THE STANDING SENATE COMMITTEE ON BANKING, COMMERCE AND THE ECONOMY
EVIDENCE
OTTAWA, Thursday, September 22, 2022
The Standing Senate Committee on Banking, Commerce and the Economy met with videoconference this day at 11:30 a.m. [ET], in camera, for the consideration of a draft agenda (future business); and to study matters relating to banking, trade and commerce generally, as described in rule 12-7(8).
Senator Pamela Wallin (Chair) in the chair.
(The committee continued in camera.)
(The committee resumed in public.)
The Chair: Welcome to this meeting of the Standing Senate Committee on Banking, Commerce and the Economy. We have a new name since you were last here, governor. We are just sharing that with you.
My name is Pamela Wallin. I am chair of this committee, and I will introduce the members of the committee beginning with the deputy chair, Senator C. Deacon. We also have Senator Bellemare; Senator Gignac; Senator Loffreda; Senator Marshall is not with us; Senator Massicotte; Senator Smith; Senator Moncion, who is replacing Senator Woo today; and Senator Yussuff. Welcome to you all.
Today, we are discussing a very small topic, of course, the state of the Canadian economy and inflation. We have the pleasure of welcoming David Dodge, the former governor of the Bank of Canada and now a Senior Advisor at Bennett Jones LLP. Welcome. Thank you for joining us in person. We are back. It is great to have you.
We will have some opening remarks from you and then we will pursue with questions.
David A. Dodge, Senior Advisor, Bennett Jones LLP, and former governor, Bank of Canada, as an individual: Thank you very much, senator. It’s great to be with you in these fancy new quarters. Certainly, you provide a wonderful venue out on the other side when one is waiting to come in.
It is a real pleasure to be with you and to be back in front of this committee, which I first faced as a young public servant when Senator Hayden was chair. So that goes back a long time. I have not been in this committee room, obviously, but I have been in front of this committee.
Let me start with a few brief words to kick things off by noting that we are living in a supply-constrained world in which demand will tend to exceed the capacity of the economy to supply goods and services. This is true in the short run as we recover from COVID, but it is also true over the remainder of the decade.
Let me explain the implication of this supply constraint for growth, inflation and interest rates over the medium term. Then I will turn to the implications for 2022-24.
There are three medium-term factors that you are well aware of that tend to keep upward pressure on prices and interest rates and to slow real growth of output per capita.
First, the aging of our Canadian population. This implies slower growth of the labour force, a higher ratio of over-65s to active labour force participants. It also means that policies — both of private employers and government employers — need to operate to try to retain older workers in the labour force, to do the retraining that is necessary for them to remain in the labour force and, thus, mitigate the impact of aging — which tends to increase certain demands in the economy — on the supply of goods and services.
The second big factor that we are contending with is decarbonization of both energy production and energy use. This will tend to raise the unit cost of production of goods and services. This can, of course, be mitigated by increased private and public investment in technology and infrastructure.
The third upward trend on prices and costs is the deglobalization of trade, which is contributing to increased costs of production as the greater risk of extended supply lines prompts the creation of less efficient factories closer to home. In short, we do not get as far down the cost curve as we were able to do in a well-functioning global economy.
So these three trend factors tend to reduce productivity and growth, push up prices and costs and, at the same time, of course, create headwinds for central banks, hence higher interest rates for us all.
Now, these three not-very-appealing trends can be offset — and I hope reversed — by digitalization, robotization and increased use of artificial intelligence to raise productivity here at home both in the goods sector and for our service providers as well.
But this is going to require increased investment, senators, by both governments and the private sector to raise it from a rather low 14.5% share of GDP that it was in the five years prior to COVID to something probably nearer to 17%, which is a little above the long-term average. That means almost three full percentage points of GDP extra are going to have to go to investment and will not be there for consumption.
Senators, you may want to come back to these longer-term issues and investment issue in our discussion. But first, I thought I should say a couple of words about our current situation in this regard.
As you well know, COVID created a huge global supply shock in the spring of 2020. This was true around the world, and governments and central banks responded appropriately in the spring of 2020 by extraordinary fiscal and monetary support — perhaps slightly over-the-top but nevertheless, given the uncertainty, absolutely appropriate to do that.
