Polity: Why Joyce is full of it on monetary policy
lprent: Rob Salmond at Polity just saved me from having to write something like this post explaining economic basics to Steven Joyce today. Over the weekend Joyce demonstrated again why his tenure at MoBIE has been a failure for the overall economy. He fixates on one thing (like the business selling milk powder) to the exclusion of the overall picture. In part that is why we have neither expanding innovation or employment in our economy at present. He is a good tactical politician. But he is a fool on strategy.
Steven Joyce, Minister of Running Interference, is trumpeting a “back of the envelope calculation” this morning claiming it would take a six point rise in the Kiwisaver contribution rate to equal just a one point rise in interest rates. Ohmigod – that’s a 6:1 ratio! How horribly inefficient! And so on.
Here is why Joyce is spouting is a load of nonsense:
- Comparing apples with oranges
A one percent change in interest rates takes, according to Joyce, around $2.5 billion out of new Zealanders’ disposable income. A 1% increase in savings rates only takes out around $400m. That is no surprise, because interest rates operate on capital holdings, while savings rates operate only oncurrent earnings. So the 6:1 thing is a rhetorical red herring, nothing more. If we compare apples with apples, Joyce is saying that KiwiSaver would need to collect an extra $2.5 billion from New Zealanders in order that banks do not have to collect the extra $2.5 billion from New Zealanders instead. True enough, but not really an argument.
- Ignoring most of the apples
Labour has a wide range of policies designed to increase savings and expand what people can do with their savings, many of which will decrease the need to adjust the Variable Savings Rate (VSR). One is to make KiwiSaver universal, which will have a very large impact. Joyce’s calculations are all about how much Labour would have to change the VSR if it had absolutely no other policies that impact on savings. Which makes the analysis pretty much useless.
- Ignoring the world around him
Joyce’s approach to monetary policy appears wilfully ignorant of interest rates in other countries. He keeps on about New Zealand’s interest rate history, instead. But nobody is choosing between New Zealand’s 2014 interest rates and New Zealand’s 1979 interest rates. For that, you need a DeLorean. Instead, millions of people are choosing between New Zealand’s 2014 interest rates and Japan’s or America’s or Australia’s 2014 rates. That is what is driving up our dollar, which is why managing growth without increasing interest rates is such a smart idea.
- Ignoring flow-on effects
Assessing the impact of a policy on New Zealanders’ lives, you normally look at all the impacts of the policy, not just one. For example, if we manage heat in the economy through retirement savings rates instead of lending rates, we take away the major force driving the New Zealand dollar upwards (see above). That means our exports are more competitive, which means more foreign exchange earnings, a better balance of payments, and more jobs for New Zealanders. Oddly none of those obvious impacts appear in Joyce’s critique. Which is entirely disingenuous.
None of Joyce’s protests change the Labour’s fundamental point: If the economy is overheating, would you rather cool it down by giving your retirement account some money, or giving an Australian bank the money instead? If you would rather give the banks the money, National’s plan is for you. If you would rather give your retirement account the money, choice Labour’s plan.
This idea is entirely sensible, which is why it is getting praise from all over the spectrum, including even Don Brash!
Steven Joyce is treating the media and the public like fools. He thinks we will see “6:1” and run like terrified peasants. We aren’t that dumb.
