Latest / The Missing Middle Podcast / Bank of Canada’s Carolyn Rogers on Productivity, Trade-offs, and Housing

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Bank of Canada’s Carolyn Rogers on Productivity, Trade-offs, and Housing · The Missing Middle Podcast

• 0:00
  SPEAKER_00: So, hi everyone.
• 0:01
  SPEAKER_00: Today is Thursday, October 1st, and welcome to our show, Answer Period.
• 0:06
  SPEAKER_00: And today we have a special guest, Bank of Canada Senior Deputy Governor Carolyn Rogers, who just finished giving a speech in Victoria titled Canada's Housing Affordability Dilemma.
• 0:16
  SPEAKER_00: So, Carolyn, thank you so much for being here today.
• 0:20
  SPEAKER_01: Thanks for the invitation, Mike.
• 0:21
  SPEAKER_01: I'm a big fan of your podcast, so really pleased to be here.
• 0:26
  SPEAKER_00: Well, thank thanks uh for being here.
• 0:28
  SPEAKER_00: And uh you you did something in your speech, uh a couple things in a single paragraph that we absolutely love around here.
• 0:35
  SPEAKER_00: Uh one is presenting data, and two is talking about that kind of nexus between uh housing and productivity.
• 0:43
  SPEAKER_00: So I want to give the quote for our audience here.
• 0:47
  SPEAKER_00: Uh you said in 2000, residential investment accounted for 4.3% of gross domestic product, GDP, while overall business investment on machinery, equipment, and innovation accounted for 8.3%.
• 1:01
  SPEAKER_00: Today that relationship is reversed.
• 1:04
  SPEAKER_00: So, you know, my question is like on the one hand, I think I can see why this would be a problem.
• 1:10
  SPEAKER_00: I think most of us can see why why this would be a problem.
• 1:12
  SPEAKER_00: But one of the kind of debates we have in our nerd uh WhatsApp chats when it comes to uh policy and and housing, that, you know, at the same time, like the federal government's acknowledged that we have a housing shortage and that housing starts need to double.
• 1:27
  SPEAKER_00: So wouldn't that suggest that, in fact, we need more investment in housing, not less?
• 1:34
  SPEAKER_01: Well, we probably need more investment in both, right?
• 1:36
  SPEAKER_01: We need more investment in the things that improve productivity and increase our standard of living.
• 1:43
  SPEAKER_01: It it is, as you say, it's there's some some logic to why housing uh investment has gone up.
• 1:48
  SPEAKER_01: Housing has gotten more affordable.
• 1:50
  SPEAKER_01: So you have to invest more to get the same amount of housing.
• 1:54
  SPEAKER_01: I think probably uh if you think about housing, we have to be careful about what kind of housing we're investing in.
• 2:01
  SPEAKER_01: You your show, you've talked a lot about this, making sure that the type of housing we're investing in is the type of housing that that people want to buy and raise families in.
• 2:11
  SPEAKER_01: But we do need to increase our our business investment in Canada.
• 2:16
  SPEAKER_01: That was a problem that uh that's been with that's a problem we've been talking about for a long time.
• 2:21
  SPEAKER_01: Um, it's been with us for a while.
• 2:23
  SPEAKER_01: So I don't think it's an either or.
• 2:24
  SPEAKER_01: I think it's both.
• 2:26
  SPEAKER_00: Yeah, I definitely agree.
• 2:28
  SPEAKER_00: And I I think it's, you know, not just what uh what type of housing we invest in, but what do we consider a housing and investment?
• 2:35
  SPEAKER_00: Uh you know, I know I know I'm talking about the Bank of Canada and not StatCAN, right?
• 2:40
  SPEAKER_00: But but I do think there's a distinction between, you know, somebody flipping homes and and you know paying real estate agents uh for that versus actually building something, uh something new.
• 2:50
  SPEAKER_01: Yeah, very, very good point.
• 2:51
  SPEAKER_01: So your point is what is that, what's inside that measure?
• 2:54
  SPEAKER_01: And is it an apples to apples comparison when we think about investment, productive investment?
• 2:59
  SPEAKER_01: Yeah.
• 3:00
  SPEAKER_00: But but I certainly uh I think we can all agree that uh we we need more more business investment.