This was amazingly successful in preventing a global collapse in 2020. Certainly, if we had been here in the summer of 2020, we would not have anticipated that we would have had the recovery in the second half of 2020 that we did.
In retrospect, I think it is easy to say that central banks and governments were too slow in scaling back that extraordinary support in the winter of 2020-21. By the spring and summer of 2021, most countries were experiencing excess demand as the lingering effects of COVID kept supply constrained.
As a result, prices around the world began to rise, first for goods in 2021 as people were forced to stay home to deal with COVID. Then in the spring and summer of this year, as COVID restrictions were relaxed, service prices began to take off. By June or July of this year, consumer prices were up about 8% here compared to the previous year.
That is the history. The question is: What lies ahead? To tame inflation over the medium term we absolutely have to focus on increasing supply.
The trouble is that in the short run — 2022 and 2023 — it is difficult to increase supply quickly. We have had a deficiency of capital investment; hence, we have a lack of capital equipment to do so. Labour has had to make major adjustments, first into the goods sector and now back into the service sector. And that takes time. The only immediate option we have to get inflation down in the short run is to tamp down excess demand.
To reduce excess consumer demand, reduced government spending and increased monetary restraint is required. Central banks here and around the world are raising policy rates quickly to try to make up for lost time in order to set the path for decreased consumer borrowing and hence slower growth of demand and a better balance between demand and supply. Ideally, fiscal policy ought to support that as well.
But because of the disproportionate impact of inflation on lower-income households, fiscal authorities are actually increasing consumer demand in a number of ways, here in this country largely through one form or other of lump-sum transfers.
At this point, I would add a parenthesis. The tools that we are using here in Canada of lump-sum transfers of one form or another is much more sensible than the price caps that are being imposed in Europe, which deny the ability of the market system to actually deal with inflation.
Hence, because of this difficulty, it really is up to central banks to do the heavy lifting, to do it forcefully and the quicker, the better.
My judgment is that, here in Canada, if the Bank of Canada gets its policy rate up to about 4% or a little bit more by the end of this year, by the spring of 2023 I think we should begin to see a marked decline in month-over-month domestically generated inflation. We do not know what is going to go on in the world, but we will have a decline in domestically generated inflation as unemployment increases and real growth slows. How much real growth will have to slow, we do not know, but as a starting point one might think it would slow to zero over the period from the fourth quarter of this year to the third quarter of next year. As that happens, inflation should come down. This period of slower negative growth is the price, unfortunately, that we have to pay for returning inflation to 2% in the short run and setting the stage for stronger growth in 2024 and beyond.
Whether this can happen is, of course, uncertain. Global events could drive this trajectory for Canadian consumer price and inflation off course as it is set to return to something in the order of 2% by 2024. All I can say at this point, senators, is that federal and provincial governments can help achieve this desired downward track in inflation by being as restrained as possible in compensating households for the pain caused by inflation and as aggressive as possible in facilitating private and public investment in productivity, productivity growth and enhancing investment in capital equipment, infrastructure and human capital.
The Chair: That is wonderful. Thank you very much. To recap, I was just reading yesterday that the deputy governor of the bank has asked for a two-year window to do exactly that, and you are optimistic about that, provided that there are no other external shocks.
Mr. Dodge: We do not know what is going to happen in the world.
The Chair: When I heard you speaking yesterday, you were talking about zero growth and you stepped back from using the word “recession.” I’ll ask you about that.
Mr. Dodge: Zero growth, after a period of 3% growth at annual rates that we have recently had, is going to feel not so good. Unemployment is going to rise. It has risen a bit so far. It will rise a bit more. Not to the levels, of course, that we have seen in previous contractions because there’s still a lot of underlying demand that is there. But, yes, that is going to happen. It is not going to feel good. Putting a number on it, I would say zero over that period is a good guess, but “guess” is the operative word.
The Chair: Thank you.
Senator C. Deacon: Thank you, Mr. Dodge, for being with us again. It is always informative and a delight when we get to speak with you.
You identified the current issues surrounding inflation as perhaps being a slow exit response to the pandemic efforts, which generally you see as being good and important efforts that produced a really good result, but a slow exit from that. Then there are the other three, which I was really intrigued with — aging population, decarbonization and deglobalization.
