It has been pretty obvious for quite some time to most people that the Reserve Bank system that NZ uses needs fixing. The way it operates right now is pretty ludicrous. The economy heats up for any reason, the Reserve Bank detects a forthcoming threat to the inflation rate, they put up the OCR which in turn pushes up interest rates and dampens out the local demand that drives local inflation.
So far so good. But it doesn’t end there and only a simpleton (Don Brash comes to mind) would think that it did. Problem is that we live wide open and exposed to the world.
So having high real interest rates in a relatively stable country gives a few other effects. Hot money roars into the country looking for something to buy. It discovers relatively risk-free property and prosperous companies. It buys those and on the way through it manages to kickstart more inflation by pushing more money into the economy for consumption. The level of hot money looking for a quiet home also drags the exchange rates up thereby pricing our exports off world markets.
The main dimension of Labour’s policy is to offer an alternative to the current reliance on interest rate hikes; mainly, by requiring higher contributions to Kiwisaver, as an inflation fighting tool.
We’re going to give the Reserve Bank another mechanism, which is a variable savings rate through KiwiSaver. The Reserve Bank will be able to keep its inflation anchor but instead of that money being lost to you in higher interest rates it will go into your savings. The benefit for the export sector is instead of jacking up interest rates and pushing up the exchange rate you will still control inflation but you’ll have lower interest rates and a better exchange rate.” Mr Parker said it would apply to working people but it would consider excluding those on the lowest incomes.
Right. Instead of paying higher interest rates to Aussie-owned banks and seeing those profits flow offshore, the Labour plan would channel those funds into domestic savings, and take a lot of the current speculator-driven pressure off the exchange rate. Even at the highest rates of Kiwisaver contributions envisaged by Labour, as Guyon Espiner pointed out on RNZ this morning, this would still be well below the level of compulsory superannuation contributions in Australia.
What does this mean for wage earners? Well No Right Turn takes the downside of it.
Which, combined with their universal Kiwisaver policy means that their “solution” to inflation is automatic universal wage cuts. So, when prices are rising, ordinary people will have less money in their pockets to pay for stuff. Thanks, Labour!
And this is exactly right. However that is exactly how you have to control inflation. The best way to stifle inflation is that you remove money for immediate consumption from the economy. In the old Reserve Bank way, this would mean higher interest rates. In this case through enforced savings, as he acknowledges.
Its a bit more complicated than that, of course, in that savers will get their money back in the long run. What it really does is redirect money from higher mortgage payments to an Aussie bank to your future self. But the immediate effect is the same: less money in people’s pockets while prices are rising. And the effect will be felt most by those who do not contribute to the problem: young people without mortgages. Somehow I don’t think they’ll be thanking Labour for this policy.
But just as importantly, for those younger people it will keep mortgage rates down and has a pretty good chance at least partially constraining the property bubble over the longer term.
Now as an aside Gordon Campbell points out the interesting political consequences of this.
English’s comments were a reminder of what has been a largely hidden dimension of this year’s election strategising. Clearly, a high exchange rate serves the political interests of the Key government, by protecting it from the immediate fallout from a lower exchange rate: which would include, for example, higher petrol prices at the pump, and higher prices for consumables. Most voters are consumers, not exporters – and thus, keeping the dollar aloft serves as a form of Muldoonist economic populism that John Key and Bill English seem very happy to embrace. Cheaper imports underpin spending in the local economy. (On the side, it also makes the imported component of our exports that much cheaper.)
So far, so good, so unsustainable. In a modern economy, no country can afford to put the interests of consumers ahead of its exporters, long term. At 85 cents to the US dollar, the pain currently being inflicted on our exporters is such that it exceeds any gains in efficiency they’ve been forced to make in order to survive. Sooner or later, the government is going to have to look beyond its own short term political interests, and start to govern in the interests of the country. For now – and just as it has done with respect to the age of superannuation entitlement – Labour is playing the role of the unwelcome guest that has to remind voters that the current policy settings cannot endure. In the old fable, the grasshoppers were more popular – but the ants had the better strategies for survival.
You don’t need to tell me that. For the last couple of decades I’ve worked most of the time in tech companies that do more than 90% of their sales offshore. One of the biggest problem has been the complete instability of the NZ currency compared to almost all of our trading partners. It helps a little on components but most local cost is in wages. But the instability of the currency is such that it often better to push the production offshore so the costs components and relatively unskilled labour don’t vary as much as they do in NZ, while keeping the skilled designers here. That way you keep most of your production risk in stable currencies (ie not the NZD), which are usually the same ones you are paid in like USD.
Your designers are paid local wages and have a low risk exposure to the exchange rate. But for designers to lose touch with the production systems means that eventually the imperative to move more of them offshore gets higher as well. So we lose another company.
But as those damn late night ads used to say “but there’s more”. No Right Turn again…
The non-headline stuff is where the real meat in the policy is. First, amending the Reserve Bank’s purpose to manage the balance of payments. There’s a consensus on the left that there needs to be some amendment, but whether it should include employment, the exchange rate or the balance of payments is disputed. Whichever it ends up as, it means the Reserve Bank will have to think about the consequences of its interventions, and should stop them from Brashing the economy to target a single part of it.
The head of the reanimated corpse of Brash should now be spinning furiously along with those fools from ACT who are into simplicity (because they can’t handle the real world). Having to deal with more than one objective! We don’t want to burden the poor economists at the RB with too much to consider. However looking the balance of payments is pretty good. It includes the exchange rate and the export economy.
Secondly, there’s a commitment to “[take] the pressure off the Reserve Bank’s OCR by using government policy to address the sources of inflation in the non-tradable sector”. I suspect this is the bit which is going to be doing all the heavy lifting. The core drivers of inflation are house and electricity prices, and Labour has strong policies to target both (Kiwibuild and a capital gains tax; NZPower). Deflating the housing market by taxing the crap out of speculators and increasing supply to the people who need it should remove the need for the Reserve Bank to intervene in the first place. So we might not need their economic sadomasochism after all.
The do-nothing government movement loses its do-nothing figleaf because it is cannot shove everything off to the Reserve Bank. They’re effectively now concerned with the exterior economy. The government becomes largely responsible for the rigidities of internal economy. That is a pretty good mix.
Of course it does rather leave up in the air the ability of MPs to take on the task. Currently I can’t think of many in the current National or Labour with a good track record of solving structural blockages locally. In fact the only one I can think of offhand is David Cunliffe with the Telecom breakup.