BUSINESS WATCH

It’s time to bounce Crow out on his ear

The Bank of Canada governor and his lunatic economics could scuttle the next government, just like he did the last one

Peter C. Newman October 4 1993
BUSINESS WATCH

It’s time to bounce Crow out on his ear

The Bank of Canada governor and his lunatic economics could scuttle the next government, just like he did the last one

Peter C. Newman October 4 1993

It’s time to bounce Crow out on his ear

BUSINESS WATCH

The Bank of Canada governor and his lunatic economics could scuttle the next government, just like he did the last one

PETER C. NEWMAN

Less than a hundred days after being elected on Oct. 25, Canada’s new prime minister will have to make a key decision.

Kim Campbell or Jean Chrétien (hopefully without having to ask Lucien Bouchard’s permission) will choose whether or not to reappoint John Crow to another term as governor of the Bank of Canada. No public servant holds greater sway over the nation’s economy. The governor sets the country’s monetary policy, which in turn determines the level of interest rates and value of the Canadian dollar. The power of the man or woman who fills this pivotal post is supreme; attempts by any politician, including the Prime Minister, to interfere with Bank of Canada policies would almost automatically result in the governor’s resignation. That, in turn, would shake the confidence of world money traders in our currency, triggering a major financial crisis.

But once every seven years, the government has a window of opportunity to appoint a new governor. In my view, and in the opinion of a growing number of economists, Crow should be unceremoniously hustled out of his fleece-lined roost when his term expires at midnight on Jan. 31,1994. Few of his predecessors, except James Coyne, who was fired by John Diefenbaker in 1961, have caused more havoc. No governor has filled the job with less distinction and inflicted more damage. To reappoint him would not only signal the new administration’s abandonment of any hope of getting the economy moving again, but it would endorse Crow’s shoddy record of the past seven years.

Technically, the appointment is made by the Bank of Canada’s board of directors, who have become captives of Crow’s rawboned policy initiatives, but the federal cabinet can overrule its recommendation. The directors struck an official search committee for the next governor in June, 1992, but Crow is definitely their leading candidate. James Matkin,

the bank’s director from British Columbia, recently commented that the board “doesn’t consider this a political appointment.”

That’s just plain silly, because it was Crow’s lunatic economics that, probably more than any other factor, helped scuttle the Mulroney government, and the same policies are bound to have a similarly negative effect on the next administration should he be reappointed.

While price stability is desirable, our low inflation rate has been bought at too high a price. Ever since he launched his “zero inflation” crusade in the winter of 1988, Crow has been adamant in his determination to not only reduce but eliminate inflation. He kept such a tight grip on the economy that factories began to close and unemployment increased to its currently agonizing level of 1.6 million people.

While it’s difficult to calculate the extent of human damage Crow’s stubbornness has inflicted, the best estimate (by former TD Bank economist Doug Peters, currently the liberal candidate in the Toronto riding of Scarborough East) is that Crow’s success in reducing inflation from five per cent to two per cent between 1990 and 1992 bled $104 billion in lost production out of the economy,

triggering and prolonging the recession. Peters also calculates that in 1992 alone, lower interest rates might have allowed another million Canadians to be employed, which, aside from its human benefits, would have lowered unemployment insurance costs by $15 billion and generated an extra $7 billion in tax revenues. In response to Peters’ attacks, whose proven abilities as an economic thinker should qualify him to be minister of finance in any Chrétien government, a confidential Bank of Canada memo noted that “reducing this [1.6 million unemployed] by one million would take us well below the natural rate of unemployment.” That heartless view revealed more about Crow’s tunnel vision of the real world than a hundred of his after-dinner speeches or policy declarations.

Another reason to demand his departure is that between 1989 and 1991, Crow kept the value of the Canadian dollar artificially high, wiping out whatever advantages we might have gained from the U.S.-Canada Free Trade Agreement. At the same time, he kept our interest rates up to five percentage points above equivalent American levels, further devastating our economic prospects.

Crow’s anti-inflation mania is based on the premise that rising prices create economic inefficiency and social inequalities. That’s true enough, but by pegging his policies to the black-or-white dictates of striving for zero inflation, he turned an economic proposition into a religious crusade. He also seems to believe that once inflation is reduced to zero, sustained economic growth will follow. There exists no documented evidence to support this theory.

One of the many peculiarities of Crow’s stormy term is that he seldom practised what he preached. He never ceased spreading his dogma that no single element in his battle with the dragons of inflation was more essential than lower labor costs, urging unions and managements alike to accept and offer lower wage packages. Yet, while he was beaming these edicts of restraint, he resolved his own war on inflation by accepting pay raises of up to 21 per cent. In dollar terms, he added up to $103,000 to his salary—raising it to the $168,800-$253,200 range. (In order to protect the guilty, salaries in these stratospheric atmospheres are only published as ranges. When Crow was appointed governor seven years ago, his range was $120,000-$150,000.)

Crow’s predecessor, Gerald Bouey, who ran the Bank of Canada from 1973 to 1986, refused to accept raises when interest rates were high, and former Federal Reserve Board chairman Paul Volcker, who held the equivalent job in Washington, took a salary cut to $60,000 from $116,000 in similar circumstances.

Revealing John Crow’s salary details is petty stuff compared with the damage he has inflicted on the Canadian economy. His epitaph will be the same as the immortal words of the U.S. army major who, after his troops had bombed the hell out of a South Vietnamese community, explained to a journalist, “It became necessary to destroy the town in order to save it.”