economy's potential growth rate. In the near term, we have lowered our estimate of potential output growth from 1.8 per cent to 1.5 per cent.


In terms of the bank's primary mandate, total Consumer Price Index inflation is currently below our 2 per cent target. The upward pressure on imported prices coming from the currency depreciation is being more than offset by the impact of lower consumer energy prices and the downward pressure coming from excess capacity in the economy. As these factors diminish, total inflation is projected to converge with core inflation and be sustainably on-target sometime in the second half of next year.

To sum up where we are, while recent economic data have been encouraging on balance, they've also been quite variable: The global economy retains the capacity to disappoint further; the complex adjustment to lower terms of trade will restrain Canada's growth over much of our forecast horizon; and households' reactions to the government's fiscal measures will bear close monitoring. We've not yet seen concrete evidence of higher investment and strong firm creation. These are some of the ingredients that are needed for a return to natural, self-sustaining growth with inflation sustainably on target.

With that, Mr. Chair, Ms. Wilkins and I would be happy to answer your questions.

The Chair: Thank you very much, governor.

Senator Black: Governor and deputy governor, I want to thank you both for the leadership and steady hand that you have exhibited since we last saw you. These are extraordinarily difficult times in Canada. They're very complicated times in my home province of Alberta. We are appreciative of the foresight and calmness with which you have tackled your role.

I have a couple of questions that you may elect to answer or not, as you choose. Yesterday, a former prime minister of Canada said that Canada must "turn our competitive advantage — our immense resource base — to our national advantage in a respectful, responsible manner, before it is too late.'' Are you able to comment on that and provide your point of view on that point of view?

Mr. Poloz: It's absolutely true that Canada is blessed, and much more than most other countries, certainly major economies, with an incredible resource base. As a consequence, our economy has always been based on the export of those materials. It's how Canada began, is still a very large part of our economy and, no doubt, will always remain so.

In that sense, the prime minister is saying that we need to be strategic about that and never lose sight of that natural advantage. In practice, I don't think we ever have. Mother Nature pretty well takes care of that for us. When Mother Nature gives us lower prices for resources, as she's delivered over the last year or so, it's a signal to us that, for a time at least, we should be investing in other things that are going to be bigger contributors to growth during that phase.

In the previous 12 years, from 2002 to 2014, in the context of rising resource prices, they were rising long enough to give rise to a whole new theory called the "commodity super cycle,'' which meant that prices could never go down because the world was running short of all these things. Many of us were skeptical of that little theory, which of course turned out to be true. When you believe there's a super cycle, of course, you tend to invest without hesitation in more capacity because prices are rising and there's a lot of money to be made in doing that. Just like all the resource cycles we've had in history, when supply exceeds demand, we go through the other side of the cycle, which we're having now. Everything we see today is a consequence of increased supply in response to those high prices.

Some have asked me: Does that mean we overinvested in the resource economy? None of us really had the foresight to do that, and to underinvest would be to say to the world, "No, I don't want your money. I don't want you to pay a lot for my resources. I want to keep them in the ground.'' In other words, the market signals did their job. Of course, as is often the case, we over-adjusted to those market signals. In your textbook from economics, it's called the "hog cycle.'' The farmer sees the high price for hogs and has more hogs the next season; but that's too many hogs so the price goes down. It's exactly this.

The bottom line is, and I don't want to go on and on, resources will always be important, and we should do as policy-makers everything we can to make it easy for people to decide what the right strategy is in the context of markets delivered to us.

Senator Black: Building on that and focusing on the right strategy, I believe that the former prime minister was urging Canada to get ahead with building pipelines to the Atlantic and Pacific Oceans. Do you have a view on that?

Mr. Poloz: That's pretty far outside the purview of monetary policy, so I think I wouldn't express a view on that except to say that anything that improves the growth prospects of the economy and the situation we find ourselves in would be a good thing. But whether it's an appropriate decision depends on the whole price story we just talked about.

Senator Black: You've indicated that the economy is going through a major structural adjustment. Obviously, we all agree with that. In your view, when this adjustment is complete, what do you see the position of the energy industry in Canada to be?

Mr. Poloz: It will be smaller, as a share of the economy, than it was at its peak. Of course, it will still be a highly significant share of the economy. We will get the reverse of what we've seen in the 2002 to 2014 period when we lost something like 10,000 companies in the non-resource sector. Specifically in the manufacturing and exporting sectors, 8,000 to 10,000 companies were lost — a lot of capacity was lost.

Now we're seeing as the recovery unfolds that the export recovery has been very hesitant and very gradual, in part because of the damage done during that period. That's primarily an effect of the strong dollar, which of course is a signal to the market that that activity is less profitable than the resource activity that was taking its place in the economy. There was a structural adjustment from the non-resource economy to the resource economy as people moved to Alberta, Saskatchewan or Newfoundland and Labrador. That's phase one.

Ms. Wilkins, would you like to talk about where we end up?

Carolyn Wilkins, Senior Deputy Governor, Bank of Canada: The hard part is now. As you get capital and workers moving towards the part of the economy that's growing — the non-resource sector — those companies that produce, sell and export more both in Canada and outside Canada start hiring more people. They also start bumping up against capacity and have to take decisions about where to invest. You can see that starting. You can see the investment in that sector growing as well. We see that now. There are many anecdotes out there. We talked to a transportation company who is seeing that because of the dollar and the increased demand in the U.S., they are having to fill more orders for large trucks and transportation equipment. That means not only do they have to hire more but also they're making concrete investment plans to invest.

We're at very early stages in that. Later this year, that investment should continue to pick up and start dominating the losses. That means we'll have more firm creation and more employment. Eventually, that should add back to the economy's potential to grow. The building phase should do that.

We're kind of in the middle of those phases. We should be getting into the more positive side as the year progresses and we get through our projection horizon.

Senator Black: If there're no more bumps, you would hope.

