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Still at the head of the Economics class

Still at the head of the Economics class

For the third time in the Bank of Canada’s 78-year history, a Queen’s graduate has been appointed its Governor, one of this country’s most important and influential economic jobs.

As the newly installed ninth Governor of the Bank of Canada, Stephen Poloz, Artsci’78, has the largest wallet in the country. He’s responsible for $17-billion in Canadian bills that slosh around the economy every day and, as custodian for Canada’s official international reserves, another $69-billion (US) back at the office.

Not bad for a guy who came down the 401 from Oshawa to Queen’s in the mid-1970s as a pre-Med student and only decided to take an economics course “as something of a lark.”

Bank of canada Governor Stephen PolozStephen Poloz is the third Queen's grad to serve as Governor of the
Bank of Canada. (Photo courtesy of the Bank of Canada)

It turned out that economics, and more specifically econometrics, beckoned more than medicine. And it was his graduating essay’s computer-savvy analysis of the stability/instability of the demand for money that led directly to work in Ottawa at the Bank of Canada, first as a summer student in 1978 and eventually in the Governor’s office 35 years later.

That path included graduate ­degrees (MA and PhD) at Western, and a return to the Bank in 1981 with increasing responsibilities for research in a volatile and controversial period in the Bank’s history.

After a stint in the private sector, Poloz (pronounced Pole-oz) returned to government, rising to the top of Export Development Canada (edc) and on June 13, became the unexpected choice as Governor, arguably the third most powerful economic figure in the government after the Prime Minister and the Minister of Finance.

That position’s power and influence extend far beyond looking after the currency and foreign reserves and setting the interest rate at which the Bank lends money to the commercial banks, which in turn influences interest rates throughout the economy.

In his initial presentations as Governor, Poloz has emphasized the limitations of his tool kit, aimed only at controlling inflation. But as his predecessors – Mark Carney and David Dodge – have shown, the governor has a ready-made “bully pulpit” from which to address much more than monetary policy if he chooses.

He also has an independent research capacity equal to or better than the Department of Finance, which gives the Bank the ability to be a countervailing source of analysis, whether that advice is made public or only whispered in a finance minister’s ear.

How Poloz got his first chance at the Bank is an interesting story in itself, and it illustrates the long and extensive links between Queen’s Economics Department and national public policy writ large – and more specifically between the University, and the Bank of Canada, and the federal Department of Finance.

Stephen Poloz – “Steve” to his family and friends – is the third Queen’s grad to become Governor of the bank. The first was ­Gerald Bouey, BA’48, LLD’81, Governor from 1973 to 1987, while the second was current Queen’s Chancellor David Dodge, Arts’65, LLD’02, governor from 2001 to 2008. Dodge also served as Deputy Minister of Finance along the way.

Gerald BoueyGerald Bouey

Queen’s historian Duncan McDowall, Arts’72, MA’74, traces the strong Queen’s-Ottawa linkages back to the 1920s and ‘30s, but particularly to William Mackintosh and John Deutsch, both of whom played senior economic-policy roles in the federal government and became principals at Queen’s. “The Economics Department that Poloz came out of has a really shining legacy of excellence,” says McDowell.

Dodge has a similar assessment. In 1961, he was a young undergrad in the money and banking course taught by Prof. David Slater, BA’47, LLD’89. At the time, Donald Fleming, Finance Minister in the government of Prime Minister John Diefenbaker, attempted to fire Bank Governor James Coyne over disagreements about tight money and Coyne’s public criticism of Fleming-Diefenbaker economic policies.

With Slater as their expert analyst, his students had a front-row seat to one of the most fascinating public policy dramas of the era. Slater and Scott Gordon, another member of the department, were publicly engaged as academics in the great debate about Coyne’s policies at the Bank and the Diefenbaker government, and Dodge was hooked. “There was a long tradition of Queen’s people being involved in national issues – people such as Dr. Richard Lipsey (author of a widely used economics textbook) and so on,” he recalls.

[photo of David DodgeQueen's Chancellor
David Dodge

As historian McDowell asserts, “The students were not just getting textbook economics, rather it was ‘This is what’s really happening.’”

Poloz hit the Queen’s Economic Department 15 years later, at a time when econometrics and computer modeling were in the ascendancy. One of Poloz’s professors was a young British econometrician Gordon Fisher (now a professor emeritus at Concordia), who encouraged Poloz to pursue his interest in how the Bank was measuring the demand for money.

At the same time, the Bank’s senior deputy governor, George Freeman, and several other officials were attending a conference at Queen’s, Fisher told them that he had a student who maintained that most of the Bank’s research was “just a load of rubbish.” According to Poloz, “It wasn’t really true, but Freeman’s response was, ‘If that’s the case, he should be on our staff.’”

Fisher called Poloz and told him to come to the Donald Gordon Centre right away (“And put on a tie!” he advised) because the Bank’s directors of research and of monetary policy were ready to hire him.

As Poloz told the Commons Finance Committee after his appointment as Governor, “Overnight, I had a summer job in the monetary department at the Bank of Canada, and that’s where a passion was born.”

Fisher recalls Poloz saying at an early stage that he wanted to be Governor of the Bank of Canada. “He was a very charming, but slightly cocky fellow…. quite confident in telling me what I should be doing.”

In his new job, Poloz is in a position to be telling a lot of different people what they should or shouldn’t be doing.

For now, he’s going about it in a deliberately low-key fashion, in the manner of an academic doing his best to explain the complexities of our current economic situation and why GDP growth has not picked up after the 2008-09 meltdown as quickly as economic theory might have suggested.

