Nothing to learn from Old Europe

OPENING SALVO 

Labour, the Greens and their cheerleaders are delirious about work by staffers at the International Monetary Fund.

Rethinking Macroeconomic Policy was written in 2010 by French and Italian nationals Olivier Blanchard, Giovanni De’Ariccia and Paolo Mauro. Professor Blanchard has followed it up with Monetary Policy in the Wake of the Crisis.

The work is being cited by Labour’s David Parker and the Green’s Russel Norman as justifying all sorts of nonsense, including Dr Norman’s loony idea of printing money despite the official cash rate being above zero.

Left-wing cheerleaders Selwyn Pallett, John Walley and Rod Oram have picked up the theme at events like the EPMU’s “crisis” summit.

Profound changes, we’re told, are needed to New Zealand’s monetary and wider economic policy. Funnily enough, their proposals would transfer wealth to Mr Pallett and Mr Walley from savers, consumers, taxpayers and the EPMU’s lower-paid workers.

Orthodox economics
Truth be told, the IMF work is more orthodox and nuanced than these politicians and vested interests would have us believe.

Professor Blanchard and his colleagues make clear that “achieving low inflation through central bank independence has been a historic accomplishment”, that “the baby should not be thrown out with the bathwater”, that “the ultimate targets remain output and inflation stability”, and that “the general policy framework should remain the same”.

The ideas they do raise for change have almost no application to New Zealand.

The focus of their work is what countries can learn from the global financial crisis to avoid, or shield them from, another one.

While it suits the left to argue otherwise, in truth New Zealand has been relatively unscathed by the crisis – especially when compared to the touchy-feely social-democrat states of Old Europe usually held up by the left as models for us to follow.

Despite everything, New Zealand and Australia have continued to grow since the US banking collapse and the eurozone debt crisis. The exception was our 2008 recession, which started before the global troubles began.

Even in these difficult international times, unemployment in New Zealand remains under 7%. Youth unemployment is 16.4%.

In contrast, in left-wing Europe with its rigid labour markets, unemployment is above 10% and youth unemployment more than 20%, with a quarter of young people unemployed in social-democratic paradises like Sweden.

The data (see table) also does not suggest any ability to buy lower unemployment with higher inflation. The opposite appears to be true.

The idea New Zealand would want to take lessons on economic policy from Old Europe, or on banking regulation from the US, is absurd.

Keating and Cullen
The reason New Zealand is in better shape that most of the rest of the world was summarised this week by former Labour Party president Mike Williams: Paul Keating properly regulated the Australian banks and Michael Cullen achieved zero net public debt.

If he included the transparency demanded by David Caygill’s Reserve Bank Act and Ruth Richardson’s Fiscal Responsibility Act, Mr Williams’ summary would be broadly correct.

These are, in fact, among the major messages for New Zealand that can be taken from Professor Blanchard’s work.

Proper banking regulation and transparency is a major theme. He also likes monetary policy being transparently laid out, as ours is in the Policy Targets Agreement (PTA) rather than, say, central banks saying they are concerned with inflation but in fact intervening in currency markets.

In terms of actual policy, he says inflation targeting should continue but that unnecessary instability in exchange rates should be avoided, just as section 4b of the New Zealand PTA requires and our Reserve Bank sought to do and transparently disclosed in 2007-08.

Tight fiscal policy
On the role of government, Professor Blanchard argues for much tighter fiscal policy in good times, saying that when economic growth returns, as it has in New Zealand, countries must reduce their debt-to-GDP ratios rather than increase spending or cut tax.

The left has been strangely silent about that.

He also thinks legislators should consider giving central banks additional monetary tools, a debate which is not new. Even Don Brash has floated ideas such as the Reserve Bank being able to impose a mortgage rate levy, or vary GST or petrol taxes at the margins.

Professor Blanchard is particularly keen to debate how monetary and regulatory policy could be better combined. In leading that debate, he acknowledges the risk that too many tools and too many interventions could be distortionary and harmful. 

He worries that, if central banks started being in charge of too many instruments, they would then be responsible for picking favourites among different sectors of the economy (say, Mr Pallett and Mr Walley over savers and consumers).

That, in turn, would raise questions of whether or not they could or should continue to be independent from politicians.

Exploring these issues, he says, will be a long and difficult process. There are all sorts of arguments one way and the other. He admits he doesn’t have the answers.

Remember that next time you hear a half-witted New Zealand politician say they can control inflation, lower the dollar, boost exports and reduce unemployment if they would just be allowed to edit the words of the Reserve Bank Act or print some cash.

ABOVE: Listen to Matthew Hooton and ex-Labour Party president Mike Williams scrap over the report on RNZ (and the MSD security breach. The toe-to-toe over the IMF report comes 21 minutes in).