- New and often radical ideas have emerged about how much governments can spend and how trade should be conducted following COVID-19 and Russia's invasion of Ukraine.
- Former BoC and Finance advisor Christopher Ragan says most people at the Bank hold conventional views, despite public discourse about concepts like Modern Monetary Theory.
- Stephen Poloz, a former BoC governor, says friendshoring must be approached with caution, and that Canada's trade should not become too concentrated in North America.
The fifteen years since the global financial crisis have been marked by economic, geopolitical, and domestic political turmoil. The rise of new ideas and political voices has disrupted long-standing orthodoxies about markets, free trade, and globalization across advanced economies. Donald Trump’s erratic and unpredictable political ascendancy is only one example.
Canada has been touched by some of these developments. The People’s Party of Canada is arguably an expression of some of these global trends. Even the Trudeau government’s pursuit of so-called “industrial policy” is broadly reflective of new and emerging intellectual movements.
Yet there’s a case that the core institutions of Canadian economic policymaking—namely, the Bank of Canada and the Department of Finance Canada—have been mostly resistant to the tides of new ideas and remain bastions of the old orthodoxy.
“I’m sure we could find some individuals in the BoC [Bank of Canada], and some individuals at Finance, who differed from the mainstream, they might have been more extreme in one direction or the other, but I think almost by definition, most of the people there hold mainstream views,” says Christopher Ragan, founding Director of McGill University’s Max Bell School of Public Policy, previously served in advisory roles at both Finance and the Bank of Canada.
The one big exception was the extraordinary fiscal and monetary policy during the pandemic. To finance its COVID relief programs during the pandemic, the federal government sold over $307 billion in bonds to the Bank of Canada in a process called quantitative easing (QE) as part of large-scale fiscal and monetary stimulus.
Yet as novel and large as these policies were, they were driven mostly by the pandemic’s exceptional circumstances rather than new ideological commitments such as Modern Monetary Theory (MMT).
MMT has received a boost of popularity in certain intellectual circles as many activists and thinkers, especially progressive ones, began exploring the possibility of the federal government’s large-scale spending becoming permanent. It theorizes that a sovereign government issuing its own currency can always afford to spend regardless of tax revenue. It argues that so long as a government controls the national currency, it can create as much money as needed to fund new programs and raise taxes as needed to reduce inflation.
Ragan doubts that anyone in Finance or the Bank of Canada is taking MMT seriously, notwithstanding the large-scale deficits and debt accumulation during the pandemic.
“My own take is that MMT is basically a prescription for eliminating the central bank’s independence and subsuming the central bank actions more or less into the Finance authority,” says Ragan. “I would be very surprised that very many people thought that was a good idea in the BoC.”
Although the Bank of Canada is a nominally independent Crown corporation, Ragan says there is communication between branches of Finance and the central bank, which he encountered during his stint at Finance in 2009.
Current bank governor Tiff Macklem, as well as Finance Minister Chrystia Freeland, have both poured cold water on the possibility of MMT guiding Canada’s fiscal policy, even though both arguably helped to generate interest in the idea by implementing QE.
With an inflationary spell induced in large by Ottawa’s emergency stimulus programs, resulting in the loonie trading at a two-year low against the U.S. dollar last September, MMT’s run of popularity has slowed considerably. The annual rate of inflation hit 8.1 percent in 2022, before dropping to 4.3 percent in March.
Adding to Canada’s current run of inflation have been persistent supply chain issues due to the slowdown of industry and shipping during pandemic lockdowns. Russia’s invasion of Ukraine in February 2022 added to the world’s supply chain woes.
Having previously relied on Russian oil and gas, most EU member states began curbing their uses of Russian energy imports in response to the invasion, while economic powerhouses like the United States and Japan imposed severe economic sanctions on Russia.
In this context, there’s been growing discussion among G7 countries, including Canada, about “reshoring”—bringing industry home—and “friendshoring”—aligning industry with politically-aligned partners, away from authoritarian states like Russia and China.
Long a favoured source of cheap manufactured imports, China has become an unpopular trade partner for Canada due to Beijing’s increasingly aggressive foreign policy choices. These actions included taking Canadian citizens hostage, alleged electoral interference in Canadian elections, and intimidating Chinese Canadians and their families.
Calls to cut trade with China have grown louder. Yet former Bank of Canada governor Stephen Poloz says Canada must proceed with caution on this front, and that Canadians cannot maintain their high standard of living without healthy trade relationships.
“We can’t be cutting off imports from somewhere and expecting them still to buy our exports,” said Poloz in an interview with The Hub. “We should be leading proponents of liberalized trade, and if we’re going to go with friend-shoring for strategic reasons…there are an awful lot of low-cost places that can be our friends in the trade system.”
Poloz said that Canada stands to benefit further from its close economic and geographical ties with the U.S., as well as Mexico, but that should not mean Canada has to double down on North American trade as part of its friendshoring effort.
Additionally, Poloz said that while China was always going to become more expensive to conduct business with due to its growing economic strength, nearby countries can provide alternatives, specifically mentioning some that are not considered full democracies.
“Vietnam, Thailand, Philippines—these are places where you can do exactly what we’ve been doing in China for the last 10 or 15 years,” said Poloz. “We can do it now for the past that we did in China 15 years ago. So it’s a natural process, and we should not be standing in the way of it or trying to turn it into politics.”
In 2021, imports from the three countries mentioned by Poloz were worth roughly $16 billion, compared to the $86 billion worth of goods imported from China that same year. Canada imported over $100 billion worth of goods from China in 2022, setting a new record.
Ragan says it is also only natural for countries to reorient their trade in the wake of supply chain disruptions, whether it be due to war or political unpredictability. He says that even if Canada may pay a slightly higher cost for a more stable supply chain, he compares it to paying for an insurance policy.
“I don’t think there’s anything very startling or very new in the concept of friendshoring,” says Ragan. “I would say you want to think carefully about it because you don’t want to throw away the benefits of globalization…it’s not an argument, in my view, for collapsing your supply chains just to North America plus Western Europe.”