BY DOUGALD LAMONT
WILLIAM White may be the most important economist you’ve never heard of.
Currently a Senior Fellow at the C.D. Howe institute, White grew up in Kenora, Ontario. Despite his lofty career, White is known for his wearing plaid shirts – the classic “Kenora Dinner jacket.”
That extraordinary career has included posts at the Bank of England, Bank of Canada, being economic adviser to the Organisation for Economic Co-operation and Development (OECD) and to the Bank of International Settlements (BIS) – a roundtable of the world’s central banks.
White is worth listening to because he saw something coming when no one else did: the 2008 Global Financial Crisis. For five years before the crisis struck, White had warned Alan Greenspan, former chairman of the Federal Reserve, that there was trouble brewing, as Spiegel International reported in 2009.
As far back as 2003, White implored central bankers to rethink their strategies, noting that instability in the financial markets had triggered inflation, the “villain” in the global economy. “One hopes that it will not require a disorderly unwinding of current excesses to prove convincingly that we have indeed been on a dangerous path,” White wrote in 2006.
Last year, in August of 2023, White wrote “Why The Monetary Policy Framework in Advanced Countries Needs Fundamental Reform” arguing that the central banks in developed nations need to update their monetary policy, which has been unchanged since the 1970s.
If economies were software, central banks’ monetary policy would be the operating system. Businesses, organizations, and governments all have to run on it, like apps. When the economic OS locks up or gets buggy, it affects everyone.
“Perhaps the most effective way of showing the need for fundamental monetary reform is to point out the negative implications of the monetary policies followed by the major central banks in the advanced economies over the last few decades,” White wrote.
First, the general adoption of a positive (two per cent) inflation target has prevented the downward adjustment of prices that would be the natural product of increases in productivity and positive supply shocks. As a result, prices have been drifting upwards (and significantly) for decades. Second, the recurrent use of monetary easing to spur demand and raise inflation has become increasingly ineffective. Current monetary policy faces a fundamental problem of temporal inconsistency: solving today’s problems also makes tomorrow’s problems worse.
Third, stimulative monetary policy has had a variety of unintended and unwelcome consequences that can only worsen; credit “booms and busts”, potential financial instability, fiscal unsustainability, a progressive loss of central bank “independence”, growing inequality of wealth and opportunity and a slower growth rate of potential output. Fourth, as the threat posed by these unintended problems have cumulated over time, “exit” and the “renormalization” of policy has become ever harder to achieve.
“To sum up, the current monetary system has trapped us on a path we do not wish to follow because it leads inevitably to ever bigger problems. This is why fundamental reform is needed.”
William White is not alone. A number of winners of the Nobel Memorial Prize in Economics have also been speaking up – Paul Romer, Joseph Stiglitz and Angus Deaton, as well as Christine Lagarde of the EU. The Bank of Canada is making some of those changes – though they won’t take effect until next year, 2025.
While we can disagree about the best solutions, we should all at least be able to agree on the facts and reality of the problem. As former Apple CEO Steve Jobs said, “There’s no upside in being wrong.”
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