"This Is New."

Game Changer: Labour's finance spokesperson, David Parker, has come up with a credible solution to the many problems associated with New Zealand's Reserve Bank Act mandated monetary policy. Labour now has a more convincing economic story to pitch to the voters than National. Game on!

 

KEYNESIANISM by other means. That’s what David Parker’s new monetary policy offers voters – and they should take it.

 

The measures announced by Parker on Tuesday morning constitute the long-awaited framework upon which the detail of Labour’s manifesto can now be hung. Indeed, without Parker’s proposed changes to the Reserve Bank Act and the Kiwisaver scheme, Labour’s promise to resuscitate the manufacturing export sector and create thousands of new jobs would’ve been empty. But now that Parker has provided the party with an economic skeleton to articulate its redistributive muscle, well: “Dem bones, dem bones gonna walk around!”

 

And it’s all Parker’s doing. Political observers have long dismissed the man behind Labour’s economic programme as an earnest, rather rumpled provincial lawyer and “policy wonk”. There’ll be a lot less of that now. For the first time in more than 40 years, Labour has developed a joined-up economic policy that is all its own.

 

Parker confirmed this himself when journalists demanded to know which other countries were running their monetary policy in the way he’s suggesting. “No one,” replied the Shadow Finance Minister with obvious pride, “this is new.”

 

That’s true – as far as it goes – but a close study of the way the Singaporean government has manipulated its superannuation and public housing schemes over recent decades might suggest that Parker is not alone in recognising the powerful monetary impact of raising and lowering the level of compulsory contributions to citizens’ savings funds. What really sets Parker’s plan apart is the way in which he has grafted what are, in effect, Keynesian demand management imperatives onto that most monetarist of institutions – the Reserve Bank of New Zealand.

 

“We propose an important new tool – varying the employee contribution rate for work based savings”, Parker informed his breakfasting business audience. “The variable savings rate mechanism – or VSR – would allow the raising or lowering of savings rates, rather than interest rates, to reduce or boost local consumption.”

 

Not only is Parker’s scheme sound economics (a judgement with which even the business community, however grudgingly, was forced to concur) but it is also spectacularly good politics.

 

A lower exchange rate bodes well for manufactured export and import substitution industries alike and that, in turn, points to job growth. Real job growth, that is: the sort that generates full-time, densely unionised, high-skill, high-wage employment.

 

And Parker’s story just gets better with the telling.

 

By utilising the VSR, rather than the Official Cash Rate (OCR) to take the heat out of the economy, the Reserve Bank Governor will be able to protect mortgage-holders from the sort of continuous income-squeeze they are currently undergoing. The VSR is unlikely to be wheeled out every six weeks in the manner of the OCR, and its wider application will almost certainly reduce each individual’s contribution. What’s more, the money being withdrawn from circulation will remain in New Zealand. The average Kiwi’s economic nationalist nerve cannot help but be stimulated by the knowledge that the big Aussie banks’ ability to turn New Zealand’s misery into Australia’s profit will be patriotically curtailed.

 

The question now for Parker and his boss, David Cunliffe, is how to bring the good news from Labour’s “war-room” to the party’s electoral base. Tuesday’s announcement has had the effect of binding Labour’s message into a single, coherent narrative – but it is not a story that can be told in a ten-second sound-bite. Social media can help in this respect, but Facebook and YouTube can only take this sort of story so far. Good news is best delivered in person.

 

The ideal vector for this type of message is the nationwide political tour. Cunliffe painting the picture of a kinder, gentler, more inclusive and economically productive New Zealand, while Parker details precisely how Labour proposes to take us from problem to solution.

 



Today He'd Use PowerPoint: In the election year of 1975 Rob Muldoon took his charts and graphs and tables on a nationwide tour to discredit Labour's economic policies - especially its NZ Superannuation scheme.

 

There would be an additional measure of delicious political irony in such a road-trip. Forty years ago Labour’s original superannuation scheme was systematically undermined by Rob Muldoon’s travelling roadshow. From town to town and on into the main centres the pint-sized “economic wizard” advanced with his charts and graphs and tables, and with every stop on his exhaustive itinerary the crowds grew larger and more convinced that Labour’s scheme (which today would be worth $260 billion!) was a bad idea.

 

How satisfying it would be to reverse the process.

 

This essay was originally published in The Waikato Times, The Taranaki Daily News, The Timaru Herald, The Otago Daily Times and The Greymouth Star of Friday, 2 May 2014.

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.