For me, that really focused me quite significantly on business investment and the challenge we have because Canada has historically had very low business investment. Our business investment has heavily tended to be in resource-related primary industries and not as much in the areas where you are describing that we really do need to make investments if we are going to get that productivity growth and manage this, which is digitization, artificial intelligence, robotics and other areas. That is not what we have done well.
Have I captured your thoughts in that area accurately? If so, can you say whether you are seeing a way for us to really stimulate that business investment?
Mr. Dodge: This is the big challenge — how to go about it. What we are seeing is that, in some sense, we need both carrots than sticks in order to get there.
The critical carrot is to facilitate reinvestment rather than distribution of corporate profits. While it is always dangerous to warp or bend the tax system to do that, you can get it wrong. But generally speaking, and certainly given the issues we will face over the next decade, it seems to me that it would be the appropriate general direction to take. It also means that we have to increase the share of our GDP that is going to investment by both governments and, most importantly, by the private sector. That means for governments, both federal and provincial, that it will appear to the public that the growth of services that they are providing to households is not as great, if you will, as might be expected given the overall growth in the economy. That is an extraordinarily difficult political challenge — small “p” political challenge — for governments and it always has been. But that is the situation we’re in.
What is really important is for those of us on the outside to talk about the importance of this investment and the possible things that governments, federal and provincial, can do in terms of their own investment — both in infrastructure and in human capital — and what governments can do to facilitate the private sector investment that has to come. That is a policy debate that needs to take place. I think that it can only take place in the context that there is a general public understanding that it is this investment that is going to be critical to our future, and to our kids’ future, that it needs to take place.
That means that private consumption over this period is unlikely to grow as fast as people hope for. That is the difficult thing to explain. I think it is possible to explain it. You have to work hard on explaining it because unless the public understands the ideas that we are trying to do — and I mean “we” collectively, what governments and the private sector are trying to do — to prepare for growth and for a better future, it is going to be very hard for governments to follow the policies that are necessary. Equally, it is going to be hard for corporate executives to explain to their shareholders why it is that they have to retain more earnings and make investment rather than to pay it out.
That is the job that I feel that I have now as a kibitzer from outside, but I think that it is a job that you have in the Senate in bringing that forward. You have an opportunity that is perhaps greater than your colleagues over on the House of Commons side.
The Chair: We always think that. Thank you.
Senator Massicotte: Thank you very much, Mr. Dodge, for being with us again. Much appreciated.
I want to maintain the same subject matter because even the last time you came, you put a lot of emphasis, basically, on trying to ring the bell to say, “You have to invest into the future. Consumption is way too loose. Governments are spending too much money.” You kept on hammering on the fact that now is the time to invest for a better future.
If you look at what has happened since then, to some degree the federal government has actually wound down some of their programs. They were talking about a lot of future programs. They have cut down quite a bit of their consumption — their near-term consumption — for the sake of long-term investments.
Are you happy, somewhat? Are we in a better place relative to the management of the balance of those issues or do you still think that we are spending far too much for the sake of poor or inadequate investment?
Mr. Dodge: We faced a real shock in the spring of 2020. Let’s not kid ourselves. We have not faced a supply shock of that magnitude even going back to 1973 when we had the first oil price shock, which was similar in the sense that all of a sudden a huge share of GDP at that time had to be devoted to paying ransom to offshore producers. We, in fact, could not increase our output at that time. We faced an enormous shock then.
The shock we had is different this time, but it is of an equal magnitude. It is not surprising that in the short run, what we had to do was to try to offset that as much as possible. It is easy in retrospect to say that we may have overshot the mark, but we didn’t know what COVID was going to produce in the spring of 2020 so we basically shut our production down here in Canada and around the world.
We’re now recovering from that, and that means making up for this gap when both output and production really stopped in 2020. That is a hole to fill in, as well as to try to reverse the not-so-good trajectory we had from, let’s say, 2016 to 2019 or, indeed, the whole decade of the 2010s. Now we have to do that, plus we have to try and make up for the things that we did not do: investment that was not made during the COVID period.
We face a number of things that are certainly a bit different now than we faced in 2019. We’re seeing a greater tendency for people to withdraw from the labour force, so our domestic labour force is not growing quite as fast as we thought, even in 2019 when we knew what aging would do. That is number one.
Number two, we are going to have to cope with those two other trends that I talked about. We are going to have to invest in decarbonization at a much faster rate than we were doing over the course of the last decade, and that is both in the production of energy and in the use of energy.
