Tuesday 8 October 2013

Targeting The Policy Agreement

Policy Target: The Reserve Bank Act (1989)  It was one of the Neoliberal Counter-Revolution's primary objectives: to keep the interfering hands of politicians as far away from the controlling mechanisms of monetary policy as possible. Otherwise known as strangling the economy in order to save it.
SOME ARE CALLING IT irresponsible meddling, others talk about the need to regain control of our destiny. Whatever it’s called, it’s attracting a lot of attention. And not a little concern.
For nearly thirty years both of New Zealand’s largest political parties have faithfully adhered to the doctrine that a country’s monetary policy is best determined by an independent central bank. Furthermore, that the prime focus of monetary policy must be keeping inflationary pressures under the strictest control. In practice, that’s meant keeping the interfering hands of politicians as far away from the steering-wheel as possible.
New Zealand embraced this monetarist view the central bank’s role with special fervour. Our current Reserve Bank Act, passed by the Fourth Labour Government in 1989, places enormous economic power in the hands of a single person, the Reserve Bank Governor. He alone is responsible for carrying out the Act’s primary function: ensuring “stability in the general level of prices”.
The only democratic check upon the Governor’s power comes in the form of the Policy Target Agreement (PTA) negotiated periodically with the Minister of Finance. It isn’t much of a check though, because the only real debate is over the permissible range of inflationary fluctuations. If the inflation rate goes above, or stays below, the agreed levels for too long, the Governor intervenes.
The mechanism he uses to do this is the Official Cash Rate (OCR). By raising or lowering the price at which the privately-owned banks can access liquid funds on a short-term basis the Reserve Bank is able to expand or contract short-term demand in the New Zealand economy and hence (at least theoretically) keep prices under control.
The use of this single, blunt economic instrument has fuelled repeated property booms, blown out New Zealand’s balance-of-payments, and undermined our manufacturing exporters.
So, why did our politicians give so much economic power to one, unelected government official? Why is something so critical to the health of our economy as setting core interest rates not the responsibility – as it once was – of the people’s elected representatives?
Answering that question takes us to the heart of the “Quiet Revolution” in economic management, in which the Reserve Bank Act (1989) played so important a part. Essentially, the decision to remove the management of monetary policy from the politicians’ hands was inspired by the growing fear among political and economic elites that the democratisation of economic policy formation had gotten out of hand.
The deadly confluence of the economic, political and social crises that characterised the 1930s, and which led to the human disaster of World War II, had largely discredited the laissez-faire economic doctrines which spawned them. Rather than go on entrusting the elites with the conduct of economic policy, the citizens of the victorious democratic powers made sure that those responsible for the big economic decisions were politicians accountable to themselves.
The result was a 30-year period of unprecedented economic expansion, during which, in the USA, the share of national income going to the top 1 percent of income earners plummeted to less than 10 percent (from a pre-war high of close to 20 percent). Between 1945 and 1975, thanks to successive post-war governments’ commitment to policies aimed at full-employment and wealth redistribution, and to preserving the bargaining strength of trade unions, the standard of living of ordinary working people rose steadily.
With their economic and political power fast eroding, the Western elites seized upon the inflationary pressures unleashed by the Vietnam War and the Arab Oil Embargo to discredit the democratic conduct of economic affairs.
Politicians, they argued, were unfit to determine economic policy precisely because they were prey to electoral pressures. Only when populist politicians, like New Zealand’s Sir Robert Muldoon, were legally precluded from interfering with the free play of “market forces” could the scourge of double-digit inflation be defeated. And that free play could only occur after the “market distorting” influence of high taxes and excessive government borrowing, inefficient state-owned enterprises, and the power of the “over-mighty” trade unions had been dismantled – comprehensively.
The imposition of what came to be called “neoliberalism” thus represented not a “revolution” in economic management but a “counter-revolution”. And absolutely crucial to its success has been the 30-year bipartisan consensus that no other economic doctrine is to be given a serious hearing anywhere. Not in the news media; not in the schools and universities; and certainly not in the two main political parties: National and Labour.
Hardly surprising, then, that serious disquiet is growing among those whose job it is to defend the neoliberal counter-revolution at all costs. Not only is the Reserve Bank under attack from the Greens (whose modest levels of electoral support make them more irritant than threat) but also, and most alarmingly, from Labour.
And once Labour’s re-democratised monetary policy – what’s next?
This essay was originally published in The Press of Tuesday, 8 October 2013.