Ms. Wilkins: If there're no more bumps — that's always the case.

Mr. Poloz: It takes a long time. We estimate that it's a three-year period while the negatives are still ongoing in the background and the positives are emerging in the foreground. It could be longer than three years before we're settled at that new place where the energy sector will have shrunk relative to the total economy and the rest of the economy will have grown to fill that space.

The Chair: In the end, investments follow the money, right? If there isn't enough money in the resource industry, they're going to move to other industries where they can make more profit. We can't predict those changes. All we can do is follow them. It's very hard to influence them. We don't know what the price of oil or the price of the automobile will be. If we believe in a free market economy, we've just got to allow it to happen and try not to screw it up, so to speak.

Mr. Poloz: It may require more patience than we're used to because it's a very slow process. It's slow not only because it's real people that have to move or change their company, whatever, but also because of what we've been through. No one is sure if this is the real deal or if suddenly oil prices could rebound and we'll have to change our minds again. You don't want to be hasty about those things. It's strategic and it's real money at stake, so it's natural for it to take time.


Senator Massicotte: Thank you, Mr. Governor and Ms. Wilkins. Like Senator Black, I thank you for all your work; we all benefit from the stability that it produces.

I would like to continue the discussion about the aspects that are good for exports, those related to a very low dollar. The last time you came here to meet with us, we spoke about them a little. We also were afraid about whether the positioning of our major export players is competitive enough. We are still also seeing some hesitation in terms of investment. According to your report, there has been an annual growth in exports of 3.6 per cent, which is not huge. Are you satisfied with those export results? This is the sector where we spend a lot in order to make up for the others. Are we competitive enough? Is it enough for Canada?

Mr. Poloz: As I mentioned, it is not an immediate decision. We lost a lot of companies when the dollar was very strong. The companies that remain do not perhaps have the ability to respond immediately to increases in demand.

At the same time, in the United States, the cycle was not an ordinary one. It was a cycle without investment. It was a recovery cycle for consumers in particular but not for investments. Like here, people are hesitant to invest. Investment is what intensifies trade between our two countries. Investment expenditures, in machinery and equipment between companies, are the most important aspect and they were missing in action. But they have just started.

So, as I told you, it will take some time. However, for the moment, we are satisfied. I feel that we have conservative forecasts and that is why, in the fourth quarter and in January, we were surprised at the increase in exports. We analyzed the details and it is probably temporary, but perhaps Ms. Wilkins will have something to add on the subject. Our forecasts are conservative because, in the past, exports have disappointed us several times. We were very encouraged, but our forecasts did not materialize.

Ms. Wilkins: We are certainly seeing some strength in exports and the increases in the number of products are still significant, but we have been disappointed before. Especially at the beginning of the year, there was a strong recovery for some products, but we believe that that is only temporary, such as for pharmaceutical products, to give you one example. However, the underlying trend is still satisfactory.

As the governor rightly said, our forecasts are careful, but we are seeing the reaction in demand in the United States and elsewhere, and we see the drop in the dollar. Those two forces are doing their job.

Senator Massicotte: I would like to change the subject. Mr. Governor, you have made very favourable comments about potential free-trade treaties. I assume that you were referring to the free-trade agreement with Europe and perhaps to the one that will be signed with Asia. Were your comments specifically about those agreements? Can we see in them your endorsement of those two agreements, when you say that they are good? Or are your comments more theoretical in nature in the sense that, as we are a country that depends on international trade, we must first fall in line, and second, if we are creating obstacles for our own companies, we must solve those problems, otherwise we will not be competitive in the short term? Can you provide some context for your comments about the two agreements that Canada is considering?

Mr. Poloz: I am not going to provide specific comments about the two agreements. Those two proposed agreements are very complex, but, in theoretical terms, they are both opportunities for us to lift barriers to growth, to broaden our overseas markets, and also to increase companies' opportunities for investment, in both directions.

We have a lot of evidence showing that agreements reached in the past have brought about growth here in Canada, and I see no reason to feel otherwise in these cases.

Senator Massicotte: I do not have to tell you that the economy is based in large part on trust. People must have trust in the banking system, the intermediate system, and the international system. We are discovering more and more — as we have seen in Panama recently — that people are using shelters, or countries where they can hide a part of their income, and it does a lot to undermine public trust. Questions are being asked about fairness, about what is right.

I know that you are involved with the OECD and other organizations. Are there steps that we must take or that we have already taken to solve this problem and to restore a sense of fairness for Canadians?

Mr. Poloz: I agree that this is a matter of trust in the system. Personally, I have no specific comment to make about it. The matter lies with the Department of Finance. It is something that I regret, and, as in the case of other problems in the financial sector, it is a matter of trust in the major players in economy. I hope that things will improve.

Senator Massicotte: We all remember the events of 2008; we discussed them a lot in 2009 with the previous governor. There was a major banking crisis in the United States that extended to Europe. At that time, it was clear that major changes needed to be made to the structure of the system, especially with that idea of "too big to fail.'' There was enormous pressure and a very strong will on the part of all governments and all central banks to do something and to force all those changes.

I know that there is an international organization and I believe that Mr. Carney is its president. A lot of progress has been made, but have we achieved the objective of change? Is it enough? My impression is that countries have less political will at the moment, because everyone really has other fish to fry. Is there still an appetite for other major changes?

Mr. Poloz: It is a very big project. Fortunately, Ms. Wilkins is our representative with Mr. Carney, and she will be able to tell you more about it.

Ms. Wilkins: It is true that, in 2008, there was a lot of will to learn lessons from the crisis and a huge amount of progress was made in several areas, such as with regard to equity and to having control of the banks' levers. That is one example. Other things have been done to improve the situation surrounding the idea of "too big to fail,'' not only inside the banking system, but also for other major financial organizations, like the insurance industry.