• 3:05
  SPEAKER_00: Um and you know, to kind of follow up on that, that you know, I do wonder if you know, we we see these things again being at odds with each other, but you know, a lot of folks in in my generation, you know, we bought a home young and we wanted to start a small business, and we were able to do that because we could actually leverage the equity in our house.
• 3:27
  SPEAKER_00: So if we can't, if small business owners uh, you know, don't have that equity in their homes, how are we going to kind of invest in in small businesses given, you know, our our financial sector hasn't historically done a really great job of that.
• 3:41
  SPEAKER_01: Yeah.
• 3:42
  SPEAKER_01: I mean, your podcast is called Missing Middling.
• 3:44
  SPEAKER_01: That's the missing middle in the investment industry or investment sector.
• 3:48
  SPEAKER_01: We hear this all the time.
• 3:50
  SPEAKER_01: Um, banks tell us, look, we've we've got capital to deploy, we're looking for good opportunities, and then we talk to small businesses and they say, I've got an idea, I need somebody to lend me the money.
• 4:02
  SPEAKER_01: Uh in a perfect world, we wouldn't we wouldn't have people mortgaging their houses to start up businesses.
• 4:10
  SPEAKER_01: It'd be good if we had a pool of risk capital um as an alternative to that.
• 4:15
  SPEAKER_01: So yeah, I mean it's it's a problem we need to solve.
• 4:18
  SPEAKER_01: I was just talking with some some folks about that just before the speech today.
• 4:22
  SPEAKER_01: And we're out here talking to businesses.
• 4:25
  SPEAKER_01: Tomorrow we're talking to a group in Victoria here who have started up um ocean technology businesses, a bunch of young entrepreneurs.
• 4:33
  SPEAKER_01: So it's definitely a question I'll put to them.
• 4:37
  SPEAKER_00: Yeah, absolutely.
• 4:38
  SPEAKER_00: So uh and I I I definitely agree.
• 4:40
  SPEAKER_00: If I could have started my my business without you know taking a DLOC.
• 4:44
  SPEAKER_00: Yeah, I would I would have preferred that.
• 4:46
  SPEAKER_00: Uh no, no question.
• 4:48
  SPEAKER_00: So so what is the the the role of the Bank of Canada in you know helping uh govern or uh business uh owners invest more?
• 4:57
  SPEAKER_00: Uh, you know, it does seem that a lot of those tools would be more kind of on the fiscal policy side than the monetary policy side.
• 5:04
  SPEAKER_01: Yeah, absolutely.
• 5:05
  SPEAKER_01: I mean, the we're not uh we don't set policy for the types of credit and capital that are available in the market.
• 5:14
  SPEAKER_01: The number one job we can do to make uh make it easier for for young people starting a business to invest and to plan ahead is to keep inflation low and stable.
• 5:27
  SPEAKER_01: Uh planning is always easier in an environment where you can control inflation.
• 5:31
  SPEAKER_01: So that's that's our number one job, and it's the single biggest contribution we can make to that challenge.
• 5:37
  SPEAKER_00: Well, that's a perfect segue to actually where I wanted to go because I wanted to uh I'm a kind of stat nerd, so I wanted to talk about inflation, talk about the consumer price index and how it flows through uh through through policy rate uh decisions.
• 5:50
  SPEAKER_00: Because, you know, if we look at this, is you know, I taught monetary policy at Ivy for almost 20 years.
• 5:56
  SPEAKER_00: And one of the things that would come up a lot is, you know, these measurement issues around CPI, that it, you know, it's a basket of goods and services that represents the average Canadian household.
• 6:07
  SPEAKER_00: But the thing is, like none of us are, you know, you know, I've never met a family with 2.3 kids, exactly.
• 6:12
  SPEAKER_00: You know, none of us are the average.
• 6:16
  SPEAKER_00: Exactly.
• 6:16
  SPEAKER_00: And and and none of us are.
• 6:18
  SPEAKER_00: So how do we and and I think about that a lot when it comes to to housing, right?
• 6:23
  SPEAKER_00: Like I look at my parents, they own a home, they don't have a mortgage.
• 6:27
  SPEAKER_00: Then there's my wife and I, we own a home, but we do have a sizable mortgage.
