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Goff on monetary policy

Written By: - Date published: 8:41 am, November 19th, 2009 - 33 comments
Categories: economy, phil goff - Tags:

It’s great news that Phil Goff is urging a rethink of the way monetary policy is conducted in New Zealand.

For too long interest rates (and hence inflation, unemployment, and house prices) have been the blunt tools of monetary policy. And for too long workers, householders, and exporters have borne the brunt.

Labour leader Phil Goff is calling an end to the 20-year consensus on monetary policy.

Mr Goff is expected to use a hard-hitting speech to Federated Farmers in Wellington today to declare that the Reserve Bank’s policy targets which influence interest rates and the dollar are no longer working.

Phil Goff is absolutely right. It’s time monetary policy was recast to be in the interest of everyday Kiwis. Good on him for having the guts to finally tackle this issue.

33 comments on “Goff on monetary policy ”

  1. roger nome 1

    This could be great, and is one of the few intelligent policies that NZ First stood for. Up until now it has been left for them and the Greens to advocate for a people-friendly monetary policy. There’s so much more we could be doing in this area to lift living standards of every day kiwis. i.e. increasing the OCR target band, to allow for growth of the minimum wage that exceeds the paltry 2% average of the last two decades.

    This way we can start to close the massive wage gap that has opened up between affluent workers and the working poor, and the gender wage gap as well (though i note that this is no replacement for a comprehensive awards system that set minimum wages by industry – ala Australia).

    These ever widening gaps that have lead to an increasingly divided and exclusive society cannot go on for ever increasing, less we want to see the entrenchment of a detached aristocracy and an equally detached underclass, and the devastating social problems that accompany this (despite what the power and money hungry elements of NZ’s wealthy will tell us).

    Good to see Labour finally differentiating itself from National in a substantial way.

  2. stevo 2

    yay bloody yay, and about time. The current Reserve Bank Act generates positive feedback into our economy and does the opposite of what was intended. That is to wreck or distort our economy.

    Part of the problem is how we measure inflation, or more importantly, what is in the CPI basket and what the Reserve Bank act does with the data.

    Anything that is included in the CPI basket that has a price behaviour that is external to NZ influence, say traded on international markets or are not made in NZ, can have an affect on inflation that cannot be countered by interest rate changes within NZ. Particularly essential commodities which we just have to buy anyway. So when dairy prices go up due to overseas demand or petrol goes up, Alan Bollard pulls the interest rate lever and I am rewarded by my mortgage repayments also going up on a house I already own. So we are double punished with less money to save or ideally spend on NZ made stuff.

    And when we have had unfettered property speculation added into the mix, further distorting our economy by making residential property unaffordable, the only tool available is Alan and his lever. I hear prices are rising again……I’m with Gareth Morgan on this one.

    And because of how our currency is valued where the effect of historic and current high interest rate DIFFERENTIALS between us and other countries, like Japan, cause a flow of cash into NZ raising our dollar, imports become cheaper which either harm local competition or encourage more spending on imports (TV’s), the exact opposite of what we should be doing..saving.

    When our dollar is too high, which it is, exporters suffer and do eventually close, never to return. Goodbye real jobs. Again Alan Bollard is warning about interest rates needing to rise while our economy is tanking.

    High interest rates are a tax levied by private interests – Banks are the only ones profiting out of this charade. We need a rethink and I applaud Phil Goff for this initiative.

  3. Pat 3

    But who to listen to?

    Gareth Morgan can’t pick his nose, let alone markets, as proven by his poor KiwiSaver funds.

    Not Bernard “Dead Cat Bounce” Hickey and his “house prices will drop by 30%” predictions.

    Personally I think Dr Ganesh Nana seems to speak the most sense, the most often.

    • gingercrush 3.1

      Ganesh wrote part of that awful piece on the costs of alcohol. So he’s no good either.

      As for Hickey, he writes some interesting stuff. But I always laugh when left-wing people quote him on stuff. Since his vision of New Zealand would be most awful to any left-wing person.

  4. ben 4

    Roger nome, congratulations on a very, very misguided post:

    There’s so much more we could be doing in this area to lift living standards of every day kiwis. i.e. increasing the OCR target band, to allow for growth of the minimum wage that exceeds the paltry 2% average of the last two decades.