Work has also been done on the parallel banking system, that is on financial activities that go on outside the banking system. I think that a number of initiatives have been implemented that go to the roots of the matter, and the G20 leaders were in agreement.

What remains to be done is to ensure that countries adopt all the measures that have been put in place internationally. We have an agreement to implement a number of measures, and we must make sure that all countries follow them.

In Canada, we have implemented almost all the measures I mentioned. Some are still not done, but we are in the process of implementing them at the moment. So, in my opinion, the financial system is in a better position than it was before the crisis. We cannot say that there will never be another crisis, but Canada is better positioned today than it was beforehand.


Senator Wallin: Thank you both for being here. You are cautious about improved growth profiles. Nevertheless, you've said that is what's on the horizon. When you look at the difference between direct investment or increased exports that you've been talking about versus a rather major spending plan like $120 billion on infrastructure, do you value those kinds of investments differently depending on the nature of the investment? Inside that frame, do you value social infrastructure, if I can use that phrase, differently than the more traditional roads and bridges?

Mr. Poloz: Infrastructure investment is modelled pretty well the same as private sector investment in terms of impact on the economy. A government infrastructure program is what we call exogenous to the system. It comes from the outside, so it's additional, and that's why we give rise to these questions about multipliers and whether you get more than a dollar's worth of economic activity from each dollar spent. Generally economists would agree that you do.

Investment in the private sector is the opposite. It's an endogenous process that comes from seeing higher demand and more exports. Perhaps a lower dollar helps or perhaps a higher dollar helps; it depends on the company. That kind of process of investment then expands the capacity of the economy.

You can have a wide range of types of infrastructure, but the essence is that you can link the investment to the future potential growth of the economy. I mentioned in my opening remarks that we think Canada's potential growth rate has been slowing because of slowing labour force growth, and productivity has been relatively slow, and now we have the shock to investment in the energy sector, so it's down to 1.5 per cent. That's our speed limit.

We have excess capacity in level terms so we can exceed that speed limit for probably a couple of years, which is what we have in our forecast. Furthermore, along the way, we expect investment in the non-energy sector to pick up quite a bit and add to the capacity so that you can grow into it. This stretches out the period during which you can have noninflationary growth, but that's all to be seen. Anything that raises that potential growth line from 1.5 per cent to 1.6 per cent or 1.7 per cent every year for a generation is real progress.

Anything that can boost productivity like that is good. What defines an "investment infrastructure'' to me: Does it add to that potential growth for the economy? If it were a bridge in Montreal, it would help people get to work and reduce their travel costs. That's the efficiency, so there you are, and high-speed rail and these kinds of things are the same.

You asked about social infrastructure. Of course, as you go down the spectrum, it gets a little less concrete. Take day care centres. A wider availability of day care makes it easier for people to participate in the workforce, perhaps sooner after they have a family or at the same time, and truly adds to the potential economic growth because labour force participation is our biggest roadblock from here.

As an aside, there are about 120,000 people between the ages of 15 and 25 who have withdrawn from the workforce because they were discouraged. We know they did not take early retirement. We believe that, over the next two years, they could re-enter the workforce. At the rate we generate jobs, that's another whole year's worth of growth potential there but untapped at this time.

Senator Wallin: Some of this investment might encourage that.

Mr. Poloz: Exactly. All those things can be facilitators, just as a trade deal could be a facilitator, or an interprovincial trade deal. Those kinds of things can add to the efficiency of the economy and give us that extra tenth or two-tenths or three-tenths on growth every year from now until kingdom come. That's possible.

Senator Wallin: The same would apply to cyber infrastructure.

Mr. Poloz: Yes. Cyber is a special case, I would say. It's this unimaginable or unmeasurable threat. Companies, governments and everybody is investing in protecting themselves against cyber. If there weren't a cyber threat, all that would be available for better things. So it's a bit like defence in general. It should be thought of in the same way as you think of national defence — a kind of common threat that reduces everything from what it could be. If it's done well, it can be a liberator.

Senator Wallin: On this same theme, and this is a bit off the wall, I guess, but I want to see where your thinking is and what kind of research you are doing. I was just reading a review of a book by Don Tapscott. I'm sure you know he has done some stuff on the Internet over the years. He has a book coming out now called Blockchain Revolution, which is about the value of bitcoin and how it's changing everything. This is about to be launched. Where is your thinking on all this stuff? Are you doing much of it at the bank?

Mr. Poloz: We certainly have our eye on that, and so much so that I have sitting beside me a globally recognized expert. Ms. Wilkins chaired that whole thing in Washington because she's recognized among her peers. I'll ask her to talk about it.

Ms. Wilkins: I know the Tapscotts. In fact, I spoke with them as they were writing the book. I think it's a great initiative.

We are looking at that, and we're not the only central bank doing so. The technology is interesting to central banks for a couple of reasons. First, we oversee payment clearing and settlement systems as one of our legislative responsibilities. Those are the kinds of systems that might employ that kind of technology. If they are going to employ it, we want to understand it. We participate in those systems as well. If those are the kinds of options that people are thinking about, we might need to participate in them, and so we also need to understand them.

More generally, if anybody's following this, they'll see that the potential applications of blockchain technology are not only the payment systems or E-money like bitcoin, which I know this group has studied, but also many other things like smart contracts and digital identities — things that can potentially rewire the financial system in ways that liberate what could be big efficiency gains.

At the same time, we know that whenever we have innovation, it sometimes creates new risks and new challenges for the institutions that participate, so we have a broader financial stability angle with that too, which means that we have a research program, which you asked about. We have a fairly extensive research program on E-money. If anybody is interested, we have a page on our website that contains all our research when it's done. We are also looking at other aspects of FINTRAC related to peer-to-peer lending, although that might be a smaller part of our research portfolio.

Senator Wallin: It's shared economy.

