By: Ken Boessenkool & Rob Gillezeau

It’s 2020 and throwing out rules, conventions and precedents is all the rage.

So it may seem a bit quaint to defend a mere precedent. Yet, here we are. As rumours abound that Mark Carney, the former Governor of the Bank of Canada, is preparing to return to political life in Canada like the prodigal son, we stand behind the idea that anyone who serves in that role must not only be beyond politics, but must be seen as beyond politics. Not even a hint of partisanship — prospectively or retroactively — should be allowed near this role or any senior leadership position at the Bank of Canada.

And don’t misunderstand, we are not making an argument that partisan politics is bad — both of us have done more than dip our toe in the partisan political world. Partisan politics has an important place in shaping our society, just not here.

There is a strong consensus amongst economists that central banks should be independent. Looking south of the border, where many independent institutions have already been overwhelmed by partisanship, there is a nearly unanimous view that political views should play no role in central banking.

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Why is this the case? Monetary policy is most effective when the central bank is a credible, independent actor. In Canada, our central bank has targeted a two-per cent inflation rate over an extended period of time with the goal of providing households, investors and firms with confidence in what inflation will be, allowing for stable economic growth over time. While one can debate the appropriate targeting approach for the central bank, independence is essential in ensuring it can meet that target as effectively as possible.

Monetary policy often requires imposing short-term costs on a narrow group for long-term benefits spread over a much wider group. These kinds of tradeoffs become much more difficult if partisan pressures are brought to bear. Monetary policy also often requires pain in the short term for gain in the longer term. Again, these decisions are much more difficult when partisanship is a factor. Partisanship would make it more likely that we leave some of those broad-based, long-term gains on the table.

Suppose the central bank was in fact a quasi-political body that responded to the political cycle. In such a situation, it might opt to engage in expansionary monetary policy to boost economic activity in the lead up to election. Why is that a problem? If the central bank is viewed as being a political actor, people will anticipate this kind of behaviour, potentially causing expectation-driven inflation. If the bank were perceptible to politically driven changes in its targeting approach it may more broadly undermine its ability to meet those goals. And even if this risk doesn’t materialize, the whiff of partisanship potentially has the ability to undermine public confidence in the ability of the central bank to focus on its core target.

This brings us to media hype around the return Mark Carney. While former governor Carney clearly brings a strong skill set to the table, he could easily put those to work by returning to the civil service, or by continuing to help the government as an advisor. What does he put at risk if he were to enter the political sphere? If bank governors are viewed as potential future political candidates, that makes every appointing government consider the political allegiance in their appointees. For appointees themselves thinking about future career options, it potentially adds an additional political screen to their decision making. And along with both of these points, the central bank would lose its ad hoc shield from partisan attack by opposition parties.

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Will these outcomes necessarily materialize? No. But they are not unlikely outcomes and the political service of a single former Bank of Canada governor is simply not worth the risk of undermining the independence and potential effectiveness of the central bank. This is always true, but the risk is particularly large today in a period of such unprecedented activity form the central bank to keep the economy afloat. The Bank of Canada has been the primary source of money to finance our deficits. It buys federal and provincial bonds. Imagine for a moment that there was a whiff of partisanship at the bank. The Bank of Canada should not have an interest in the partisan trajectory of our government during the pandemic. It must act in its role indifferent to ideology of the party in power.

In concrete terms, this means Bank of Canada governors must be chosen from the ranks of those who are scrupulously non-partisan. It also means that past Bank of Canada governors must remain scrupulously non-partisan so as to not retroactively undermine confidence in our central bank. There are many ways former Bank of Canada governors can serve their country, but standing for elected office should not be one of them.

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Ken Boessenkool is a Research Fellow at the CD Howe Institute and a consultant. He has advised various Conservatives.

Rob Gillezeau is an assistant professor of economics at the University of Victoria. He has advised various New Democrats.

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