All I would say in that regard is that we are lucky in Canada. We have the capacity to take advantage of our superior starting point both in terms of our production of hydrocarbons and our production of electricity. I do not think that we ought to be discouraged. It just means that we have to get down to it.
Then the difficulty becomes that we are going to face higher real interest rates. We had this incredible period from 2010-19 where we had negative real interest rates and where the interest rate on 10-year Canada debt was two percentage points — 200 basis points — below the rate of growth of the economy. Hence, the rate of growth of our revenues. We’re not going to have that advantage as we look out over the next decade, unfortunately.
It is going to mean that we are going to have to struggle more to ensure that retained earnings and profits get reinvested. Because it is more expensive to go to the debt markets, it also means that the share of government revenue, both federal and provincial, that is going to go to service debt is going to be higher than that long period where it kept coming down and down. Now, unfortunately, it is going to be going up.
The Chair: Thank you.
[Translation]
Senator Bellemare: Thank you for being with us, Professor Dodge. You were a professor before you became governor, and I remember reading you back then.
I find your explanation of the situation and the issues involved very compelling.
[English]
Now I will say it in English because I want to be sure that I focus my question clearly.
I share the characterization of your supply constraints and everything. However, I have a question about the model to explain the reality and to find a solution. I think the model is not in sync with the reality in some ways.
Even though I agree we have to increase interest rates because they were really, really low, I contest the idea of fighting inflation through monetary policy only, as we’re doing. Because monetary policy, with increase in interest rates — and Canadians are concerned about it — it has unintended consequences, not only in the labour market but also on prices.
What I am concerned about is the boomerang effect of monetary policy on prices. This boomerang effect, like when we fought inflation in the past with monetary policy, the effect on inflation was such that Canada supported high inflation for a long time. In other words, we have a cancer. It is a tumour, but we use chemotherapy that is very big for that.
When I see what the European countries are doing — and I think you know because you alluded to that — they use fiscal policy a little bit more. You can constrain demand through fiscal policy without having the bad effect of monetary policy, and you can also use your fiscal policy to have an impact on the price index, that anticipation and so forth.
What do you think about using fiscal policy more for Canada?
Mr. Dodge: Undoubtedly, it is desirable to not add to the excess demand that is there at the moment. Certainly, governments and the central bank have to work together in order to deal with the price increase.
Fiscal policy has one big advantage over monetary policy, and that is that it can be tailored to deal with specific issues. Monetary policy is a terribly blunt instrument.
There are great advantages to using fiscal policy to try to deal with it. That requires, I would say, careful construction of that policy, which is not easy. With monetary policy, we can move rates up and down quickly, although the impact takes a long time. Fiscal policy tends to be slower in being able to actually put in place the programmatic changes or the tax changes that are required.
I’ve been on both sides of the house so to speak and I think you’re absolutely right that the fiscal policy is incredibly important at this point, but governments have to deal with the distribution effects of inflation. They have to deal with it in a way that doesn’t nullify the operation of the private market because prices are doing the job of restraining demand. The best cure for inflation is, in fact, the rising prices, which in the end cut off demand.
That’s the dilemma that government faces. Ideally, what you would like are policies that would make it less attractive for people like me to consume at the moment, number one, but that would not discourage industry or governments from making investments at this point in time while at the same time recognizing the movement of prices, in particular food prices and rents. Those are the two tough ones at the bottom of the income scale. Something is needed to deal with that.
In terms of the instruments, the instruments that governments have chosen in this country, both federal and provincial, are the right ones. They are a form of lump-sum transfer, like the GST credit. When we designed the GST in 1997, we explicitly always thought of that credit being a tool of fiscal policy and it is being used as such; the lump sum of the lump-sum transfers that the provinces have made, the $500 distribution and so on. Those at least don’t nullify the impact of the price system in dampening demand.
So what tools are there? As I said, I think the tools on the tax side to facilitate investment over the next period are really important. I think if those tools were in place, you could actually raise corporate tax rates at the same time. Similarly, on the household side, I think we’re doing maybe too much, but we’re doing the right thing in trying to deal with the people at the bottom. I think we should be balancing that, if you will, by making people like me pay a little bit more so that we would constrain our consumption a little bit in the process.
The Chair: Thank you. You’re helping us set the stage very well here for this discussion.