Ms. Wilkins: All that shared economy is very interesting to central banks. We are also working internationally. This is a global technology, in a sense, as it can be applied everywhere. A lot of international groups are looking at it, including the Financial Stability Board. I'm part of a group doing some of that, so we're quite involved.

Senator Wallin: It's reassuring, thank you.

The Chair: To remind people who may be listening on the Internet, our Banking Committee did a study on bitcoin. The report is called Digital Currency: You Can't Flip This Coin!, authored by Senator Ringuette. Anybody who wants to have a read, just go to our website.

Senator Tannas: Welcome, and thank you for being here. I want to learn from you a little about household debt and the way in which you look at those numbers. Could you give us your view on sensitivity in terms of it reducing because this is the moment when consumers decide they're going to tackle household debt? What does it do for the economy? Is there kind of a correlation between $1,000 of average debt and some micro-point in the economy? Is it a significant issue?

Also, when are consumers looking at other economies, and when are consumers typically motivated? Everybody would like it if consumers got motivated when the economy is ripping, but I don't know if that's the case. They may wait until things are either in fragile recovery or in slow growth, and that's where the catalyst happens. Maybe you could comment on that. What are the specific markers, if there are any, that would begin to tell you that we're headed into a spot where maybe the consumer is going to decide they need to tackle that?

Mr. Poloz: That's an interesting question. First, it's very hard to compare these debt levels through time for the reasons we were just talking about — how much our financial system has changed. It is much easier these days for people basically to manage their balance sheets. That's part of the financial innovation we've gone through. Long past are the days when you needed to wait for an hour in the bank to request a loan and all that. Today, you've got it in front of you. You can self-serve. Behind all that have been similar advances in the way that banks manage all of that. It is not a free-for-all but rather a well-controlled environment.

I don't like to compare across time and say, "My goodness, 165 per cent of income is the debt level we have right now. Look how much that's gone up since 10 or 20 years ago.'' You can say that, but how much of that is because it's become more possible for people to choose their own level of indebtedness, and how much of it is something that we should be concerned about?

One way to check that is to talk to the people who are actually making those loans. They have strengthened their lending standards throughout this piece, quite in contrast to the kinds of behaviour we saw leading up to the U.S. financial crisis. I can say clearly that we have none of the kinds of behaviours that gave rise to that. Nowadays, central banks and regulatory authorities, of course, are much more alert to that. We've made the regulatory changes that Ms. Wilkins was talking about. As well, we've enhanced our surveillance in almost every respect. We put out our Financial System Review twice a year. The central banks all have those and they look carefully at them. All that has come around to a better place.

Part of our outlook is exactly what you're envisioning: For the last six or seven years, the economy has been supported primarily by private sector spending, of course, in response to really low interest rates. Central banks lower interest rates because they're hoping to boost the economy, and that means somebody borrows who wasn't planning to borrow. In every business cycle, you have this. People borrow earlier than they thought they would or more than they thought they would, and that gives the economy its lift. We never worry too much on the other side because the economy recovers and then things go back to normal and the person who bought a house a year early doesn't buy it a year later because they already bought it, so things work out over the cycle.

This is the first time we've had such a protracted period of time when this has been true. We've begun to notice the accumulation of those behaviours, and they're of concern. We've been highlighting them for some time in our Financial System Review. We know so much about it because we're studying it carefully.

Our base case is the following: Now that the export sector is getting traction and we'll soon begin to invest in creating new jobs, two things will happen:

First, the economy recovers, and that brings the level of income up to meet this higher level of debt. That's an important thing. We call it a soft landing, not because something is coming down but because the land is coming up to meet us.

Second, the household sector will moderate its behaviour and the savings rate will be higher. Of course, that's partly because they've done so much spending in the past — the houses and cars have been bought. As we go forward, the housing sector won't have a problem with that because all these new jobs will be created and new people will want to buy homes and cars.

The stock of debt — the overhang of what has occurred — will become more natural relative to the level of the economy, and its rate of growth will be slowing relative to the economy. As that happens, those debt ratios will peak, sustain and probably decline gently through time. That's the dynamic that we envision.

The markers would be, well, that's our story, and we check it basically every week: How are the data shaping up? Of course, in the Monetary Policy Report, there's a quarterly, fulsome checkup. It says this is what's happening, and it's what we said or it's less than we thought or it's more. That's exactly how we do it.

Senator Tannas: We're getting close to negative interest rates now at 0.5 per cent. What's your view on this? Is a half point from 1 per cent to 0.5 per cent equal in its impact from 0 per cent to -0.5 per cent? If you've got any narrative or education you want to give us on negative interest rates and the view, it would be appreciated.

Mr. Poloz: The quick answer to your question is no, they aren't equal. Moving interest rates from 2 per cent to 1.5 per cent has a larger impact than moving them from 0.5 per cent to 0 per cent and so on moving into negative territory. It's precisely for the reasons we just laid out: While there's always some extra folks out there that are kind of interested in buying a house and if the deal becomes irresistible you will prompt a response in the economy, that effect gets smaller when you've already prompted so many to do so. It therefore becomes more marginal. Some people have said it's a bit like pushing on a string, which is a bit too extreme because it still has an effect. We've seen it working in certain countries.

In 2008, we laid out our unconventional tool kit in case we needed it. In that tool kit, we thought that the interest rates would bottom out at 0.25 per cent, which is the lowest we ever went. Experience in other countries that had more difficult situations than ours showed that negative interest rates can actually function and markets continue to work. There are distortions in it, so you don't like it to be for a long time, and whatever power they have, they probably lose it the longer they're there because the system will adapt to it and so on.

That's exactly the setting described in Keynes' General Theory of Employment, Interest and Money in the mid-1930s when we were in a depression. All of our economics textbooks describe that situation as one where monetary policy has only moderate or minimal effects and actually fiscal policy is at its most powerful. As we go into a situation that is more normal, some of the power of fiscal policy disappears because interest rates rise and exchange rates rise while the fiscal action is working its way through the economy. In this situation with the excess capacity, that doesn't happen.

