Tiff Macklem, dean of the Rotman School of Management.Gordon Hawkins
This article, which has been edited for length, is reprinted courtesy of Rotman Magazine, a publication of the Rotman School of Management, University of Toronto.
In May, just before he began his five-year term as the new Dean of the Rotman School of Management, Tiff Macklem talked about the quest for a balanced economy, why service exports should be the next big thing, and his personal challenge ahead.
Household imbalances have been on the radar for the last couple of years. Describe the nature of these imbalances and how they relate to monetary policy.
At the root of household imbalances are high household debts. The ratio of household-debt-to-disposable-income has risen sharply over the last 10 years, and now stands at almost 165 per cent. Canadians are actually more indebted than Americans and the British; in fact, this ratio in Canada is now close to where it peaked in the U.S. before its housing market collapsed.
That does not mean that our housing market is about to collapse. The distribution of household indebtedness is better in Canada than it was in the U.S. Nonetheless, debt is high, and that makes households vulnerable.
The other aspects of this are that housing prices appear to be stretched in a number of Canadian markets relative to traditional benchmarks, and house building has been high relative to demographic demand for new housing. When you put these three things together – highly indebted households, stretched house prices and overbuilding – it spells 'risky'. The good news is, we are seeing a welcome and gradual unwinding of household imbalance: credit growth and house building have both eased off.
The risk is that an over-extended housing market adjusts abruptly and overshoots. Nobody wants to see that happen. An abrupt adjustment could well lead to another recession, and inflation would fall further. Clearly, this is an outcome that monetary policy does not want to stoke. It's a tricky situation: on the one hand, inflation is too low, so there needs to be enough monetary stimulus to get it up to target; on the other, monetary policy does not want to exacerbate household imbalances, but obviously, very low interest rates encourage people to do things like buy houses. It's a very delicate balancing act.
It has been said that the Canadian economy needs to rebalance its growth towards exports and investment. Why is this so important?
The recession in Canada following the financial crisis was less severe than in the U.S. or Europe. Because our financial system continued to function through the crisis, when the Bank injected monetary stimulus and the government undertook an extraordinary fiscal stimulus program, it worked its way through the economy very effectively. Ultra-low interest rates and government spending stimulated domestic demand, which filled in a big part of the hole left by the collapse in foreign demand.
But now, five years later, the fiscal stimulus is over and consumers have taken on a lot of debt to pay for their spending – particularly mortgage debt. Simply put, households are now largely 'played out', and we can't continue to grow in the future in the same way we have grown in the past. We need to rebalance our growth, with less of it coming from household expenditures – in particular, housing – and more coming from exports and investment.
There are good reasons to believe this will happen. The U.S. economy is showing more sustained momentum, and they are our biggest export market, by far. The Canadian dollar has also depreciated, which makes our exports more competitive. And once firms see their order books increasing, we can expect them to start investing.
Is this happening yet? Not as much as we would have expected, and that is a worry. Maybe it's just a little delayed. Perhaps business is being more cautious after the recession. Or perhaps something more fundamental has changed – global supply chains have shifted or new competition has emerged. We need to understand this better. The answer is very important to Canadian businesses and the Canadian economy.
Many countries, including Canada, focus on exporting goods; but you have noted that services have the potential to become an even more important arena. How so?
Canada is a leader in a number of service industries. We've already talked about the strength of our financial services sector. That's a centre of expertise for us, and we are successfully exporting those services. There are other areas. We are world leaders in mining and in oil and gas extraction. The service aspects of these businesses – the logistics, the engineering, the design – these are all services that Canada can – and is –exporting to the world. Our world-class universities are attracting top students from around the world. I could go on.
There has been lots of talk about the middle class disappearing – particularly in the U.S. What is your take on the situation?
My take is that we don't have a very good understanding of the fundamental causes of rising inequality, and we need to do some deep thinking on this. One of the great things that is going on at the Rotman School is that former Dean Roger Martin – who is now running the Martin Prosperity Institute at the School – is launching an ambitious project to look at the problems with democratic capitalism. What is it about it, for instance, that is causing so much of the returns from work and capital to accrue to such a small number of people?
Beyond that, there are two points that I would make. First, as your question suggests, this issue is often characterized as a problem of the U.S. middle class, but it is actually much bigger than that. It is a global issue, and it's about the poor as well; and we need to start thinking about it that way. Inequality is particularly pronounced in the U.S., but it has been rising in countries as varied as the U.K., Germany, Denmark, Sweden, China, New Zealand, Japan and yes, Canada.
Second, when you look at it as a global issue, you realize it is complex and multidimensional. At the same time as inequality has gone up within countries, it has gone down between countries. Over the past 25 years, steady advances in transportation, communications and information technologies combined with the widespread adoption of market-based policies have globalized and expanded economies everywhere, especially in China, Brazil and India. This has dramatically narrowed the gap between rich and poor countries and lifted hundreds of millions of people out of poverty.
My point is to beware of partial analysis and simplistic solutions. Markets are still better than anything else at delivering opportunity and prosperity. We don't want to stop globalization or technical progress, but we do need to manage them better so that the benefits are shared by more people. And this comes back to where I started, with the need for a deeper understanding of the root causes of rising inequality.
In accepting the role of Dean at the Rotman School, you are making a significant transition. What drew you to this role, and what do you see as your greatest challenge?
There is so much that drew me to Rotman and to the University of Toronto. The first two are the same things that first drew me to the Bank of Canada: smart people and an important mission. Rotman is full of very smart people – extraordinary students and an outstanding faculty – and it has a very important mission: to build talent and scholarship for the world.
I was also attracted by the ambition of the place. Roger Martin, together with the faculty and staff, have built Rotman into a powerhouse. It has the best MBA program in Canada and competes with the best in the world. Rotman scholars are tackling some of society's biggest problems, and there is a deep recognition that business–and therefore business education–must be part of the solution.
Tiff Macklem began his five-year term as Dean of the Rotman School of Management in July, 2014. He served as Senior Deputy Governor of the Bank of Canada from July 2010 to May 2014. He holds a Bachelor's Degree in Economics from Queen's University and a Master's and PhD in Economics from the University of Western Ontario.
For the full text of the interview with Mr. Macklem, see the fall 2014 issue of Rotman Management magazine.