Further to my post the other day on Grant Robertson’s latest statement on monetary policy, Bernard Hickey has posted a substantial article about his interview with Robertson on these matters. It is a useful piece to have – certainly the most sustained discussion of monetary policy and Reserve Bank issues from Robertson since he became Labour’s finance spokesperson.
And yet it still poses more questions than answers, and still leaves Labour looking as though it has not really thought hard about either monetary policy or the reasons for New Zealand’s continuing economic underperformance (including the continuing large gap between New Zealand and “world” real interest rates). As a voter and an interested observer/commentator, I found that pretty disappointing. There is certainly space for a different approach to economic policy in New Zealand – it is not as if either recent Labour or National led governments have managed to do anything that begins to reverse New Zealand’s relative economic decline.
But it is still looks as though they are more interested – at least at this stage of the electoral cycle – in positioning (with their party base, and with the business community), and being seen to be different, than in the harder aspects of substantive economic analysis and concrete alternative policies (and the connection between the two of them).
Thus he says “the lowest inflation since last century combined with rising unemployment…is making a farce of monetary policy”, and “when you reach 15 quarters outside of the mid-point we do have to ask ourselves what we’re doing with monetary policy”. And yet Robertson is very reluctant to criticize the Reserve Bank, and the Governor (formally the single decision-maker) in particular. Indeed, he goes out of his way to praise the Governor and – despite the single decision-maker model – says “the targets agreement has not been met, but I wouldn’t want to bring that down to him personally at this time”. Certainly, the Governor has advisers, but they are all employed by, and accountable to, him.
Instead, Robertson repeatedly argues for changing the framework. He isn’t very specific about what he wants – and it is still 20 months from the election – but the only point that keeps recurring in all his statements is a desire to have the Reserve Bank actively promote higher employment. But he adduces no evidence whatever to suggest the reframing the wording of the Bank’s goal, along the lines of the Fed or RBA objectives, would make the slightest bit of difference to how the Reserve Bank actually runs monetary policy. Past Reserve Bank research suggests that, on average over time, the Reserve Bank of New Zealand has reacted to incoming data in much the same way as the RBA or Fed have done. Robertson either knows that, or should do, so the onus is on him to explain how his approach would make a difference, in substance rather than rhetoric.
And there is still nothing on the “new tools” Robertson has talked of needing. When Hickey asked him about the variable Kiwisaver rate proposal Labour took into the last election, all he would say was that it was under review, and “that wasn’t mentioned today and won’t be in the foreseeable future”, adding (Hickey’s words) that “Labour preferred to have a simple policy that gave voters certainty”. Which is all fine no doubt, but doesn’t give hardheaded observers reason to think Labour actually has serious alternative tools in mind. That shouldn’t be surprising, as the tool the Reserve Bank does use is the tool other central banks use – at least until they exhaust its potential when policy rates get to or just below zero.
It seems to me that there are two quite important separable issues:
- the Reserve Bank has not done a particularly good job in the last few years of carrying out the Policy Targets Agreement. That failure has been particularly stark since the 2 per cent midpoint reference was added in 2012. With (as Robertson notes) inflation very low and unemployment high and rising, it is a pretty clear-cut case of a shortfall of demand, and a lower OCR is the best tool for stimulating additional demand. The Reserve Bank can do something about that, but has failed to do so – as Robertson notes, he was among those uneasy about the OCR increases in 2014, which were unnecessary, and the Bank (the Governor) has been slow to lower rates since. Real interest rates now remain higher than were two years ago, when dairy prices were at their peak.
- the disappointingly poor economic performance of New Zealand over recent decades, including such symptoms as the large gap between New Zealand real interest rates and those abroad, and the persistently high average real exchange rate. As it has abandoned support for the existing monetary policy framework over the last few years, Labour has tried to imply (perhaps especially to its base) that there is something about the monetary policy framework that Labour could fix, offering some material improvement in our economic performance. Neither Phil Goff, David Cunliffe nor David Parker ever quite managed to explain the connection. Robertson has done no better. That isn’t surprising, because it really isn’t there. There might be better ways of articulating the objective, and there are better ways of running/governing the Reserve Bank etc, but none of them offer anything much in addressing the structural underperformance of the New Zealand economy.
Veteran commentator and analyst of left-wing politics, Chris Trotter wrote a piece the other day suggesting that Labour and the Greens were adopting an approach, akin to that in the early 1980s, of getting alongside the business community – getting them to the point where business was comfortable that an alternative government would not “scare the horses”. I’ve no idea if that is an accurate description, but Robertson’s comments don’t look inconsistent with Trotter’s story. I was interested, for example, in Robertson’s reaction to the question of whether Graeme Wheeler should be reappointed next year: Wheeler’s term expires almost three years to day from the date of the last election. Robertson doesn’t refuse to comment, but goes on to express his regard for Wheeler (twice), only then concluding that “ultimately it won’t be a decision I’ll be involved in”.
I have no idea, of course, whether Graeme Wheeler will even seek a second term, but whether he does or not, I think there should be some disquiet about the fact that his term expires in late September next year. Monetary policy is now hardly something that the main political parties are united on (unlike the situation from 1990 until 2008, when any differences were about details, and the statutory goal united National and Labour), and it doesn’t seem very satisfactory that, for example, the current government could appoint someone to the office of Governor (single decisionmaker across a range of policy areas), taking office perhaps in the middle of an election campaign, or indeed just as a new government was taking office. It isn’t a problem if the current government is re-elected, but (say) a Labour-led government supported by the Greens and/or New Zealand First might have a rather different view about priorities and emphases for the Bank. The Governor has a degree of personal policy autonomy not shared, for example, by heads of core government departments (eg the Secretary to the Treasury).
The last time a Governor’s term expired in an election year was in 1993 (2002 was different – Don Brash resigned just before the election campaign, and a new permanent appointment was not made until after the election result was determined). But, as I noted, on that occasion National and Labour went into the election with no real difference on the Reserve Bank Act. On that occasion, the Reserve Bank’s Board and the then Minister agreed to reappoint Don Brash in December 1992, well before any election year market uncertainty (or campaigning) took hold. And the first Brash term was due to expire a couple of months before the election would normally be due.
The situation next year seems much less tractable. Wheeler’s term expires more than three years after the date of the last election. And Labour seems sure to campaign for material changes to the Act (as would its potential future support parties). And if Graeme Wheeler does not seek another term, any capable person pondering applying for the job in early to mid 2017 might be more than slightly uneasy – it not being clear what the substance of the role might actually be. I hope the Board – and perhaps the Minister – have already begun to think about the issue. I’m not sure what the best way ahead is. These clashes don’t happen often, but perhaps one option for the longer-term might be six year terms for the Governor, rather than five – so that a new gubernatorial appointment was always in the middle of an electoral cycle. For now, I wonder if it might be wise to consider extending the Governor’s term for another year. to allow longer-term decisions to be made with greater clarity about the longer-term direction of the Reserve Bank and New Zealand’s monetary policy regime. As longerstanding readers might imagine, I’m hesitant about that option for a number of reasons, but none of the alternatives look ideal either.
In this post I haven’t touched at all on Robertson’s comments on immigration – with which I am generally sympathetic, although sceptical about the extent to which immigration policy can be managed in a countercyclical way. And countercyclical issues are not where the real debates about the economics of New Zealand’s large scale inward migration programme should be centred.