You have this question about mix, and it's exactly why the IMF is suggesting a better mix for policy is one in which you're not putting all the onus on monetary policy and putting a bit more onus on fiscal policy.


Senator Bellemare: My next question comes with a short preamble. I find that the picture you have just painted is a little depressing, in the sense that I have children entering the labour market and I wonder what the future holds for them. They often ask me for advice.

Economically, we do not have the internally generated forces that stimulate the economy. Exports will perhaps be able to stimulate the economy, but we do not know when. The same goes for private investment. Consumers are in a lot of debt and we cannot get the economy going again on the backs of taxpayers.

So that all leads us to consider public investment and tax policy. In Canada, we are looking at federal expenditures on infrastructure to the tune of $120 billion over 10 years. That may seem like a huge amount of money, but in reality, we do not have an envelope that big. The forecasts show that growth will be quite slow in the coming years.

As well, provincial governments are in somewhat of a tough situation. They have to take decisive action to balance their budgets. That is far from being a stimulus to the economy in a situation where the global economy is not moving. We have an urgent need for public investment, especially for our public infrastructures, the north, our schools and our hospitals. I am aware that monetary policy cannot do a great deal anymore, but is there a way we could look at possible measures that would help provinces to fund public infrastructure projects?

I am trying to open up this discussion in order to get some creative answers. Provinces do not have the same means of paying for their expenditures as the federal government does. If they go to the markets, with their financial records, they can be downgraded, their interest rates go up, and so on. It is a vicious circle. Are there any initiatives that could be proposed to encourage provincial governments to participate in public investment and infrastructure costs to a greater extent? Could the Bank of Canada play any stimulating role in this regard?

Mr. Poloz: Regrettably, no. You are right, the situation is difficult all over the world. The potential global growth rate has dropped and it will continue to drop for the reasons that I previously mentioned, especially the slowdown in employment. First of all, we have to reduce our expectations, because the future outlook is less positive than in the last 50 years. We have to adjust. Today, if the rate of growth were 2 per cent, it would be a good level. In the past, that rate would have been seen as disappointing.

At the moment, we have targeted all the efforts we can to other initiatives. We have to focus our efforts on tax initiatives. The change in fiscal policy must be seen as an investment, not a cost. It is an investment that helps to increase the trend in the rate of growth, which stimulates our productivity. The International Monetary Fund and the G20 have stressed the importance of implementing structural reforms designed to remove obstacles to growth. We can take action like that if we work closely together. As a priority, we have to have a tax policy that provides support during the adjustment process, a structural reform that would stimulate economic growth and a monetary policy that would provide the impetus needed for that growth.

Senator Bellemare: I just have one question about that. How do we go about launching structural reform? In your opinion, what are the basic elements that give that structural reform a concrete shape, so that businesses change their sectors and people adjust to it? What is your opinion?

Mr. Poloz: I think ± I do not know how to say this in French.


Necessity is the mother of invention.


Is there a way to translate "necessity is the mother of invention'' into French? At the moment, it is the only thing we have left. Now, that is often a political question. A structural change always has negative impacts on some people, but positive impacts on the economy as a whole. That is why the IMF is advocating for tax policies. Structural reform pays for itself by stimulating growth and by generating revenue for the government. The safety net can be made stronger with a change of that kind.

As an example, free trade is not everyone's cup of tea. In that debate, there are conflicting opinions. The most significant effect is felt on total revenue. It's not about finding out who wins and who loses. It's about total revenue. Economic studies have confirmed those results many times.


Senator L. Smith: You talked about expectations moving forward. One thing I read about quite often in the last year is the number of businesses in North America that are sitting on capital and not investing. Maybe you have the exact number, but I thought I heard a figure of something like $630 billion of capital that was being held in corporations based in Canada. What's going to be the signal for corporations to start moving forward?

If the expectations for growth are going to be stable but kind of minimal, how do we encourage risk-taking? We have been noted as being risk-averse in our country. We've talked about trade deals with the European deal and the Asian deal. These are things that as a trading country we need to do. What's going to kick-start this to get it moving? I know there's so much interaction in terms of world economies and how we're tied to the U.S., et cetera, but is there something that stands out in your mind that needs to happen to move this economy forward? We've been in a cycle that's lasted a long time. How do we get into the new cycle?

Mr. Poloz: That's a pretty complicated question. I want to begin with a couple of things to set the scene.

The first is that many of the things that threatened to push us into the second Great Depression back in 2008 are still pushing against us. The fact that we have really low interest rates and that people observe that there isn't a lot of growth or inflation as a result doesn't mean that monetary policy is broken. What it means is that we're pushing against something that's really pushing hard against us, pushing a rock up a hill or whatever metaphor. If we stop, the rock will simply roll back down the hill. That's an important starting point. There's a lot still out there that's holding things back.

The result of that is that whenever we get some good news, there are three or four reasons why it might not be for real or it might not last and so on. That caution is not just natural; it's been proven a few times since 2008. We've had several false dawns when we thought we were out of the woods, and it turned out we weren't out of the woods.

I'm not sure about the $600 billion. It sounds not too far off something I've seen too, but I don't want to be pinned to a number. I know that corporate Canada has cash. Where did it come from? That's hard-earned money. That's not just money that's sitting there; that's hard-earned money. Every week, you observe this debate about whether things are turning around or not. If you're trying to decide, in your business, if it's time to deploy some of that money, to put it at risk, your perception is that the risk level today is higher than it has seemed to be in the past. You take, therefore, more convincing that it's real. I think that, too, is perfectly natural, given what we have been through.

I talk to a lot of CEOs in my job. Some people put it this way: People are taking all kinds of risk in financial markets, searching for yield, but companies aren't really taking any risk in the real economy. When I talk to CEOs, they will come back on that and say, "It feels pretty darn risky to me just sitting here because I could lose all this, what I've got going here, easily if things didn't keep going.'' There's enough uncertainty about that that they're cautious, and I think that's appropriate because it's real money to be lost if they are wrong.