• 6:32
  SPEAKER_00: And you have my nephew who's a renter.
• 6:34
  SPEAKER_00: So, you know, changes in uh home prices and rents and interest rates affect all three of these households like very, very differently.
• 6:45
  SPEAKER_00: So, how can the Bank of Canada take that into account when we do have this kind of single measure of of inflation that we you know base a lot of our decisions on?
• 6:53
  SPEAKER_01: Yeah, I mean, it's it's one of the hardest parts of the job, I think, is we we deal in aggregates, right?
• 7:00
  SPEAKER_01: The we're always dealing in aggregates.
• 7:02
  SPEAKER_01: And as you say, aggregates or averages don't describe anybody.
• 7:06
  SPEAKER_01: Nobody's CPI basket is going to equal what the CPI measure is.
• 7:12
  SPEAKER_01: And I think one of the things that you do a really good job with on your podcast is this intergenerational issue.
• 7:18
  SPEAKER_01: Uh this the challenge that we have that um what was true for our generation when we were trying to get into the housing market is no longer true.
• 7:28
  SPEAKER_01: It's it's much more difficult to save a down payment.
• 7:33
  SPEAKER_01: So uh, you know, we think about these issues a lot.
• 7:37
  SPEAKER_01: Monetary policy is a is a very blunt tool.
• 7:39
  SPEAKER_01: This was a big part of the speech I made today.
• 7:42
  SPEAKER_01: Uh do we always ask ourselves these questions?
• 7:44
  SPEAKER_01: Are we always challenging ourselves to see if there is a better way to measure?
• 7:48
  SPEAKER_01: Are we are we getting the right indications?
• 7:51
  SPEAKER_01: Uh we do, but I walked through this in my speech today.
• 7:55
  SPEAKER_01: We we looked at uh mortgage interest costs or or housing in general, how does that show up in the inflation number?
• 8:01
  SPEAKER_01: And is it the best possible alternative?
• 8:04
  SPEAKER_01: We looked at alternatives, you you probably know this.
• 8:06
  SPEAKER_01: Other countries do it differently.
• 8:08
  SPEAKER_01: And we we looked at some of these ideas and they all have their their pros and cons.
• 8:13
  SPEAKER_01: Um so at the end of the day, we decided look, rather than focus on trying to find some adjustment to how we measure things, what we should put our energy into is making sure people understand how we measure things and they understand the trade-offs that are inside of our policy decisions, and they understand what monetary policy can and can't do, what it's designed to do, and what it's not designed to do.
• 8:39
  SPEAKER_00: Yeah, I absolutely as you you know mentioned, it's a it's a single policy instrument by nature.
• 8:44
  SPEAKER_00: It has to be a blunt instrument.
• 8:46
  SPEAKER_00: And, you know, one of the criticisms that I hear a lot uh from my students, or maybe concerns might be a better way of putting it, is that you know, we we had this low interest rate environment for 20, 25 years, and you know, that might have contributed uh to the lack of affordability.
• 9:05
  SPEAKER_00: That, you know, if interest rates are really low, it makes it easier to qualify for a mortgage or you know, put down a different, uh larger down payment.
• 9:14
  SPEAKER_00: Uh, you know, so how does the bank think about that?
• 9:16
  SPEAKER_00: And how can the bank make sure that they're kind of rowing in the same direction as the government if you know a government's looking to increase affordability, but at the same time, the bank has to make a rate decision, you know, based on the current standing of the economy.
• 9:32
  SPEAKER_01: Yeah, I mean, it's tough.
• 9:33
  SPEAKER_01: This was again, this was sort of some ground I covered in the speech.
• 9:38
  SPEAKER_01: Ultimately, you you want to hope that all different policymakers are coordinated and rowing in the same direction, but different policymakers have different tools, they have different objectives, they have um uh they have different constraints.
• 9:53
  SPEAKER_01: And so it's not always the case that everybody's rowing in the same direction.
• 9:57
  SPEAKER_01: We have had periods of time in the last 20 years where um there were measures coming out of different policymakers that were designed to uh they were very well intended, they were designed to make mortgage credit more affordable.
• 10:12
  SPEAKER_01: If we can't bring the price of houses down, well then let's bring the price of house finance down.