    How does accelerating the growth of minimum wage in exact proportion to the debasement of the spending power of each dollar earners receive help? It doesn’t.

    This way we can start to close the massive wage gap that has opened up between affluent workers and the working poor, and the gender wage gap as well (though i note that this is no replacement for a comprehensive awards system that set minimum wages by industry ala Australia).

    Pure bs. You are confusing real with nominal, and how exactly does what Goff is proposing give women an advantage over men? This is monetary policy. It could not be a blunter policy tool.

    These ever widening gaps that have lead to an increasingly divided and exclusive society cannot go on for ever increasing, less we want to see the entrenchment of a detached aristocracy and an equally detached underclass, and the devastating social problems that accompany this (despite what the power and money hungry elements of NZ’s wealthy will tell us).

    Explain how monetary policy can help with inequality and stratification when we all operate with the same currency! Debasement of the dollar in my hand is the very same debasement of the dollar in anothers’ – whether they be aristocracy or working class.

    What – Phil Goff said it so let’s just make up reasons why its A Good Thing?

    • roger nome 4.1

      ben –

      Is the global price of oil set in NZ? Think about it – you’re the one who’s misguided.

      “how exactly does what Goff is proposing give women an advantage over men?”

      First off, equality isn’t advantage. Secondly, women are over-represented in minimum wage jobs, therefore boosting the minimum wage will close the gender pay gap.

      “Debasement of the dollar in my hand is the very same debasement of the dollar in anothers’ ”

      increasing the minimum wage does not lead to a proportionate increase in inflation, because only the price of goods and services that are set locally are effected.

  5. Any alternatives from Fill Gap? Any? No..just hot air. Fed farmers were left blinking and asking each other “Who was that guy and was he on drugs?”

  6. Bored 6

    Whilst very good news this announcement from Goff is a mere twenty five years too late. In effect the Reserve Bank Act said to the electorate, “your government no longer interferes in the unfettered market mechanism that will deliver heaven on earth to all”. Economists and politicians took the line of market puritanism, hands off. Which posed the question why the hell did we employ them if doing nothing was their recommendation? We could have saved a swag in fees, bonuses and salaries in Treasury alone.

    Meanwhile Heaven on Earth got delivered over 25 years, to the rich atleast. My biggest question to Goff (and Labour) is why in 9 years at the helm and with abundant evidence that the RBA was a blunt instrument in a severely depleted tool kit, they did not debate this and do something about it?

  7. The Baron 7

    “Mr Goff is not expected to spell out the alternatives in his speech today but will call for more work on the options”

    I’m up for a debate on Monetary Policy, but I’d love to actually hear what alternative Goff has in mind… “I really wanna look into this” isn’t a policy. We do need to take care here too – the current system isn’t perfect, but monetary policy is notoriously tricky stuff to get right, and the consequences of messing it up can be disasterous. Lets hope we can actually get some debate on options here, rather than what frankly seems like vain populism from Goff.

    As for this stuff about “alternative” (though not specified) monetary policy being better for workers… ah, really? Keeping inflation low is a great thing for the lowly waged, as they are more sensitive to inflation eroding their smaller asset bases. There is no point in having 10% pay rises a year if 9% of it is eroded away through price rises.

    • Daveo 7.1

      Pay rises use CPI as a baseline. So long as you’ve got a unionised workforce it’s not a problem.

      The thousands of workers who’ve lost their jobs over the last few years due to fluctuations in the exchange rate might beg to differ with your analysis. That’s the same reason you’re seeing manufacturers and exporters lining up with the unions and calling for a change in monetary policy.

    • Bored 7.2

      You might want to consider that inflation and pays rates might be related to one another. Then there are the host of other factors. No simple answers or simplistic statements on the relative merits of either monetary or fiscal policy provide adequately answers to why, how and who is paid what. Which is why Goff atleast opening it up for debate is a good thing.

  8. The Baron 8

    So… fixing the exchange rate is what you propose? Last time we tried that, we got into a fair bit of trouble. Remember Soros versus the pound, too? Christ, currency sharks would have a field day at your expense.

    As for this workers will be fine so long as they get CPI plus on their pay rises… what about their savings? Their house values? Their asset base? How does CPI plus help those from being eroded away through increased rates of inflation? Say what you will about the cons of the current system, but it has done an awfully good job of protecting the value of people’s real assets – and that’s in everyone’s interest, cos even “the workers” own houses.