I just take that as proof that, just as has happened in long cycles in the past, you kind of get animal spirits. That is what Keynes called them. They get crushed by the experience. They're just kind of glum. They're not ready. They need extra convincing that it's okay. That means they need a longer period of proof that the economy is recovering, and it will be gradual. It will differ from company to company. Are they at capacity? Is their customer phoning them every day saying, "Where's my delivery?'' "It will be another 30 days because we're really busy.'' Some customers are going to say, "I don't want it anymore.'' You're going to lose that business if you don't invest and expand.

We're at that stage, we think. More and more companies are telling us they're at that stage, so they have to either decide or start turning business away. According to our surveys, later this year, we're going to see a lot more action that way. There are pockets, as Carolyn mentioned before, where we can already see it. I think we just have to be patient with this. There's no way that I know of to force it to happen. Certainly, you've made the cost of borrowing as low as you can make it, pretty well. So you've done everything on that front to make it easy for them to proceed.

One of the things I'll just add finally is that we talked about the slower rate of growth, globally and here. One of the implications of that is that the equilibrium, or what we call the neutral rate of interest, is declining. That's the interest rate that would settle in when everything was all back to normal. As that declines, it means that companies also will have to change their expectations. I they're considering an investment and are used to having a hurdle rate of 8 per cent or 10 per cent before they move, they may have to start scaling that down or they'll never move, because rates of return will be much lower in the future than they were in the past cycle. But that is a slow realization to creep in, I find.

Senator Ringuette: My question is related to Senator Smith's question. Every time you come here, I have the same questions for you. It is all in relation to the over $600 billion in reserve in large Canadian companies. A few years ago, we were talking about the new policy to reduce tariffs on equipment, and for them to invest, to be more efficient and so on, that cash and that reserve will be used for that purpose. It hasn't been used or has been, as far as I know, in very limited quantity.

Therefore, one of the questions that needs to be asked is: Are they waiting to invest that money in a foreign region? Are these Canadian corporations resisting investing in Canada?

Mr. Poloz: I don't know the answer to that question. In my experience, it creates growth in Canada regardless of where it is they're thinking of investing, so that doesn't worry me excessively. Building a business that is sustainable and creates employment in Canada requires that you think about all of those options that are in front of you. For instance, a global supply chain that has parts of the operation in a different country results in a less expensive, more efficient product, and you sell more of them, so you create more jobs in the other parts, which are here, including management. There are buildings in Toronto that are full of people who manage foreign business for companies in Canada. Those are very good jobs and there are lots of them. It's not seen as an export, but it surely is.

I don't want to express a hard view on all those possibilities. I'm just saying, as to pulling the trigger on investment, you can look around you and ask how much money is being lost today in the energy sector because of investments that were made three or four years ago, or even two years ago, if you like. Those expectations on which those investments were based turned out to be wrong for now. You see examples like that, and you think: What if it all reverses again? Will my investment in this business be okay two years from now? It is a hard call to make. It's not theoretical; it's real people with real money and real employees.

Senator Ringuette: So are household investments. What I'm questioning right now is that it seems that it is okay for Canadian households grow the economy. It seems that it's okay for them to venture into major mortgages and loans and so forth, on the one hand, and yet it is okay for Canadian corporations to sit on $600 billion of capital, of cash. There is a major discrepancy here.

I feel that with regard to your monetary analysis and the fiscal policy, there is a disconnect between the risk and the incentive and between the expectation of households and Canadian consumers fostering Canadian growth and less expectation and hardly any commitment with regard to Canadian corporations.

Mr. Poloz: I fully understand your frustration with this. I would just say that we are in a very unusual place, and we have been in an unusual place now for several years. Economists call it a disequilibrium. You just used the word "disconnect,'' which is very similar. It's when things don't fit together in the normal way.

As I was just describing here, there is a sense of animal spirits, the will or the desire to grow your business, the willingness to take risk, which is diminished because of the experience that we have been through. The good news is that those companies are all ready to invest, and that really matters, because if they had no cash, then we would have to rely on the whole process of borrowing and raising capital to get that all started, but that doesn't have to happen. The companies we talk to say they are ready and are waiting for this, and somebody else is waiting for that, but they are being patient about it.

We need to bear in mind that the economy has perhaps 2 per cent excess capacity, possibly a little more if we stretch the re-entry to the workforce, as I described earlier. That means that the other 98 per cent is actually running along pretty well. In our analysis, the energy economy is shrinking at about a 4 per cent rate. The non-energy export economy, which is about 17 per cent of the economy — getting close to 20 per cent — is growing at close to 4 per cent. The rest of the economy, which is about 69 per cent, is growing at about 2 per cent.

What we see, though, is the total. The total looks a little discouraging but actually. underneath it, there is a lot of good stuff happening. What we are waiting for is the good stuff to get enough momentum so that we don't notice the stuff that is shrinking anymore, even though it will still be happening for two or three more years and there will still be people being hurt by the energy shock, such as having to move or losing their business. We can't lose sight of that. Those negatives will be there for a long time.

We can see the positives, and we believe they will add up to a decent positive number looking ahead, and it must have investment with it because we are at that stage where they just won't be able to grow their business without it.

Senator Ringuette: Thank you.

Senator Greene: It occurs to me that while you're not painting a horrible picture at all, by any means — it has been worse and it's not horrible — it is a bleak picture. We have been at 1 to 2 per cent for quite a number of years with no expectation that we can exceed that, except hope perhaps, and no real plan or means, it seems, to change that, for us to have a different future.

One of the things that plagues the Atlantic economy, where I'm from in Nova Scotia, is not only the lack of people but that the people we do have are getting old, and they are getting older fast. At the same time, the costs of government are rising a lot. In terms of a way out, there is a resource available that I think is relatively cheap, and there are millions of them. I'm talking about people.

