The response to Labour’s Monetary Policy Upgrade released this week has been extraordinarily good. I am certain that National’s minions have been beavering away looking for a slightly inelegantly phrased sentence or an addition mistake so that evidence of utter incompetence can be bundled up and shopped to tame media but so far nothing of the sort has happened. The best they have managed is Bill English in attack mode. As Vernon Small has said “[i]f Finance Minister Bill English’s first flailing attempt to attack Labour’s new monetary “tool” is any guide, the Opposition may be on to a winner.” Labour’s Tim Barnett has compiled a number of positive responses which has been circulated and this post relies on his list. In a Dominion Post Editoral the policy was described as a “possible game-changer” and having “real heft”. The editorial included the following comments:
Unlike its recent pronouncements on trucks in highway fast lanes, or the flagging national demand for wood, Labour’s ambitious new monetary policy has real heft. The idea is first to make KiwiSaver compulsory, with payment levels about 9 per cent of income. That’s not monetary policy per se, but it’s a good idea – our savings are chronically low, which pushes up our interest rates. Compulsory savings are also necessary for Labour’s next big idea – making KiwiSaver payment rates adjustable. Under the plan, the Reserve Bank could recommend increasing savings rates as a way of slowing the economy – or, conversely, lowering them to heat things up. If that sounds like a hole in the wallet, Labour says it won’t be. Finance spokesman David Parker says the tool will be used instead of interest rate hikes. So when the economy overcooks, people pay more into their retirement plans instead – in theory – of copping higher interest rates on their mortgages. If this works, there would be plenty of positives – higher national savings, healthier government balance sheets, lower interest rates, perhaps even some effect on the overvalued kiwi.
Brian Fallow in the Herald spoke glowingly of the policy. He said:
Though billed as an “upgrade to the monetary policy framework”, what we got from Labour’s finance spokesman David Parker on Tuesday was a much broader economic policy than that would imply. It is subtle and complex, and therefore hard for people to appraise in the context of sound bites and partisan pushing and shoving. They could always read the document, uncatchily titled: “Improving Macroeconomic Stability”.
He then said this:
What is useful and innovative about the policy is that it creates a new tool for withdrawing some demand from the economy when it is heading (as it is now) into a period when willingness to spend is outstripping growth in the capacity to produce goods and services.
The Labour Party has done well to come up with a constructive monetary policy for the coming election. Its proposal to make KiwiSaver compulsory and use its contribution rate as an alternative to interest rate rises is imaginative and reasonable. It is not a drastic departure from the monetary consensus that has maintained low inflation and underpinned the strength of the economy under successive National and Labour governments. Most importantly, Labour’s new policy would not undermine the independence of the Reserve Bank which would remain in complete charge of the currency and it would be entirely up to the bank whether at any time it wants to recommend an increase in KiwiSaver contributions instead of raising the official cash rate. Either device could take a little money out of circulation when inflation looms.
Bernard Hickey also approves.
It’s big and it’s hairy and it could change the way monetary policy is run. David Parker’s proposal for a Variable Savings Rate (VSR) certainly qualifies as the ‘big new tool’ he promoted it as over the weekend. It ties together Labour’s savings policy and its monetary policy in a way few expected. Parker is certainly hoping it is the tool that fixes the big, hairy problem for the economy, the over-valued exchange rate.
It’s a very cunning plan. You’ve got to admire the fact that this man has come up with something that at least is different and well and truly worth thinking about.
Of course there will be critics of the policy. David Farrar has referred to BNZ Economist Tony Alexander who thinks that the policy will result in reduced interest rates which will increase the incentive to borrow money and therefore be counterproductive. Well it would probably tend to reduce interest rates but if people are instead putting more money into savings than in paying interest increased borrowing will not necessarily occur.
The release has dominated policy debate for the week. When you combine the effects of this to Maurice Williamson’s deserved demise, Peter Dunne’s abysmal sacrificing of the ability to prevent the stockpiling of synthetic drugs for political advantage and the continued murkiness of Judith Collins’ Oravida dealings it has clearly been Labour’s week. The best the right had was to try and manufacture a mini scandal about David Cunliffe’s grandfather’s medals. This attempt well and truly backfired and left many questioning the utility of such behaviour.
Could it be that the tide is turning?