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Nothing to learn from Old Europe

OPENING SALVO 

Labour, the Greens and their cheerleaders are delirious about work by staffers at the International Monetary Fund.

Rethinking Macroeconomic Policy was written in 2010 by French and Italian nationals Olivier Blanchard, Giovanni De’Ariccia and Paolo Mauro. Professor Blanchard has followed it up with Monetary Policy in the Wake of the Crisis.

The work is being cited by Labour’s David Parker and the Green’s Russel Norman as justifying all sorts of nonsense, including Dr Norman’s loony idea of printing money despite the official cash rate being above zero.

Left-wing cheerleaders Selwyn Pallett, John Walley and Rod Oram have picked up the theme at events like the EPMU’s “crisis” summit.

Profound changes, we’re told, are needed to New Zealand’s monetary and wider economic policy. Funnily enough, their proposals would transfer wealth to Mr Pallett and Mr Walley from savers, consumers, taxpayers and the EPMU’s lower-paid workers.

Orthodox economics
Truth be told, the IMF work is more orthodox and nuanced than these politicians and vested interests would have us believe.

Professor Blanchard and his colleagues make clear that “achieving low inflation through central bank independence has been a historic accomplishment”, that “the baby should not be thrown out with the bathwater”, that “the ultimate targets remain output and inflation stability”, and that “the general policy framework should remain the same”.

The ideas they do raise for change have almost no application to New Zealand.

The focus of their work is what countries can learn from the global financial crisis to avoid, or shield them from, another one.

While it suits the left to argue otherwise, in truth New Zealand has been relatively unscathed by the crisis – especially when compared to the touchy-feely social-democrat states of Old Europe usually held up by the left as models for us to follow.

Despite everything, New Zealand and Australia have continued to grow since the US banking collapse and the eurozone debt crisis. The exception was our 2008 recession, which started before the global troubles began.

Even in these difficult international times, unemployment in New Zealand remains under 7%. Youth unemployment is 16.4%.

In contrast, in left-wing Europe with its rigid labour markets, unemployment is above 10% and youth unemployment more than 20%, with a quarter of young people unemployed in social-democratic paradises like Sweden.

The data (see table) also does not suggest any ability to buy lower unemployment with higher inflation. The opposite appears to be true.

The idea New Zealand would want to take lessons on economic policy from Old Europe, or on banking regulation from the US, is absurd.

Keating and Cullen
The reason New Zealand is in better shape that most of the rest of the world was summarised this week by former Labour Party president Mike Williams: Paul Keating properly regulated the Australian banks and Michael Cullen achieved zero net public debt.

If he included the transparency demanded by David Caygill’s Reserve Bank Act and Ruth Richardson’s Fiscal Responsibility Act, Mr Williams’ summary would be broadly correct.

These are, in fact, among the major messages for New Zealand that can be taken from Professor Blanchard’s work.

Proper banking regulation and transparency is a major theme. He also likes monetary policy being transparently laid out, as ours is in the Policy Targets Agreement (PTA) rather than, say, central banks saying they are concerned with inflation but in fact intervening in currency markets.

In terms of actual policy, he says inflation targeting should continue but that unnecessary instability in exchange rates should be avoided, just as section 4b of the New Zealand PTA requires and our Reserve Bank sought to do and transparently disclosed in 2007-08.

Tight fiscal policy
On the role of government, Professor Blanchard argues for much tighter fiscal policy in good times, saying that when economic growth returns, as it has in New Zealand, countries must reduce their debt-to-GDP ratios rather than increase spending or cut tax.

The left has been strangely silent about that.

He also thinks legislators should consider giving central banks additional monetary tools, a debate which is not new. Even Don Brash has floated ideas such as the Reserve Bank being able to impose a mortgage rate levy, or vary GST or petrol taxes at the margins.

Professor Blanchard is particularly keen to debate how monetary and regulatory policy could be better combined. In leading that debate, he acknowledges the risk that too many tools and too many interventions could be distortionary and harmful. 

He worries that, if central banks started being in charge of too many instruments, they would then be responsible for picking favourites among different sectors of the economy (say, Mr Pallett and Mr Walley over savers and consumers).

That, in turn, would raise questions of whether or not they could or should continue to be independent from politicians.

Exploring these issues, he says, will be a long and difficult process. There are all sorts of arguments one way and the other. He admits he doesn’t have the answers.