• 10:16
  SPEAKER_01: But if you do that in an environment where housing supply is constrained, it can have the opposite effect.
• 10:22
  SPEAKER_01: Um you know, it can it can push prices up.
• 10:25
  SPEAKER_01: So so this is the challenge.
• 10:27
  SPEAKER_01: Um it's not that any one policy is wrong.
• 10:29
  SPEAKER_01: It's it's that a policy is designed to do one thing, and when you mix it with all the other policies, you don't ultimately get the perfect outcome in all cases.
• 10:38
  SPEAKER_00: Yeah, no, absolutely.
• 10:39
  SPEAKER_00: And again, it's a kind of a single instrument, and you're you're having to control a lot of different things uh with that uh single instrument.
• 10:47
  SPEAKER_00: So kind of speaking of which, that I, you know, uh unless I missed it and I've been away a few days, you know, my understanding is that the monetary policy framework is up for renewal uh soon.
• 10:57
  SPEAKER_00: And actually, for the first time in Canadian history, we've got a PM who was a former central banker having to come up with an agreement with it with a central bank.
• 11:06
  SPEAKER_00: Uh my recollection is, and I might be wrong about that, but in the last agreement, uh home prices and housing affordability didn't really show up in there.
• 11:14
  SPEAKER_00: You know, is has there been any thought to uh incorporate, you know, kind of explicitly incorporating um housing affordability, you know, the same way that, you know, over the last decade, I think we've um incorporated a little bit more in Canada um, you know, uh labor markets and and unemployment uh in monetary policy uh decision making.
• 11:38
  SPEAKER_01: Yeah.
• 11:39
  SPEAKER_01: Well, uh well, first of all, you you didn't miss it.
• 11:42
  SPEAKER_01: We we are we we re- re review our framework every five years.
• 11:45
  SPEAKER_01: We're right in the midst of of doing that now.
• 11:50
  SPEAKER_01: And what we do each time we renew it is we uh we typically approach it by po uh posing a few big questions.
• 11:58
  SPEAKER_01: And we try and pick those questions partly as a function of what we think needs a deep dive or research, but also what's on the mind of Canadians.
• 12:08
  SPEAKER_01: Ultimately, the framework is designed to support the Canadian economy and we're accountable to Canadians, so we want to tackle the questions we know that Canadians have.
• 12:19
  SPEAKER_01: So we we did tackle the question of of housing affordability.
• 12:24
  SPEAKER_01: And is there something that monetary policy could do that it isn't doing to help with this very real economic challenge in the country?
• 12:33
  SPEAKER_01: Um and that that really was the ground I covered in the speech today.
• 12:38
  SPEAKER_01: And you come back to where we were just a few minutes ago, Mike, which is monetary policy is a blunt tool.
• 12:44
  SPEAKER_01: So if we raise interest rates, uh that can help uh dampen demand and maybe bring house prices down temporarily.
• 12:53
  SPEAKER_01: But we don't get to pick one interest rate for housing and one for everything else in the economy.
• 12:59
  SPEAKER_01: And we can't set an interest rate for a city like Vancouver or Toronto, where we're having really extreme housing issues and a different one for Calgary and Winnipeg.
• 13:08
  SPEAKER_01: And so at the at the end of the day, I mean, you are you are stuck with sort of that aggregate measure and that blunt tool and and choosing to target house prices using monetary policy is basically picking the wrong tool for the problem.
• 13:26
  SPEAKER_00: Yeah, I I I couldn't agree more.
• 13:28
  SPEAKER_00: And uh, you know, on the wonkier version of this podcast, you know, we we could have a debate about, you know, is Canada an optimal currency area uh area that we'll uh we'll say that for next for another time.
• 13:38
  SPEAKER_00: We'll say that for next time absolutely.
• 13:40
  SPEAKER_00: That's the uh 201 uh version, and we're gonna stick with 101 uh today.
• 13:45
  SPEAKER_00: Uh and you've mentioned uh uh a few times about you know trade-offs and uh teaching the general public, and I'm you know, as an educator myself, I I loved uh hearing that.
• 13:54
  SPEAKER_00: And you know, you I I actually just gonna quote you directly.
• 13:57
  SPEAKER_00: You said the most important lesson we took from our review is the need to explain these trade-offs better and be clear with Canadians about what monetary policy can and cannot do.
