The Labour Party’s finance spokesperson, Grant Robertson, yesterday took the opportunity of today’s OCR review to make another statement on monetary policy. I was pretty critical of his previous effort, which seemed to involve trying to blame Bill English for Graeme Wheeler’s errors and misjudgements.
The latest statement is little more inspiring. It was good to see him focus on the high and rising rate of unemployment, and to point out that inflation hasn’t been at the 2 per cent midpoint since that target was set three years ago.
But he wants to use this record as a basis for amending the Reserve Bank Act to “put employment up as a core objective“. I presume he would really mean low unemployment, since the Reserve Bank would (reasonably) point out that employment growth and participation rates have done quite well over the last few years. And unemployment is the measure of excess capacity in the labour market.
Robertson talks about a dilemma that the Governor apparently faces. But there simply isn’t one. Inflation (and more particularly core inflation measures) is well below where it should be, and unemployment is (rising and is) much higher than it needs to be (than any plausible NAIRU). That is a classic case of a demand shortfall, and the standard prescription is looser monetary policy. Lower interest rates and a lower exchange rate will tend to raise both activity and inflation, and lower unemployment.
There are times when monetary policy faces hard choices – when keeping inflation near the target might involve measures that will temporarily raise unemployment. Some of them are explicitly addressed in the Policy Targets Agreement (and have been ever since 1990), and others are captured in a more general way – the PTA is quite clear, for example, that the focus of monetary policy is supposed to be on the medium-term trend in inflation, not the near-term wobbles. And, for better or worse, for 15 years the PTA has explicitly enjoined the Bank to avoid unnecessary variability in output.
I’m not a diehard defender of the way the monetary policy bits of the Reserve Bank Act are worded, or even of inflation targeting itself. There might even be some sensible ways of formulating section 8 of the Act to include references to unemployment. But section 8 of the Reserve Bank Act has almost nothing to do with the combination (persistent low inflation and persistent high unemployment) that Robertson rightly worries about. Rather those outcomes are about a persistent series of misjudgements by the Governor (and, apparently, most of his advisers).
I’ve pointed out previously that central banks in other countries have also been taken by surprise by the events of the last few years. But most of them have reached the limits of conventional monetary policy. Several – including the ECB and the Swedish Riksbank – even started to tighten, only to have to fully reverse those tightenings. But the Reserve Bank of New Zealand is the only advanced country central bank that has (a) never been constrained by the near-zero bound on nominal interest rates, and (b) has twice (repeat twice) started tightening only to have to reverse itself again. Taken together with the outcomes (too-low inflation, and too-high unemployment) it is a pretty poor track record. And the Bank – the Governor, recalling that the system is one of personalised accountability – has not been seriously called to account for that failure.
Legal responsibility for calling the Governor to account rests with the Minister of Finance and the Reserve Bank’s Board. As I’ve noted, the Board seems to see itself as champions and defenders of the Bank, rather than being there to provide serious scrutiny and challenge. And it isn’t clear that the Minister does more than grumble privately, and occasionally make slightly cryptic public asides.
But where has the political Opposition been? In both his last two statements, Robertson absolves the Governor of any responsibility – in his view the problem is the mandate, or even the Minister, not the month to month choices the Governor has actually been making.
Perhaps it is easy to call for changes in the mandate. It isn’t going to happen any time soon.. It might be harder to actually have a go at the Governor. And one shouldn’t do so lightly, but this is an episode of repeated failure, and a stubborn reluctance to acknowledge, or learn the lessons from, those failures. Of course, lots of the great and good have agreed with the Governor’s stance – as I’ve pointed out before the NZIER Shadow Board’s recommendation have tended to mirror what the Governor actually does. But they have been wrong, not just once, but again and again. And the Governor is the person who is paid to get it right more often than not. Why isn’t Robertson taking more of a stand and saying so.
And what about the governance arrangements? Robertson notes that the Act was passed in the 1980s and is ‘out of date and out of touch with changes in the global economy’. But if he looks at central banking legislation around the world what he will really find is that it is the governance aspects of the Bank – the single decision-maker – that look odd. As the Reserve Bank’s survey showed, there is a wide variety of ways of expressing the statutory objectives for monetary policy, but there has been no trend away from something like a medium-term focus on price stability. Our Governor simply has too much power. Treasury reports that the Minister likes the current model because it provides better accountability, but where is the evidence of the accountability in the failures of the last few years? The Minister can’t be blamed for who was appointed as Governor – he had to appoint someone the Board nominated – but he and the Board can, and should, be blamed for how little effective accountability there has been.
The unemployment rate is currently 5.9 per cent (and expected to rise further). A reasonable estimate of the NAIRU might be 4.5 per cent. If so, that is about 35000 people who are unemployed now who might not be unemployed if the Governor had run monetary policy, within his current mandate, rather better. Even if the NAIRU, is nearer 5 per cent, it is still more than 20000 people unnecessarily out of work. Does he get out and meet any of these people? If so, I wonder how he explains his failure, and excuses the way his choices have blighted the lives of these people?
I suspect the answer to my question is “no”. In fact, I just had a quick look through the list of audiences the Governor has given on-the-record speeches to since he took office. There are various official forums and conferences, but not one of the remaining nine speeches was to groups representing workers, beneficiaries, or the wider community. Most are to top-end business audiences (the “Admiral’s Breakfast Club” in Auckland, the Institute of Directors, INFINZ, Chambers of Commerce etc), and speeches given by the Deputy Governors seem to be to equally select audiences. Perhaps the Governor gets no invitations from other sorts of groups, although in my experience that is unlikely. Perhaps he gives lots of off-the-record speeches to such groups, and just by coincidence it is only the on-the-record speeches that were to upper-end business groups?
I’m not suggesting that the Governor is exercising anything other than his best judgement in making OCR decisions. And his business audiences would also typically have been better off if the Bank had not been persistently and unnecessarily holding back the recovery, but his choices typically hit hardest on those at the bottom. And it isn’t apparent that he is even listening to their plight, simply taking comfort from the echo chamber of the elite.
Traditionally, one might have expected an Opposition Labour Party to be their loud and clear voice. Robertson’s is currently anything but that.