The government has got it badly wrong with the new Policy Targets Agreement, its contract with the Reserve Bank about monetary policy. Perhaps inadvertently, the emphasis is now on maximising employment, not living standards. Maximising employment is not the same as minimising unemployment.
The Reserve Bank’s main role is to maintain the stability of the monetary system, essentially to ensure that there is enough money circulating (and sometimes to ensure there’s not too much money circulating) to ensure that full employment GDP (gross domestic product) can be purchased. The Reserve Bank’s role is to facilitate the circulation of money. Indeed, the cycling and recycling of money is the role of the banking system as a whole; to ensure that money in circulation grows in tandem with market output.
In the years from the mid-1970s to 2008, the world’s Reserve Banks came to see their role as essentially constraining the growth of the money supply. Since 2008 their role has been mainly to expand the amount of money in circulation. The (generally) two percent inflation target indicated to bureaucrat bankers whether the growth of circulating money should be constrained (seen as necessary if actual and/or expected inflation was above the 2% target) or should be stimulated (seen as necessary if actual and/or expected inflation was below the 2% target).
In reality, the indicator that guided monetary policy had been the ‘natural rate of unemployment’, which has consistently been regarded, in New Zealand, as between three and four percent of the workforce. For public consumption, an inflation target was always better than an unemployment target. Imagine a government supporting a Reserve Bank which was actively trying to raise the unemployment rate. (Indeed there are many people who cannot quite get their heads around the idea that central banks do – and are now mandated to – raise the inflation rate; they have been doing that since the 2008 global financial crisis. We were brought up with the idea that inflation was bad, period.)
So far so good, and the new government contract means that the Reserve Bank will in practice be doing much as it has already been doing, albeit with a change of style reflecting a new man (Adrian Orr) at the helm.
The big new problem is that, rather than seeking to maintain full employment (which is widely understood to mean three to four percent unemployment), the government wants the Reserve Bank to support “maximum sustainable employment”. This is not at all the same thing as maintaining full employment, by any definition of ‘full employment’. Rather the new language of ‘maximum employment’, if taken literally, indicates a supercharged growth agenda. Does “sustainable” mean a willingness to sustain three percent unemployed? Or is it meant to relate to a sustainable natural environment? It’s probably little more than a buzz‑word to placate the Green Party.
The working age population is conventionally divided into three groups: the employed, the unemployed, and the non-workforce. The new language of ’employment maximisation’ says it is bad to be either unemployed or in the non‑workforce. The language of ‘full employment’ says it is good to be either employed or in the non‑workforce. The status of the non-workforce has been further undermined through the use of the phrase ‘maximum employment’ in high-level contractual language.
Until today, the accepted economic mantra is that we work to live. The new mantra is that we live to work. Under the new refrain, paid toil (ie labour) is good, productivity dividends that increase our free time are bad.
In the developed world, from 1840 to 1970, we understood improved living standards primarily as achieving reductions in necessary work; as creating leisure. Samuel Parnell, in Wellington in 1840, persuaded citizens that at least 8 hours of each day should be devoted to activities other than labouring and sleeping. That enlightened view – equating rising living standards with increased leisure and the capacity to enjoy it – changed from the late 1970s with the advent of neoliberalism. While the cultural transition from ‘work to live’ to ‘live to work’ took place in New Zealand in the 1980s and 1990s, it was actually advanced by Roger Douglas in the early 1970s with a superannuation scheme that elevated work – and the rewards from work – way above all other contributions to our social, whanau and individual wellbeing. Indeed, today’s mental health crisis springs from the mix of constantly cajoling people to labour, while making it in practice extraordinarily difficult for our most vulnerable to meet that expectation. Further, many who do meet that expectation – people toil for a living – are not exempted from poverty.
The Reserve Bank’s contract with the government could target ‘full employment’ in the context of a society where rising productivity would be steadily reducing (not raising) the number of hours in our lifetimes that we commit to performing and preparing for paid work. In 1972 – when equal pay was introduced – 40 hours of labour in a week, plus universal social benefits, could support a whanau of five people. A labour maximisation policy cannot, by definition, achieve anything like that.