NOW I BEGIN TO UNDERSTAND why David Cunliffe was able to keep on smiling through all the bad news. What he knew, and we didn’t, was that David Parker had come up with a weapon to win the September war.
Labour’s “upgrade” of New Zealand monetary policy represents the single most important – and original – contribution to social democratic economics in more than 40 years. Parker has provided the crucial mechanism which unlocks and enables all the other policy mechanisms Labour has announced.
The party has been promising to rebalance the New Zealand economy to the point where the exchange rate falls and the manufacturing export sector resumes the vital capital investment needed to generate the high-skill, high-wage jobs that Labour is counting on to boost living standards maintain a steady rate of economic growth. The problem was that, until the release of Parker’s new monetary policy, it was by no means clear how this could be done.
With the Reserve Bank ratcheting up the Official Cash Rate (OCR) every six weeks for the foreseeable future, the NZ Dollar was bound to remain seriously overvalued. Capital investment in manufacturing continues to be high-risk, and jobs are not being created in anything like the numbers required. Barring the addition of some major new economic lever, it was difficult to see how simply swapping National for Labour in September could alter these circumstances in any meaningful way.
Well, that’s exactly what Parker did. On 29 April Labour’s finance spokesperson announced the creation of a major new economic lever – the Variable Savings Rate (VSR). In Parker’s own words:
“We propose an important new tool – varying the employee contribution rate for work based savings. TheVariable Savings Rate mechanism – or VSR – would allow the raising or lowering of savings rates, rather than interest rates, to reduce or boost local consumption.”
Reducing and boosting local consumption are, of course, the core objectives of Keynesian economics. With a small miracle, Parker has figured out a way to smuggle these imperatives into that most monetarist of statutes – the Reserve Bank Act.
The key purpose of the Reserve Bank Act was to take from the hands of politicians all responsibility for determining the pace of economic activity. By requiring the Reserve Bank Governor to focus on the rate of inflation, to the exclusion of all other economic variables, the Act made any extended period of growth – especially in wages – impossible.
As soon as there is an upsurge in job growth and wages begin to rise the Reserve Bank, in its legally mandated quest for “price stability”, raises the Official Cash Rate (OCR). This, in turn, raises the price of borrowing (i.e. we all pay more for our mortgage, credit cards, hire purchase agreements and car loans). Growth is slowed, unemployment rises, real wages fall and … all is well.
Except that all is very far from well. By raising New Zealand interest rates the Reserve Bank Governor is, in effect, hanging out a big sign saying: “Buy Your NZ Dollars Here! Excellent Return On Investment Guaranteed!” Not surprisingly the value of the NZ Dollar gets bid up to levels which sends the “return” on New Zealand’s exports into the toilet.
Not that we, the consumers, care. After all, an overvalued NZ Dollar means cheaper imports. All those flat-screen TVs and designer-label clothes. All those European cars and the petrol needed to run them. All those wonderful overseas holidays. They all cost less. For those with money it is pure bliss. For those without money the banks have credit cards.
The result? Massive debt.
It has been more than 40 years since New Zealand earned enough from its export sales to pay for the cost of its imports and the interest on its borrowings. Bluntly, we’ve been living off the national credit card ever since the first year of Norman Kirk’s government. Sure, countries have bigger credit limits than people do, but even for sovereign debtors a day comes when the bank says “No more.” If you doubt that, just ask Greece.
Classical Keynesian economists will tell you that in times of recession the most important thing a government can do is SPEND. And, in times of rapid economic growth, those same economists will tell governments to SAVE. There are two ways a government can save. The first is to cut back on the jobs and services it provides for its people. The second is to withdraw money from circulation by raising taxes on income and consumption.
Economically-speaking, it’s a pretty simple prescription. Politically-speaking, however, it’s an extremely difficult sell – especially in a democracy. Everybody loves a government that spends, but hardly anybody loves a government that cuts jobs and services and/or raises taxes.
Actually, not quite everybody likes a government that spends. Spendthrift governments tend to put too much money into circulation and that, in turn, leads to inflation. It’s really good news if you’ve just raised a huge mortgage to buy a house or set up a business because, essentially, you’re able to pay off your loan with dollars that are worth less than they were when you borrowed them. But if you make your money out of money (like a bank, or a widow living off an annuity) inflation is a killer. When you inherited your late husband’s $100,000 of savings it was enough to buy a decent house. Factor in ten years of high inflation and it’s barely enough to buy a decent car.
That’s why we have a Reserve Bank Act. It put an end to spendthrift governments by making inflation Public Enemy No. 1 and by taking the responsibility for beating it out of politicians’ hands. Wonderful for banks and widows, not so hot for first home buyers and small business people.
And it is here (at last!) that we come back to the talented Mr Parker. By making Kiwisaver compulsory he will ensure that just about everybody will become a work-based saver. This, in turn, will allow the Reserve Bank Governor a choice of instruments when it comes to taking the heat (i.e. inflation) out of the economy. No longer will he or she be restricted to the blunt instrument of raising interest rates (with all its malign effects on the exchange rate and our export industries). If Labour is elected in September, the Governor will be able to seek from the Government an increase in the sum workers must transfer to their Kiwisaver accounts.
Rather than have their money siphoned out of the New Zealand economy by the big Aussie banks, New Zealanders will see their money shifted into savings – where it will be waiting for them when they turn 65.
Yes, it’s Keynesianism, Jim, but not as we know it. The VSR is not a tax, but it has the same effect as a tax. It is also not an initiative that can be taken by the Minister of Finance – but only by the Reserve Bank Governor. In other words the whole process retains its spurious claim to being “apolitical”.
The neoliberals have been hoisted by their own petard. Keynesian aims are achieved by monetarist means.
Let’s hear it for the talented Mr Parker!