• 14:08
  SPEAKER_00: Uh so what is the the Bank of Canada doing as as far as uh their kind of outreach and education to the public beyond being on this podcast, which we definitely appreciate.
• 14:18
  SPEAKER_01: Well, I mean, we appreciate the opportunity to come and talk to you and and your listeners.
• 14:22
  SPEAKER_01: So, I mean, we're trying to do more of this, really.
• 14:25
  SPEAKER_01: Um, the the optimal communication strategy for central banks is a topic of some conversation right now.
• 14:31
  SPEAKER_01: Our colleagues in the US are are taking a bit of a different approach under their new chair.
• 14:36
  SPEAKER_01: But I would say um Bank of Canada has over the duration of Governor Macklam's term continually ramped up our communication.
• 14:46
  SPEAKER_01: We used to uh we used to, for example, we used to hold uh a press conference only four times a year when we release our our monetary policy report, and we switched to holding a press conference at every rate decision and making ourselves available for questions from the media.
• 15:02
  SPEAKER_01: Um I'm out in Victoria right now giving a speech, and I'll spend two days here just talking to local businesses and community leaders and trying to understand the economy on the ground.
• 15:15
  SPEAKER_01: We spend part of that time.
• 15:17
  SPEAKER_01: Um, I was I was at a high school on Tuesday, I'll be at the university later today.
• 15:24
  SPEAKER_01: Uh so we're definitely out trying to talk to different groups of people, both listening and talking, so explaining our decisions, answering questions, helping people understand the trade-offs that are in front of us, but also gathering intelligence about what the economy is like in the different parts of the country, how people are making decisions.
• 15:44
  SPEAKER_01: We add that to all of the data we get when we make monetary policy decisions, and it factors in.
• 15:50
  SPEAKER_01: It's a huge help for us to understand what's going on in different parts of the country.
• 15:55
  SPEAKER_01: But communication is a is a challenge, right?
• 15:57
  SPEAKER_01: As you as you know, these are complex topics, they're they're not always intuitive.
• 16:02
  SPEAKER_01: And so we we have to put some effort into explaining them.
• 16:07
  SPEAKER_00: Yeah, yeah, I I I couldn't uh agree more.
• 16:09
  SPEAKER_00: Uh though, you know, I I will say that that complexity is job security uh for the for this educator.
• 16:15
  SPEAKER_00: But uh, you know, I I I I wouldn't mind if you put me out of business.
• 16:19
  SPEAKER_00: That would be uh that that would be quite okay because I think it's more important that Canadians.
• 16:23
  SPEAKER_01: Well, I think people like you make our job easier.
• 16:25
  SPEAKER_01: I mean, the more people monetary policy works better when people understand it.
• 16:29
  SPEAKER_01: So the more people we have who appeal to to different audiences.
• 16:33
  SPEAKER_01: I mean, what I think is really great about what what you're doing and and your colleagues, Karen, Sabrina, the, I mean, you're reaching an audience that is hard for people like us to reach.
• 16:45
  SPEAKER_01: So so it's important.
• 16:47
  SPEAKER_00: Well, thank you for that.
• 16:49
  SPEAKER_00: I really uh really appreciate it.
• 16:50
  SPEAKER_00: And I know, you know, on your uh whirlwind uh trip of uh BC, you've got a lot of communicating to do.
• 16:56
  SPEAKER_00: So I, you know, I want to save your voice a little bit.
• 16:59
  SPEAKER_00: So I'll kind of uh I think we'll we'll end it here.
• 17:02
  SPEAKER_00: And uh Carolyn, thank you so much again uh for being on.
• 17:05
  SPEAKER_01: Thank you.
• 17:05
  SPEAKER_01: It was my pleasure.
• 17:06
  SPEAKER_00: Thank you.
• 17:07
  SPEAKER_00: Thank Meredith Martin, our uh producer, our editor Sean Foreman.
• 17:11
  SPEAKER_00: And if you have any further thoughts or questions about uh Canada being an optimal currency area, uh you know, please leave a comment in the YouTube comment section and we're gonna keep the conversation going there.
• 17:21
  SPEAKER_00: So uh thanks everyone and thanks again, Carlin, for being here.