CarbonGuilty said...

Like so much in politics it really is a choice between two imperfections, or the lesser of two or more evils to put it another way. Personally I trust a banker more than a polititian elected for 3 years. Same for most things. The board of a large coeporation is more resposive to the public than polititians, because the firm's products are voted on daily, not 3 yearly. Yet we can chuck pollies out so there is merit in that. Great merit.
If the next two headed Green Labour government monster gets born in a lightning strike, like Frankenstein and decides to intervene everywhere and in everything as you hope, it will only last 3 years max, if they don't also rig the vote. That is the only way socilists can stay in power. Essentially, democracy always saves us in the end from the evils of the left and right. Now with MMP, a German system, we get mostly bland government, the only safe type.

Brendan McNeill said...


Politicians of all colours have sufficient capacity to bankrupt the nation by borrowing to meet the electorate’s appetite without giving them complete control of monetary policy as well.

As witnessed in America, central banks can revert to printing money when they feel the need. No doubt ours can do the same. (what more could any Keynesian want?)

It's drawing a long bow to suggest that the reserve bank of NZ is a self serving tool in the hands of the wealthy.

Anonymous said...

Trust bankers? Politicians were only marginally responsible for the last economic meltdown - that's because they BELIEVED bankers :-).

Anonymous said...

The FED seems to print money at the behest of the US government, and receives treasury bonds in return. I suspect that if Bill English asked to borrow money from our Reserve Bank they might tell him to get lost.

It is not drawing too long a bow to suggest that the RB subscribes to economic theories which happen to favour the wealthy.

Davo Stevens said...

As Anon previously so eloquently out it, bankers can't be trusted Carbon. They created the very mess we are now in.

We only need to read our modern history to see the issues that arise namely; every ten years there is a collapse financially and a more serious collapse every twenty years.

1909; financial - crash probably contributed to WW I. 1929; a biggie! Caused WW II. 1949; small one as we were re-building after WW II. 1969; small one probably because Socialism was in control. 1989; We know what happened then! 2009; yes, we know that one too.

All of these were caused by there being too much borrowed debt and not enough money to re-pay it all. So the system collapsed. We never learn.

Carbon my friend, you refer to a Green/Labour Govt. as a "Monster" yet ignore the two and a half headed monster that we have now with the jack-up done by Key and Banks with Pete 'Wind in the Willows' Dunne in the background.

Incidentally, MMP was first used in Holland not Germany. It was imposed in Germany by the Allies after WW II. To stop one political party of every getting full control again.

Anonymous said...

As I remember my history, Germany didn't have an MMP system as such. Just a pure proportional representation system, all lists in other words, no electorates. If you look at the political posters of the time, there doesn't seem to be any reference to electorates - just lists. That meant that anyone who could get 100,000 votes – again from memory, could gain a seat in the Reichstag. So that every man and his dog who could gather together enough money to advertise could probably get themselves elected. The parliament was much more fragmented than ours even. And certainly much more polarised. Our extremes are probably a bit less extreme than theirs and quite tiny by comparison. Let's face it, if there wasn't that jack-up referred to earlier Banks would never be in government, as no one in their right mind would ever vote for him :-).

alwyn said...