    As I said, monetary policy is an utter minefield. You need to do better than “keep exchange rates low” – that ain’t a policy fella, that’s a pipe dream. Care to propose something coherent then?

    • IrishBill 8.1

      I’d suggest that we make Kiwisaver compulsory and allow the minimum contribution rate to be adjusted by the RBG.

      There also needs to be a Tobin tax introduced (around 2%) and a gradual increase in reserves until we get to the point where we can meaningfully fix our currency to those of our main trading partners.

      We could also possibly require RB approval for large transactions. I suspect leakage would be low as most of these transactions go through a limited number of trading houses.

      And of course property tax. A capital gains tax on investment property is a good start but if we really want to deepen NZ’s investment pool by steering money from housing to the markets then we also need to increase investment regulations to improve investor confidence.

      There also needs to be some serious work done at an international level to re-regulate capital flows in such a way that capital flight is hindered. This is an area where our PM’s background and experience could actually help us lead the discussion.

  9. Zorr 9

    Phil Goff standing up and saying something sensible and taking the initiative for a change. Say it ain’t so! –swoons a little– There may be hope for us Lefties next election yet!

  10. TightyRighty 10

    monetary policy is effect driven while residential property is the main investment for households. it would be more beneficial to the nation to leave monetary policy alone and to see how investment could be directed to wealth creating approaches as opposed to stores of wealths. it would help with the liquidity of the economy too and potentially see exports rise as more money would be available for R & D by NZ firms. While increased liquidity can lead to inflation, this in turn can be adjusted for by RB interest rate adjustments. thereby maintaining the current policy but improving the outcomes.

  11. Herodotus 11

    How do we seperate montry policy from the wimms of who ever holds office Whilst Phil may have broken the bipartisian approach with his comments, we require at least agreeemnt by both major parties (All would be desirable) but I cannot see 100% agreement on this, so it would be the lesser of … There needs to be agreeement on the macroeconimic outcomes, what consequences we are willing to suffer then empower the governer with the tools to manage. No Lab does this and 3 years later Nat changes the system. Then what is left of the cow will be devoured by speculators and we will be wishing to attain the economic heights of Zimbabwe !!

  12. Daveski 12

    The tagging isn’t showing properly.

    I can’t find “flip flop” any where. Or should that be dead rats?

    • mike 12.1

      I was looking for the ‘desperation’ or ‘hollow posture’ tag myself

    • Pascal's bookie 12.2

      Flip flops and dead rats are when you steal an opponent’s policy that you had once decried.

      I do seem to remember that folks had a lot to say about Goff being a leap to the right for the Labour party. Stupid folks, as it turns out.

  13. Pascal's bookie 13

    One thing that’s kinda weird.

    Lot’s of people have been warning about inflation in the US. They’ve had their (poorly targeted) stimulus package and interest rates set at pretty close to the zero limit for quite some time. Along with that they’ve had the ‘quantitative easing’ and the govt bailouts and guarantees for the banksters. With both fiscal and mnetary policy they’ve been pumping the accelerator since well before Obama took office.

    But the inflation isn’t showing up.

    Our policy doesn’t mean we get speculators in the NZ carry trade, because speculators implies a gamble. At the moment it’s free money. Can’t last though.

    • RedLogix 13.1

      Steven Keen has been adamant that the bursting of the debt bubble is causing a deleveraging deflation that is far more powerful than the amount of money printing that has happend so far.

      The total US Debt to GDP ratio is about 300% giving a total debt (Household + Business + Government) roughly in the order of $14T * 3 =~ $45T.

      Keen points out that the historic rate of unwinding total debt during the 1890 and 1930’s Depression was about 5%pa. That translates into a $2.5Tpa hit on GDP. Combine this with the fact that this $45T of debt was growing at about 3-4% over the last five years ( an ongoing stimulus of about $1.5T which directly added to GDP) the total negative drop in GDP will be around $2.5 + 1.5 =$4T … in a $14T economy. Incidentally that amounts to almost a 28% total negative drop in economic activity. If you think this far-fetched, it is not. It is the consequence of such an outlandishly high Debt to GDP ratio.