Senator Loffreda: Thank you, Mr. Dodge, for being here with us. We did discuss monetary policy being used to tame inflation and to hopefully dampen and decrease demand. You mentioned your top three challenges to our economy. The aging population was number one on your list, and obviously the scarce resources, the supply chain issues and problems are huge. Increasing interest rates may dampen demand, but it won’t correct supply. You did mention having employers retain their aging workforce, but what we’ve seen so far is the opposite. We’ve seen earlier retirements, a greater number of workers retiring, et cetera. It’s a significant problem.
Where do you see immigration, just to have your thoughts on that? You’ll see in a second what I’m getting to. Is our immigration policy adequate? Yes, we are looking at 1.3 million immigrants in the next three years. There were 405,000 permanent residents in 2021. But an unusually low number were newcomers. Many of those permanent residents in 2021 were international students and temporary workers who were converted. Should we decrease barriers and allow more newcomers in? Would that solve the problem? I don’t see how employers can incite their workforce to remain — from what I’ve heard and seen in the economy — to stay employed.
Last, do you see a soft landing for Canada given all these issues? Any relevant and appropriate recommendations, besides those you’ve already made, that could lead to a soft landing?
Mr. Dodge: We’re going to have a period of slow growth, whether it’s zero, minus a little bit or plus a little bit. That’s where we are as we try to bring down that excess demand.
Let’s then turn to the labour side. First of all, government policy has been — certainly in recent years — a policy to actually facilitate early retirement. In my view, governments have not helped this situation in doing that. Leaving that aside, what can be done? It’s really important that people that are already here — that are consuming housing, health services and so on — make as big a contribution to the output of those services as possible. I think that is certainly possible. Our 65-year-olds and 70-year-olds are a lot healthier than they were decades ago and can be expected, in fact, to work longer. Not necessarily doing exactly what they did at work earlier in their lives. You can’t expect a block layer to go on laying blocks when he or she is 70 years old, but you can find other things and you can facilitate other things to happen. I think one of the greatest contributors here has been the Home Depots and Canadian Tires of the world that make very effective use of these folks. I also think, for all employers, the day-to-day conditions of work that are acceptable for older workers are different than for the 20, 30 and 40-year-olds. You need to work at that. My observation is that a number of employers are working quite hard on that because they need the labour and they’re finding ways to do that. I think we in government have to try to do exactly the same thing.
Then the question is what about immigration? How can we use that to meet some of our skill needs going forward? Of course, we can. It requires that we are smart in the way we facilitate the adaptation of the immigrant to Canada and to our workforce. I would think that the fact that a fraction of the increased immigration is coming from students who stay here is probably a pretty good sign because there has already been that period of adaptation.
We have problems, of course, with the rules that allow people to practice — whether they are colleges of medicine or whatever — or the rules we have for skilled workers, for apprenticeship and so on. We have to be flexible on that side to make maximum use of people that come in.
Let’s remember that the 400,000 people that are coming in a year all have to be housed and they all have to have access to medical services whereas folks that are already here are already paying for that. It’s really important that we put some emphasis on better use of our folks who are already here.
Finally, I would just note one bit of arithmetic, and that is that immigrants age one year at a time just like the rest of us. So for immigration to be a solution, it has to actually increase every year because former immigrants are dropping off onto the age side.
I put much more emphasis on not increasing the amount of immigration, but really on making sure that the folks who are here in the country are put in a position or get themselves into a position where they can, in fact, make the maximum contribution to the economy.
The Chair: Thank you.
Senator Yussuff: A few quick questions, Mr. Dodge. Thank you for your remarks.
Thank you, chair, for laying out the challenges of where we need to get to.
You did not mention any unforeseen circumstances such as the war, which has exacerbated the problems we are dealing with in terms of supply chains. But, equally, this challenge of getting employers to spend more on training and retraining of their employees has been a decade-long challenge. Despite the efforts of successful governments of all political stripes, we are not any further than we were three or four decades ago. The Organisation for Economic Co-operation and Development, or OECD, numbers are quite dramatic in this regard. I do accept your argument and your thesis on what we need to do.
The reality is do we need a stick to beat people on the head to get to this place? Because we have not been able to do that despite the preaching of the last three decades — to say we need to invest more in retraining and training our workers in this country.