In contrast to predecessor Mark Carney, who had a penchant for catchy terms, such as referring to corporate cash reserves as “dead money,” Poloz took a more positive spin in his first public speech in Oakville back in June. “The good news is that the balance sheets of corporate Canada are healthy and the capacity to invest exists,” he said.

Carney had warned about the increase in household debt in alarmist terms, but Poloz is more conciliatory. Consumers have made a major contribution to sustaining the economy (in part by increasing their debt loads), but he argues that now is the time for other sectors to rectify the sluggishness of the economic recovery, specifically, increased exports and increased investment in the ­capacity to produce those exports.

To appreciate Poloz and his enthusiasm for his new job, one has to understand the role of the central bank. Currently the two biggest challenges are to maintain price stability within a narrow range – that is, to control inflation – and to maintain public confidence in Canada’s economic machinery so that people are willing to spend, invest, and create new companies or activities that keep the economy moving.

Both challenges depend on continued research into what makes the system tick and how to make it tick better for the benefit of Canadians. Therein lie the seeds of Poloz’s current intellectual challenge. When he first joined the Bank, Gerald Bouey was Governor and the debate swirled around the theories of University of Chicago economist Milton Friedman, who argued that inflation could be controlled by limiting the amount of money in the economy.

But the research Poloz was doing, along with fellow Queen’s and Western graduate Tiff Macklem, Artsci’83, showed the relationship between money and inflation wasn’t working the way the theories said it should. “I was hoping to save the money targets, but in fact, I just proved they were unreliable,” says Poloz.

Begrudgingly, Bouey was persuaded to abandon them. Then Poloz and Macklem tried to determine what kind of guideposts could replace them. They tried several parameters. “In the end, everything was unsatisfactory, and so we recommended the bank point towards inflation itself,” says Poloz.

"Four decades after he first arrived in Kingston with high marks and a strong work ethic (the product of a Ukrainian immigrant background), Poloz retains his academic curiosity in his quest for better explanations for the economic phenomena he works with . . "

The recommendation was eventually accepted by Bouey’s successor, John Crow. He also appointed Poloz as Chief of Research during his controversial term when as the bank rate peaked at 14 per cent, unemployment rose to more than 11 per cent and the GDP contracted by 3.4 per cent during the 1990-1992 recession. So Poloz is no stranger to monetary policy controversy. (Coincidences abound: Poloz recruited Macklem to the bank in 1984, and he’s again his boss.)

The man who now has his hands on some of the country’s most powerful economic levers is the product of an eclectic mix of academe, public service and private sector experience, in which his studies, fellow students, and professors at Queen’s have left a traceable impact. Four decades after he first arrived in Kingston with high marks and a strong work ethic (the product of a Ukrainian immigrant background), Poloz retains his academic curiosity in his quest for better explanations for the economic phenomena he works with.

With his undergrad brushcut now showing tinges of grey, he performs in meetings and speeches like a professor committed to explaining how theories and models work, or more often, don’t work.

At Queen’s, Poloz was exposed to the notion that economics was not an end in itself. “In the environment at Queen’s there was a lot of attention to policy issues,” he recalls. “You weren’t learning economics just as a discipline or to understand it on its own. We learned that there were problems in the world and that economics, if you understood it well, could actually do something about them.”

Referring admiringly to such professors as Richard Lipsey and the late Doug Purvis, Poloz says, “These were people who weren’t just great economists, [they were] macroeconomists with a very strong interest in policy and what economists could to make things better – that is, with a Keynesian or neo-Keynesian ­approach. Western had a different kind of economics culture, also involving policy, but more interested in Rochester and Chicago, the monetarist schools.

Poloz says that when he first worked for the Bank of Canada, economics was “close to a religion and I got a certain passion for that, but then I went out to the private sector where nobody cares about the theories; they just want to know if they can make any money.”

His experience in the private sector led to another turning point. “Somewhere along the way, I came to realize that public service was an important driver for me, that the wish to do something for the common good is something that really fills my bucket… and so I was delighted to have the opportunity to come back to the public service [at EDC] in 1999.”

Although EDC does extensive research and economic modeling, for Poloz it was more of an immersion into the hands-on practical world. He admits his experience at EDC has given him “much more of a grounding in the real business community in Canada, [and that] gives you a whole other way to think about these issues.”

As Poloz told the federal Finance Committee, “We must always remember that beneath our economic and financial statistics and analysis [there] are real people, making real decisions that can lead to bad outcomes as well as good ones.”

An EDC colleague has observed that Poloz has become more of a people person while using “all of his knowledge to make the globalized world understandable to Canadian businesses… I think Steve was able to show people that to stay competitive, Canadian business has to use every advantage and if that means moving some production offshore, then so be it as long as the companies keep a huge Canadian footprint and do their research and development here.”

Although as Governor of the Bank of Canada he earns in the range of $500,000 a year, Poloz remains, in the words of one admirer, “a real down-to-earth guy from Oshawa who can talk to anybody about anything, and he’s a good listener”

But Poloz also remains a number cruncher at heart. In his off hours, he’s a keen golfer. When I suggested his 17 handicap seemed fairly modest, he quickly pointed out that only about 10 per cent of recreational golfers shoot under 100. “So 17 puts me in the top 10 or 15 per cent,” he says.

A keener since his student days, Steve Poloz still wants to be at the head of his class.

[Queen's Alumni Review 2013-3 cover]