      The US has done a stimulus roughly about 20% of GDP (0.2 * $14T =~ $3T) which is close to, but still less than the $4T deleveraging, so to answer your question… no inflation. The obvious problem is that the prevailing model means that all the money being created is being done so in debt, so that there is a limit to how much more can be done without completely overwhelming the US ability to ever service the debt.

      NZ is running Debt to GDP around the 160% mark. For our economy the long run average during stable periods is around 30-40%… so NZ has about 120% of GDP to unwind as debt before we hit bottom. If we unwound that at say 5% pa, it would still hypothetically take 24 years to stabilise.

      • Herodotus 13.1.1

        RL does not the US have a inbuilt protection to its economy in that currently the US$ is still the base for commodity trading, and still it is the preferred currency to trade with. So there is no need for currency conversion, as would say the NZ$ which the trade could occur to the middle east, in US$ then in required converted into NZ$. A policy, internation events, speculators, RB act in such that results in a change in the NZ$/US$ cross rate our economy is dramatically effected.
        We also donot have the Chinese not just managing their economy but also their actions are dictated to by the US bonds they hold, so they will protect their position i.e. Act to protect US economy for self interest reasons. The NZ$ who cares what happens to that internationally i.e. We ahve no fairy godmother
        I also thought our debt was around 98.2% of GDP page 25 http://www.issues.co.nz/library_images/bankinquiry/report_of_the_parliamentary_banking_inquiry.pdf

        • RedLogix

          RL does not the US have a inbuilt protection to its economy in that currently the US$ is still the base for commodity trading, and still it is the preferred currency to trade with.

          Yes. Which is why the US normally runs a much higher Debt to GDP Ratio than most other nations. For the US anything in the range 80-120% is perfectly normal.

          I also thought our debt was around 98.2% of GDP page 25

          For the country as a whole, net overseas liabilities rose from $99.8 billion to $173.5 billion. As a percentage of GDP the rise was from 76.1 per cent to 96.5

          Agreed. But not all debt is overseas debt. The difference would be funds generated by various banking institutions within NZ leveraging off local depositors.

    • TightyRighty 13.2

      Inflation is demand driven, there is little to indicate in the US that demand is reaching the same levels as it was 15 months ago.

  14. gingercrush 14

    I disagree with the other right-wingers. I think this was a smart move by Goff. In fact I’ve found Goff rather impressive as of late. As for giving alternatives for this policy. There isn’t any need for it yet. We’re not even into 2010, let alone 2011, now simply isn’t the time. Regardless, National in 2008 set perhaps a long-term situation where policy isn’t as detailed as it has been previously. Hence, why the left often is seen to be saying John Key isn’t doing anything etc. Their policy manifesto was extremely light on details and have subsequently been rather vague in detailing things. I would prefer this not to be the future of politics. But I suspect it will be.

    Also it’s best if he doesn’t go into too many details as the last time he did so he stuffed it up. Right now he just has to project a direction a for his party. Thus far they’ve come up with reversing the cuts to ACE, ACC changes, changes in benefits (though whether this continues after the recession or not is in the air)and now Monetary policy. Of particular interest is he’s targeting an economic area. Something we’ve not seen from Goff before and an area where Key is seen to have credentials. He’s done it spectacularly well.

    Likewise, my other big impression was Goff with his response to Hone Harawira. I realise many of the left-wing will be disappointed in what he had to say. But his statements were never targeted to the liberal left. It was targeted at everyday New Zealanders. People that vote every election but don’t pay particular attention to politics. The people that would find Harawira’s comments to be distasteful. Goff did well there. Also while it was a huge PR exercise. He’s surely done some good in his opposition to changes in ACC levies for motorcyclists.

    If Goff keeps up this momentum then his profile will lift particularly as National is entering a difficult year with what will be a very difficult budget. I still think Goff has a long way to go. His chances in 2011 are very slim. But he has certainly lifted his game this month.


    In regards to this policy. I’ve always been bothered by the idea our dollar must be low otherwise we can’t export. If anything that just exposes how commodity based our export market is. Real success in exports will not be obtained by a low dollar. Sure that can help for a short period of time as can increases in the price for commodities. Something that improved our economy from 2000 till about 2005. But the future is about adding value to those exports. For some areas such as forestry, seafood and our meat industry that is difficult. Even Fonterra and milk producers have struggled in this area. But the only way we can have a successful export market is if we offer high-tech, high-cost and specialised goods that are less impacted by a rise in our dollar and a fall in the price of commodities.