Have you done any work on the impact on the Canadian economy of more immigration? By more immigration, I mean not at the current level but substantially more.

Mr. Poloz: Well, you're quite right that the main ingredient to trend growth in the economy is people. Of course, on the other side of that, the demand for growth is also a function of people. If your population is growing more slowly, you can grow living standards and income per person, but at a lower growth rate for GDP. That's important to bear in mind. You can have a slower growing economy, and people are still advancing their standard of living when there are fewer of them along the way.

Some of the standards that we carry in our heads, like 3 per cent growth or more and those kinds of things, they come from times when we had a much faster workforce, because folks like us, the baby boomers, were working their way through the system. It's a 50-year story or even longer, so it becomes part of your trend mindset instead of something unusual. But in the wide sweep of history, it is unusual. The new normal will be something more subdued, where there are fewer people.

I said before that in raising that trend growth rate, you can either increase the people or you can increase the productivity per person, and we have a lot of opportunity to do the second part. There are a lot of structural things in Canada and in other countries, of course, which would, if changed, allow more growth to happen. As we've said before, sometimes it's a tough sell, but at lower and lower rates of growth, it may become an easier case to make because other policies can no longer magically make those issues unimportant. Again, that's why the G20 is emphasizing this three-way policy combination as the way to advance growth across the entire G20, not just here. Structural is the key part, which is the limiter of that.

It will be things like encouraging labour mobility, interprovincial agreements that allow easier movement of labour and those kinds of things. Free trade within Canada ought to be an easier thing to do than free trade internationally, yet you and I know that it's not. But it really should be. Those are the only things I can point to as things that can raise that line in a sustainable way.

For us, we take immigration directly into account in our models for potential output. When I said our potential output has slowed to about 1.5 per cent, that includes faster rates of immigration as planned, not a big change but more immigration than in recent years. To change that in a material way as you suggest would require a very significant change in immigration. The whole world is slowing down population-wise.

Senator Greene: In my view, this is worth exploring. Certainly in my region, where I work and live, it's the lack of people able to work. People who have the wherewithal to spend money is clearly lacking and in serious decline. The only solution that many people can see is more immigration, and it's difficult to attract people to Atlantic Canada when the economy is not doing well.

As a country as a whole, we are very lucky in that we are blessed with a huge territory. It seems to me that we should do some major work around increasing immigration and understanding what the effects of that might be. That's a comment more than a question.

The Chair: Did you wish to make a comment in reply, or should we go on to the next question?

Mr. Poloz: I think we can go on.

Senator Mockler: Governor, listening to your comments, we're blessed by our resource-based industries. Last week I was in New Brunswick, where I come from, and I was talking to some people in agriculture and forestry. We are next- door neighbours with the state of Maine, in a border town, so we have both. As we were chatting with some of those entrepreneurs in agriculture and forestry, we shared different ideas and factors of uncertainty in the economy. We all know that when you have economic uncertainty, it impacts on our ability to create wealth and it becomes a barrier to prosperity. We become vulnerable.

Since we are in the G20 and a Commonwealth country, we could be faced, on June 23, 2016, with the facts of the scenario we call Brexit: Britain exiting the EU community. I have three questions. One is: have you made an assessment of the impact of that on our Canadian policies? Second, what impact would it have on the Canadian economy? And third, would it soften our economy?

Mr. Poloz: Certainly I would not comment on how I think that may turn out or how I might like it to turn out. You have touched on the right word, which I think is "uncertainty.'' Financial market uncertainty in the lead-up is, of course, one thing. There is a scope for possibly more financial market uncertainty in the aftermath, depending on how it turns out. Any time we have a significant bout of financial market uncertainty, that can reverberate back on our own markets and therefore have effects on the Canadian economy.

Just in January and February of this year, we had heightened concerns in financial markets about whether China was slowing down a lot as opposed to moderating a little. That process gave rise to big declines in commodity prices, a big decline in the Canadian dollar and, of course, major moves in stock markets. All sorts of stuff was going on. Those are wealth effects that can then affect the economy in future periods even though we believe China had a good growth story and would not be nearly as weak as people had worried about. Policy makers agreed on that when the G-20 met in Shanghai and we said so in our communique. Nevertheless, if the volatility is there — usually when they say volatility in that sense, they mean downwards or negative volatility — it can have feedback effects on economic growth and therefore soften the economy. That theoretical possibility is always there, and it's always why less uncertainty is usually better than more.

That's the way in which we would think about that issue from Canada's point of view.

Senator Mockler: Is it on your radar and whether it would have an impact — 1 per cent, 2 per cent, 6 per cent or 10 per cent — on our economy?

Mr. Poloz: Not in that sense, sir.

The Chair: He keeps pushing, governor.

Senator L. Smith: He just wants a pipeline.

Senator Campbell: I think one of the reasons why Canada is weathering this storm is because of the actions of the Bank of Canada. We should be extremely grateful that we have had incredible people running that, from the governor on down.

I really wish I had paid more attention some 30 years ago when I did take Economics, but I do remember Keynes and animal spirits. I remember that when someone asked what that meant, the professor said, "No guts, no glory.'' That's all I remember.

This may seem simplistic, but you keep referring to "real money.'' I would like you to explain the difference between real money and the alternative to that. You say, for instance, that when somebody has a factory and is looking to decide whether to invest or not to invest, this animal spirit comes in, and they are putting real money up there. What is the opposite?

Mr. Poloz: Somebody else's money. If the company has only so much value and very little cash to do this thing, then you can borrow the money in one form or another, and if it doesn't work out, well, it's not your money. It's somebody else's money. You may lose the rest of the company. That's what I mean. If you have accumulated that money, that's been earned by the company.

Senator Massicotte: It's cash.