Remember that next time you hear a half-witted New Zealand politician say they can control inflation, lower the dollar, boost exports and reduce unemployment if they would just be allowed to edit the words of the Reserve Bank Act or print some cash.

ABOVE: Listen to Matthew Hooton and ex-Labour Party president Mike Williams scrap over the report on RNZ (and the MSD security breach. The toe-to-toe over the IMF report comes 21 minutes in).

More by Matthew Hooton

Comments and questions
14

I've had a slow start to this weekend and Mr Hooton has delivered too meatier a topic to grasp before caffeine. I guarantee he has written a good one though as I already caught "The left has been strangely silent about that" and in light of Labour & Greens typical demographic I reckon they would prefer not to debate too deeply prefering populist catch alls with the added bonus of discount vouchers for KFC or mung beans. Another more concentrated good read later, looking forward to it.

Very well summarized and written , Matthew.

The high inflation that occured in NZ between 1968 and 1989 produced the same effect as the general working of an efficient capitalist system and its core the joint stock limited liability company and its shield , the veil which allows capital for investment to pass rapidly from the slow, old and stagnating to those capable of innovation, entrepenurial risk and chance.
Inflations helps rapid change and the transfer of resources to the efficient. The arguments for strong anti inflationary measures are based on the risk of political instability. The risk of political instability is enhanced by the excessive nature of democracy in NZ with MMP and the percieved need to defer to the wishes of the ordinary man, the country towns and the very low IQ dumber half of the male popualtion and quarter of the females who make up 85% of talk back callers.
Economic depressions and war often clear out the debris or the old and failed and allow innovation, new people and economic growth to flourish.
The current tight economic policy settings and high exchange rate are immensely damaging to a diversified economy and tourism. High prices and general hostility to bright young people enjoying themselves and the pleasure econony have set NZ back.

As a general rule with 95% confidence, anything that the likes of Norman, Hickey and Oram advocate is nonsense.

We can always lean from others even if it is from their mistakes otherwise we will put ourselves in a straight jacket. Roosevelt had the right solution in the 1930's but this may be quite wrong now. Reagan and Thatcher seemed to get it right in the 1980's but again it may not be right today. Whilst I agree the Greens are a pack of Wally's we owe it to everyone to consider every idea. Just occasionally they may have a usable idea.

Yes, but not on this occasion.

The idea that we have growth here and it is all good is absurd. We export unemployment ( our go getters). We despoil the environment for the quick buck. We divide the population along economic and racial grounds.
Hello...anybody home???

The Left divide people along racial lines (national socialism - 6 million deaths), economic/class lines (USSR/China - 120 million deaths)and now seek once again to rebrand their totalitarian societal purification collectivist philosophy under the 'Green Banner' a la UN Agenda 21, ICLEI local government infiltration and an army of 'useful idiots' in media and (pseudo) academia.

This philosophy is anti-minority as it hates the individual. There is no smaller minority than the individual ergo the left hates minorities.

But I guess it's ok for Norman to hit the printing presses and at a stroke destroy the the savings of little old Kiwi ladies.

Leftism - the philosophy of death and mugging old people.

The philosophy of the neo-barbarian thug.

Broadbrush strokes ignore complexities of time and place.The rich and the wannabe rich are in fact the media controllers. Those who are focussed on the individual as supremo are in reality the purveyors of greed and selfishness and indeed promulgate these vices as positive attributes a la ayn rand zombies.
Brain dead mainstream blows with the wind until the economic pain produces change. Better get out of the way OCR.

Brushing off objective fact in favour of subjective personal opinion followed up with"Better get out of the way OCR".

Thus speaks the thug.

The violent left never let the individual get in the way of a good bloodbath. Was always the way!

The elitist greedy right brought the blood down on their own heads. Didnt mummy teach you its good to share?

...rightism. the philosophy of greedy old dinosaurs fiddling while the earth burns

Bring back FPP - fast,
before we evaporate in Lefty 'P' ovens [ code for financial and social experiments ]

So if inflation stability is the goal, why not keep a stable rate of inflation a little higher - say 4-5% - with the trade-off being that employment would grow. This was the objective of Winston Peters' Reserve Bank Amendement Bill that was voted down in the house last week - not printing money, as uninformed folks like John Banks believed. Bill English even admitted it was a rather moderate change. We all know unemployment was used as a tool to bring down inflation in the first place.