Mr. Dodge: Yes. Well, probably the biggest stick for employers is the fact that they can’t get labour unless they do the job. So there is a stick out there that actually was not there from 2010 to 2019.
From 2010 to 2019, as we came out of the disruption of 2008, our big problem was not excess demand, our problem was excess supply, if you will. That was a period where there wasn’t that market incentive to do the right thing.
I’m a little bit more hopeful — and I use that word advisedly — going forward because there is a market force that is operating, and will continue to be operating through this decade, which is much stronger than what we had in the previous decades. I would say that’s number one.
Number two, I think management is also changing. Private sector management is changing so that there’s much more recognition on the importance of this for the health of the enterprise, of the firm.
Boards today, which didn’t take a lot of interest at all in this in the past — that’s a little strong, but that is sort of the case — boards are very concerned about how the management folks are going to deal with this problem. They are pressing in a way that they certainly didn’t press before. As I say, I’m a little bit optimistic that there are forces out there that are going to have us do better.
But I think we can do better as governments. It’s dangerous to say, but we have allowed self-regulatory organizations to tend to constrict supply rather than augment supply and training. While it’s appropriate to hand off some things to self-regulating organizations, I think, as governments, we have to set stronger expectations that those organizations have a responsibility for the development of the labour supply that they are overseeing.
If you asked for something that we can do — and this goes from skilled trades right up to specialist doctors, and so on — we have handed over these regulatory powers to self-regulatory organizations. I think, as governments, it’s probably worthwhile looking at that and saying as a quid pro quo for handing over that regulatory power, then we as governments have certain expectations about what they’re going to do in terms of developing personnel for which they are responsible.
The Chair: Thank you for that.
[Translation]
Senator Gignac: Welcome back, David. It’s a pleasure to be around the same table again.
[English]
Let’s talk about central bank communication and guidance provided by central banks.
In 2020, central banks — not only in Canada; the Fed as well — mentioned that interest rates would remain low for a while. As a result, in Canada, a lot of people who have bought a house went with a variable rate because of what the long-term looked like more than two years ago.
In 2021, the Fed and the Bank of Canada mentioned inflation will be such and such a rate. Whoops, not necessarily that rate.
In early 2022, we received people from the Bank of Canada here and they mentioned that, like the Fed, we will go at a very measured place by removing liquidity. Today, we are 300 basis points higher than last spring, including a jumbo 100 basis point rate hike, which is unprecedented in the G7.
Now central banks give another guidance. They mentioned yesterday — at least the Fed, and it looks like the same thing from the deputy governor — that we will continue to increase rates until inflation declines, until that job is done. It looked like that, which is another guidance. That makes me nervous because you mentioned that monetary policy works with the lag. So the impact on the economy is not overnight. It is longer than, in fact, fiscal policy.
Professor Dodge, you were the Governor of the Bank of Canada for eight years. You had the opportunity to meet, work and chat with the former Fed chair Alan Greenspan, whom they call “Maestro Greenspan” because he would talk for 30 minutes and people at the end would have no clue exactly what he would do, and he was happy to mention that. In fact, Mr. Greenspan refrained to give any significant guidance regarding the path of interest rates.
My question is simple: Do you think central banks talk too much and give too much guidance? Because they give the impression they know a lot more than us, and we have started to realize they have no better clue than Wall Street economists.
Mr. Dodge: First of all, let me say that I think that guidance was very helpful in 2007-08. I think it was very helpful. We were getting over the “Greenspan put.” We were dealing with the consequence of the “Greenspan put” at the time. So I think guidance at that time was new and I think it was very useful.
Fast-forward 10 years, the world is different. It’s clearly very much more uncertain. The distribution of outcomes that we might expect, the tails are just very much fatter than they were.
I think it’s very hard to give guidance other than, “We are going to watch and see what happens, and we are going to adapt as necessary going forward.”
I would recommend everybody read the recent paper from the bank on this. A good academic who is at the bank explains what is going on well.
I think in 2020 and 2021 we still had too much of a hangover from what we discovered as being useful back in 2008, not taking into account that our problem was totally different. Our problem was a supply problem this time, not a demand problem as we had in 2008.