Mr. Poloz: It's cash. It belongs to the company, so the company has that much value in addition to its intrinsic value. It has value to lose. That's what I mean by real money. It's not just a theoretical exercise. It's real money that can be lost easily.

Senator Black: Governor, you have mentioned, on two occasions now, interprovincial trade — obviously, trade in goods and services between provinces in Canada. As luck would have it, this committee is studying that very issue now. Perhaps you can pretend that you're a witness at our hearing, and I'm going to ask you: Can you give us the view of the Bank of Canada on interprovincial trade and where it stands today?

Mr. Poloz: The Bank of Canada really doesn't have a view for me to share with you. I am raising it as a rather theoretical or abstract concept. We know there are lots of barriers to trade and labour mobility across Canada. I have every confidence that if they were gone, or if even some of them were gone, we would have a more efficient economy, and we would have better economies of scale and scope in our companies here — in other words, a bigger, more fluid domestic market. That would be, unambiguously, a good thing. That trend line would have more upside potential in that setting than it has in the setting we have today. I have no doubt of it.

Senator Massicotte: I guess I am looking for advice or a bit of help. I need an Economics lesson.

Mr. Poloz: I'm your guy.

Senator Massicotte: Here is why: I sit on the Energy Committee where we talk a lot about an immense challenge we are facing as a world relative to the heating of the climate and GHGs, and we absolutely must do something about it. It's atrocious. It's the issue of our generation. It's very critical.

We have all kinds of experts coming to us and saying that if we spend a couple of billion dollars on this and this, they say it's always very positive because it will increase economic growth and so on. The difficulty I have is the following: It's accurate, the way we count GDP, that if I dig a hole and spend $100 and I then spend $100 filling it up, I cause a turn-out of the GDP, but it has no effect. I just want to make sure we talk real about this stuff. If we spend a lot of money creating green energy to replace dirty energy, I buy that it's necessary, but it's redundant relative to our quality of life because the GDP never goes up. Effectively we haven't improved our quality of life at all. We simply replaced one source of energy with another one. Yes, it's clean, and it must be done.

Aren't we fooling around with numbers when we say that if we spend billions of dollars, the GDP goes up? Yes, but it's done nothing for the quality of life. Am I missing something?

Mr. Poloz: Maybe I'll give you my quick reaction and then turn it over to Ms. Wilkins because it's a really hard question.

You can dig a hole that costs $100 and fill the hole back up for a cost of another $100. The person who gets paid the $200 spends it, which creates something. I know there is nothing sustained in that, so you're right, but I don't think that argument applies to the kinds of investments that you're talking about.

Furthermore, it's about how we measure our well-being. The GDP is kind of an old-fashioned way to measure it. Canada's well-being under one form of energy can be higher if measured in a broader sense, the way John Helliwell at the University of British Columbia would measure well-being as opposed to the pure dollars of GDP. That's my quick reaction.

By now, Ms. Wilkins has a much better answer.

Ms. Wilkins: I'm going to build on what Governor Poloz said as I think it's exactly right. Central banks and economists tend to focus on the measure of GDP. Certainly from a central banker's point of view, we do that because it gives us an idea of capacity, compared to potential, and we get an output gap. It helps us guide our policy to achieve our inflation target. That's why we use that measure. A measure like that counts what the economy produces, whether people are happy or not. Whether it would go up by more really depends on whether the new sources of energy increase productivity because that energy is enabling companies to produce. It turns on the lights and runs the cars they need to transport their goods. It does all those sorts of things. How it would affect GDP depends on how it enhances the productivity, among other things.

When it comes to quality of life, certainly GDP is only one factor. As the governor said, there is a whole literature out there about the kinds of things that add to happiness — like a happiness index. It's out of the purview of central banking, but it certainly could be relevant if what you're really interested in at the end of the day is the well-being of your population.

Senator Massicotte: That's what I thought.

The Chair: Just to confirm what you thought, right?

Senator Bellemare: Do you think that the war on climate change to protect our environment could be enough of a stimulus to the worldwide economy to put us back on track in a virtuous circle?

Mr. Poloz: That's a very interesting question that I had not really thought of. I was thinking at the end of Ms. Wilkins' answer to Senator Massicotte that one of the by-products of that switch from old technology to new is the potential for spin-off technologies, which can have positive synergies or side effects, which we've always under- estimated in the past. Things that we take for granted today are often just things that no one decided we needed. They just kind of happened, and they happened because there was a breakthrough in technology.

The global push for a greener economy, if you like, touches on so much more than energy. It touches on water management, for example, which is a huge area. In fact, in both of those areas, Canada has probably a disproportionately greater opportunity if they hit big — lighting systems that use far less electricity for cities; much cheaper bulbs that last 20 years; and water treatment so there is a whole water cluster down in the Waterloo Toronto zone for conserving water used for cooling or for other systems.

Even cleaning up old style energy is a technology that's being developed in Canada. A smokestack has heat and dirt going up through it. Harnessing that for a price tag of say $50,000 and feeding the energy back into your grid sounds so simple, yet it's $50,000 per smokestack to make that actually happen. There is an externality there because no one has to pay as the heat is being lost and the soot is going into the air. If somebody had to pay for that, then they would pay the $50,000 to prevent it. It would create a whole new business for someone that makes those kinds of products.

There is a lot of opportunity in this space that I have seen a little bit of while I was at EDC and getting to know some of those companies. It's very encouraging. Then the price of oil goes down, and they think it'll be harder to make money in that business. It's funny. All those things are to suggest that it's an uncharted future. If you look back and read enough history, you realize it's never been right to be pessimistic.

Senator Bellemare: I tell my son to take environmental engineering.

Senator Massicotte: Or dig a hole.

The Chair: Or just be optimistic, is probably the best lesson for all young people.

Thank you, Governor Poloz and Deputy Governor Wilkins. It was a great meeting, and we very much appreciate it.

(The committee adjourned.)