It was George Santayana I believe who said "Those who do not remember their past are condemned to repeat their mistakes".
Prior to the introduction of an independent Reserve Bank Governer New Zealand had inflation rates in the double digits. I at least can remember when mortgage rates were about 18%, and even then the people offering the mortgages were losing money. Since 1989 the CPI rates have been averaging little more than 2%. To allow the MPs to regain cotrol would only meen a return to the bad old days of the 70s and 80s.
If you do nothing else please look at figure 2 in this reference
Do we really want to go back to the first twenty years of that period?
It would be particularly invidious if we had a CGT introduced. We would be taxed on completely spurious "gains" that were simply the result of politically induced inflation, in exactly the same way interest paid to savers in the decade of the 1970s was taxed as if it was real income.

aberfoyle said...

The control of inflation the reserve bank,will always bean count in favour of thrift.But the real elephant of control and what is fiscally acceptable is those ghosts those many triple xxx double xx= almost x- dictators of the market valuers credit raters,who!s rates make or break countries investment popularity.Cruel is capitols profit margin and humanity and its care is not in its abacus.

Chris Trotter said...

Why stop the clock at 1970, Alwyn?

Had you extended your investigation of inflationary trends all the way back to the end of World War II, then you would have been able to see those massive inflationary spikes of the 1970s and 80s for what they were - aberrations.

And, don't forget, those inflationary spikes were global - nothing to do with the NZ economy per se.

As I say in the posting, the inflationary surges that were used as pretexts for the monetarists' counter-attack were the result of the USA attempting to have guns AND butter - Vietnam PLUS the Great Society.

Add to the USA's fiscal recklessness the dramatic inflationary effect of the massive increases in the price of oil occasioned by the OPEC actions of 1973 and 1979 and inflation would have been a major problem - no matter whose economic fashions were being worn at the time.

That the 1970s are still used as a bugbear for all that was wrong with the social-democratic post-war era is all the proof anyone should need that it really was the pivotal decade of the second half of the 20th Century: the decade in which the Right had to fight back and win - or lose the game completely.

Right-wingers should probably be congratulated for holding the line for 30 years, but they should also be aware that it will not be able to be held for much longer.

Better days are coming

Anonymous said...

What is the result of these monetarist policies? In NZ 10% own 50% of all the wealth ( assets + income).The bottom 10% own nothing.Monetarist policies imho are a trick to hoodwink people that the Commonwealth of a nation ( Its publically owned assets and natural resources) should be privatised and that Inflation is the greatest evil not inequality and poverty.This is the maths smart alec con of the boy wonder economist Milton Friedman. These policies have brought ruin to the US which is near to economic collapse.The reason is clear the 1% sit crowing at the top with their immense piles of lucre protected hopefully from inflation but not from decline.

Nic the NZer said...

I don't think this post gets to the heart of the matter, Chris. The issue with monetary policy as I see it is not that it's worse when it's independent, the issue is that it's not very effective.

I don't think that many central bank actions have been unwarranted, but they can't deliver the recovery (especially in employment). The governments need to use fiscal policy to actually deliver an economic recovery and this is not happening.

You can observe this from the massive monetary policy of QE running in most western economies. This is often described as money printing but that's miss-leading, a better analogy is that commercial banks have accounts at the central bank, when the central bank does QE it moves the banks funds from their savings accounts (govt bonds) to their current accounts (reserves). You can probably understand why this has little impact on employment.

The policy of tinkering with interest rates has also been relatively ineffective in controlling bubbles, though I think that the policy of cutting the interest rates to zero did help to reduce the crash.

It would not be good if there was a side-show of re-litigating the reserve bank charter and this deflected attention from the fact that the government has the levers it needs to deliver recovery already at its finger tips.

Nic the NZer said...

I don't think I made the most important point clearly enough.

The point is that the NZ government could employ everybody who is presently counted as unemployed at any time (e.g. tomorrow). It can do this without any changes to the reserve bank act.

In fact if it did this without competing with private sector wages (e.g the government will always employ you some how but not for more than the minimum wage) this would be non-inflationary as well.

The govt could administer this scheme, taking suggestions from the community for socially useful functions. The main requirement being that the position is not economically viable and is not a business supplement.

Would also limit the hypocrisy of telling people to find jobs which are not there.

The only thing standing in the governments way is the political will to do so.