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.
