He may be Canada’s finance minister, but some of Jim Flaherty’s recent pronouncements on the economy make him sound more like an economics blogger shouting from the wilderness, or from an academic perch somewhere far from the centres of power.
Take, for instance, Flaherty’s prediction this past weekend that Canada will be under international pressure to raise interest rates this year.
“I think the pressure will be there, because the Fed in the U.S. should stop printing money, and taper off as they say,” Flaherty told CTV News in an interview Sunday.
“The OECD and the IMF have both said to Canada we ought to let our interest rates go up a bit. So there’ll be some pressure there for that to happen.”
That’s not the view of Bank of Canada Governor Stephen Poloz, the guy who actually sets Canada’s base interest rate. Poloz has taken a more dovish outlook on Canada’s economy than his predecessor, Mark Carney, and if anything, Poloz’s statements suggest he wants to put off any future interest rate hikes even longer than Carney did.
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And though Flaherty was careful to stress he wasn’t trying to step on Poloz’s toes and tell him how to do his job, some among Canada’s economic literati accused him of doing just that.
“Even if his comments were well-informed — which they’re not — he shouldn’t be speaking publicly about his views on how monetary policy should be conducted,” economist Stephen Gordon wrote in Macleans.
Flaherty might not actually be wrong. When Fed Chairman Ben Bernanke announced last spring that the U.S. would soon stop “printing money,” as Flaherty refers to the Fed’s $85-billion-a-month stimulus program, it did cause a jump in Canada’s fixed-rate mortgage rates. And the Fed’s tapering of the stimulus program has indeed begun, so the possibility of further mortgage rate hikes can’t be discounted.
As some observers have speculated, Flaherty might just be trying to talk down the housing market, which saw very strong price hikes in major metro areas like Toronto and Vancouver at the end of 2013, despite Flaherty’s efforts the year before to cool things off.
But whatever Flaherty’s reasons for the interest rate comment, it’s clear the finance minister is taking some unpopular positions that are placing him outside mainstream economic thought, at least in the halls of power.
Take, for instance, Canada Mortgage and Housing Corp., the country’s government-run mortgage insurer. The International Monetary Fund last year suggested that Canada scale back the mortgage giant, or maybe get out of the business of insuring mortgages altogether, because essentially it’s working too well and the Canadian economy as a result is throwing too much investment into housing and not enough into other things.
To the surprise of many, Flaherty sounded receptive to this idea, saying CMHC had become “something more grand” than it should have been.
While it’s unlikely Flaherty will actually end the CMHC, it’s telling that those are the public remarks he’s making. To an extent, Flaherty is exhibiting signs of right-wing economic radicalism, though it’s couched in the calm, diplomatic language for which he’s known.
One clear sign of this is his attitude towards quantitative easing, the abovementioned $85-billion-a-month economic stimulus program from the U.S. Federal Reserve. Flaherty has repeatedly referred to it as “printing money.”
In a sense, this is correct, but when he frames it in those terms, he is echoing conservative economists who, in the early years of the economic crisis, warned that printing that amount of money and throwing it into the economy would cause hyperinflation a la Weimar Germany in the 1920 and ‘30s.
Those economists now have to concede that, five years into the economic stimulus, there is no hyperinflation in the U.S. or other developed economies.
But Flaherty’s position does raise the question of how Canada would respond if a new economic crisis were to hit. Would Flaherty stand in the way of fiscal stimulus? And if so, what alternatives would he propose? Or would his conservative view of economics tell him that a laissez-faire, do-nothing attitude is the right response?
Interestingly, few of Flaherty’s controversial economic views have much broad political appeal. Certainly doing nothing in the face of economic crisis wouldn’t fly very well; higher interest or rates or the scaling-back of the CMHC would make buying a home harder.
Maybe Flaherty is just playing to his base, but it’s likelier he’s expressing what he simply believes is correct.
If that’s the case, then of Flaherty we can at least say this: Love him or hate him, the man is nobody’s mouthpiece.
And in the halls of financial power, that alone might make him more of a radical than the Bay Street crowd would like.