    • Daveski 14.1

      In general, I think it is abundantly clear that National largely slept walked into office and many have retained that state in office.

      I’m interested in this change of tack tho. The accusations here about secret agendas, dead rats and the like, and yet Goff can get away with oops we made a mistake with the EFA and monetary policy. To be fair, I think it’s straight out of the National game book but this was exactly the kind of thing most here were so adamantly outraged about.

      And if things were so goddam good under Labour, while is Goff changing core things?

      Perhaps Goff realises he has to do something for HIS own sake. I still can’t see him getting Labour back in power.

      The age of pragmatism is on us.

      • lprent 14.1.1

        He is doing it two years out from an election and signaling a further change in policy (one of the first things Labour did in their first term was to change the targets for the Reserve Bank Act). It was pretty clear over the last 5-6 years that there was a problem with objectives. While controlling inflation it caused real overheating problems in some sectors of the economy and cost other sectors. It is clear that the Act needs review, and many on the left have been saying that for a while. Hell I’ve been saying it for a while as the instabilities in the exchange rate hurt like hell for any exporter. I’m on the right of Labour.

        The inherent structural issues with inflation have largely been overcome in the economic sphere through 20 years of adherence to quite rigid guidelines. We need to start fixing the other structural issues like the mis-investment and lack of available capital for productivity improvements.

        This is timely, announced in the open, and set up for a debate on policy in the public arena. Only a paranoid git would consider that there is anything underhand about it….. *sigh*

        • Daveski

          I don’t want to get into a you said he said type of argument.

          I have no problem with arguing that Goff is right to change policy – even tho Labour revisited it recently and decided to keep the status quo.

          The point is that many if not most here ranted and raved about Key changing long standing policy and putting the most negative possible spin on it.

          So what’s different this time?

          • lprent

            The main difference is that there is a major suspicion that Key was simply moderating National’s position in public, but that he, his MP’s, and many national party members fully intended to carry out the original policy by stealth when they got into power.

            This was shown to be the case both in Hagers book from the 2005 election and in the covert taping last year. It is also clear that in a number of areas that NACT ministers have been less than honest in their presenting of information (Nick Smith and Rodney Hide come to mind) – skewing the stats and budget presentation to further their opinions.

            Tell me – what ‘hidden’ position that you think Goff is concealing over this announcement?

    • lprent 14.2

      I’ve always been bothered by the idea our dollar must be low otherwise we can’t export.

      I couldn’t give a shit about that. High or low doesn’t matter too much.

      The real concern is the volatility. That causes big issues for exporters. The normal annual cyclic effect as the farming receipts come back (ie the Fonterra effect) are one thing. But we’ve been having the effects of people shoving money into the currency and out based on perceived instabilities elsewhere. It means that from quarter to quarter you can never be sure of what you’re going to get. Since there is a monumental lack of capital for anything less secured than property, it means that people don’t invest in productivity improvements because they’re never sure what their revenue and profit is likely to be. Increases the risk, decreases the improvements in productivity investment. You need to hold the cash for the changes in the exchange rate doing nasty things to the bottom line.

    • Draco T Bastard 14.3

      I’ve always been bothered by the idea our dollar must be low otherwise we can’t export.

      A low value currency is to do with capitalist markets need to continually grow. If they don’t they can’t pay for themselves (debt+interest > income) or make any profit and the only way the markets can grow is by having more people in them.

      If the market remained the same size rising productivity would induce deflation due to demand remaining constant. To counter this companies seek to export from the local market to try and maintain the same or greater demand. The problem then becomes price – a high valued local currency makes the price in export markets higher and when most of the markets you can export to are poorer than the local market then exports must fail. Throw in the fact that the market you’re exporting to may, and probably will if they’re developing any sort of economy at all, also have local competition with their own rising productivity and what you end up with is a massive over-supply of product.

      If anybody really thought about it they’d realise just how stupid export/import markets really are and just why they don’t work. Unfortunately, most economists haven’t thought about it and continue to peddle the same irrelevant economic theory that they’ve been using for the last couple of centuries that just doesn’t work.

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