It’s understandable that here and, in particular, the United States — where I would really criticize the Fed — in August 2020, they changed their rules and basically said, “We’re not going to care about inflation.” Then in August 2021, they said, “It’s all transitory.” It was an unfortunate use of the word “transitory.” As an economist, I understood what they meant, but in plain English, it wasn’t very helpful. So I think there were big mistakes made. We made mistakes as well, as did other central banks. I think they were not as bad as the mistakes the Fed made at the time.
The right answer is that, in an uncertain world, we at the bank are going to continue to observe what happens and stand ready to act appropriately, recognizing that the impact of what we do in terms of changing interest rates is going to be felt over time.
Then that comes to a very interesting place where the Bank of Canada is going to be after the next meeting because we’ll get a new set of forecasts and so on in the next meeting. Presuming they go up to about 4%, let’s say, as a policy rate, I think there is — as long as we are seeing inflation move down bit by bit — a good argument for just staying there for a while and waiting to see that if that bit-by-bit deceleration — month-over-month deceleration — continues during the course of the winter. We don’t know, and that’s why the right words for central bankers at this point in time are that our policies are going to be data dependent.
Suppose we’re at 4%. Our domestically generated inflation at the moment is 5.2%. It’s not inconceivable at all that that will be down to about 4% by the spring, at which point we will have a zero or maybe slightly positive real interest rate. In the end, you know you’re going to have to go to that at some point, but I think there is a real risk of overshooting.
I don’t envy the job my colleagues at the bank have. But again, I think those of us on the outside, so to say, we can explain what it is that they are trying to balance, and then I think we actually help them to do the right thing.
We’re lucky in Canada. It’s unfortunate in the United States, those two silly things that the Fed did in August 2020 and then the inappropriate use of language in August 2021 kind of boxed themselves in. Because they had boxed themselves in by the language that they had used historically, they kind of have to use overshoot language at the moment.
The Chair: We will get that document, follow-up with you and circulate it.
Mr. Dodge: Yes, it’s Paul Beaudry’s —
The Chair: Is it for civilian eyes?
Mr. Dodge: It is very well written.
Senator Smith: Thank you, sir.
You talked a little bit about problems or obstacles facing business: red tape, regulation, et cetera. As we look at the present situation, it would appear that leadership becomes a major opportunity but also a major challenge for governments, not only in Canada but throughout the world.
If you had to give three pieces of advice that would help to kick-start the issue of investment and labour productivity — and we could use the demand in Europe for natural gas and oil, but that’s a very sensitive subject in our country — how would you address that?
Mr. Dodge: I just go back to my time at the Department of Finance. We were actually quite smart and quite clever — and I use that word both in its good sense and in its pejorative sense — in being able to craft rules that were supposed to do a job, both on the tax side and then in other departments, of course, on the programmatic side.
Very big businesses can deal with those rules, understand and figure out exactly where that’s heading. Changing rules are always difficult to deal with, and so in changing rules, one should be cautious about making changes and certainly about reversing directions where businesses have already set their plans. For small business, it’s impossible to cope with these things. It is just difficult.
I think as rule writers, we have to exercise a certain degree of restraint in trying to do too much through rules and through changes in the rules. Continuity of rules and being certain of more or less how those operate, how courts have interpreted how those rules operate — that’s really quite important in facilitating investment.
Investment is risky enough where you’re trying to gauge what’s happening to technology and what’s going to happen to demand in the rest of the world. It’s a risky enough job in the first place, but we don’t want to compound that with rules that are ever changing, where we try to write them, perhaps, too definitively and then end up getting some unexpected consequences of that.
It’s very hard because the pressure from the public is there ought to be a law or a rule. It’s hard to resist writing rules and changing rules. If there’s one thing from sitting on boards that you understand is that these changes and uncertainty about where it’s going make it hard. While maybe we cope with it here in Canada, it’s hard for the foreign investor to cope with the uncertainty.
The Chair: I think that’s a whole issue that you’ve raised. I’ve just been listening to leaders in the energy sector talk about that, saying, “We don’t mind the rules, we just need to know what they are so we can function.”
Thank you so much, Mr. Dodge. It has been really helpful as we begin our new session this fall by taking a look at fiscal and monetary policy and where we are headed. Thank you for being with us today, and I’m sure that we will be back to ask you more questions in the future.
Mr. Dodge: I wish you good luck, senators. What you are doing here is extraordinarily important.
The Chair: Thank you so much.
(The committee adjourned.)