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Economy : How can we convince voters Labour’s economic policy will work? Labour Leadership Q&A #9

Posted by on September 12th, 2013

14 Questions for 2014

Virtual Hustings Meeting – Question 9

Economy : How will you convince voters Labour’s economic policy will work?

Question : How can we get the voting public to believe that the present economic thinking has failed? And that Labour’s ideas will work for them?

Submitted by : Angie Croft, Christchurch


Explanatory Note: From September 10th to 14th 2013 as part of the official selection process for a new leader the New Zealand Labour Party is holding a “Virtual Hustings Meeting” hosted by Red Alert and organised by Scoop Amplifier. Over 7 days questions were solicited from eligible voters in the election. The questions and answers are now being posted as a set of 14 posts at the Red Alert Labour Party Blog. This started Tuesday 10th September, and continues till Friday 13th September. At Red Alert all-comers are welcome to discuss the answers in the comment section of the blog. The candidates are expected to participate in these discussions at times over the five days till Saturday 14th September.



Answer from Grant Robertson

We have to relate our economic vision to the reality of everyday lives.

This means an economy where people come before money. Where the centerpiece is full employment- decent jobs paying decent wages.

We need to talk about Labour using the power of government to help create a productive economy, not one like National’s that is based on speculation and selling off assets.

To create this economy we cannot tinker at the edges. We have to leave behind the neo liberal agenda and create a Labour way. This means changing the settings of monetary policy, giving Kiwi firms a fair go at government contracts, lifting wages, reducing power prices, building affordable homes and investing in industry and regional development.

The message from Labour must be, the economy will work for all New Zealanders not just John Key’s mates.


Answer from David Cunliffe

We need to be clear that the Global Financial Crisis (GFC) blew the lid off the myth that trickle-down economics will create a fairer, more prosperous New Zealand.

Free markets left to their own devices are ultimately destructive of human well-being. Unregulated markets tend towards monopolies and often concentrate vast wealth in the hands of a few. Neither outcome is sustainable or morally right.

When National says they are going to cut people’s legs off, Kiwis don’t want to hear that Labour will too, just nearer the ankles and with more anaesthetic. The post-GFC modern social democratic alternative must include:

• using the power of the state to intervene when markets fail;

• guaranteeing fair workplaces and decent wages through employment laws, including industry standard agreements;

• lifting the minimum wage to $15 and rolling out a living wage as fast as can be afforded;

• building new partnerships between communities, regions, industries and an empowering and investing State; and

• revised marco-economic settings that do not solely focus on inflation but include growth, employment, and our external balance.

New Zealand desperately needs change.

The next Labour Government mustn’t be more of the same.

I am offering Labour a bold economic agenda and leadership with the vision and economic credibility to see it through.


Answer from Shane Jones

Our ideas are exciting. We will use both the market and the State.

I am convinced that our tax system can be refined to incentivise and expedite fresh investment.

Industry will be actively supported, regional development will be promoted and in special cases underwritten.

Our mix of economic stewardship and equity is desperately needed throughout NZ.

I have the experience and the communication skills to sell this narrative.


Dear Sir Peter and Fran

Posted by on February 26th, 2013

“Thank you for your email of 4 October 2010 raising issues of actors work permits and possible amendments to the Commerce Act 1986 and the Employment Relations Act 2000 (ERA).

Having considered the possibility of amendments to the ERA or Commerce Act carefully, our view, following extensive consultation with the Crown Law Office, is that, for the reasons set out below, it would not be appropriate to recommend such amendments.

“…….In our view, the relevant legislative provisions provide sufficient clarity such that no legislative amendments are required.”

Hon Gerry Brownlee

Hon Christopher Finlayson

This was the government’s position in mid-October 2010.  But by the end of the month, they had caved into demands to change our employment legislation to exclude film and video workers from their right to challenge the status of their employment.

The government released more information on this sorry saga today after being told they had to by the Ombudsman. It makes for fascinating reading.  Put to one side the florid and over the top language about the union and the MEAA union leader, Simon Whipp that has attracted some media comment.

Read the documents and see for yourself the hand New Zealanders were dealt by a weak government, not prepared to stand up for all of us.

The right-wing track

Posted by on November 13th, 2012

History suggests the “right track” in politics often leads to inequality and bad outcomes for ordinary people.

Back when today’s university students were still in kindergarten Bill English was New Zealand’s Finance Minister. English’s first half-life at Treasury is mainly remembered for setting a new record in unemployment.

Decades later, zombie-like, Bill English is back with responsibility for our economy. And last week history repeated when the National Government set a new record for unemployment in our country: 7.3% and trending upwards.

A reasonable person might expect the minister to reconsider his policies now he’s won a double-crown for atrocious economic management. After all English was a dry neoliberal obsessed with his ideologies and prejudices and wholly unmoved by evidence last time around. Now in John Key’s government he’s exactly the same and it’s delivered exactly the same awful result.

But no, there is no reflection. Today Bill English was asked in Parliament “What results has he seen of progress in the Government’s programme to build a more competitive economy?”

He replied “We have seen good, steady results.”

If record and growing unemployment is a good result for Bill English then what on earth would a bad result be? Probably it’s an economy where his mates have to pay their fair share of taxes like the rest of us.

But the Finance Minister’s boss sets the tone. And John Key has Steven Joyce as his as Economic Development Minister alongside Bill English so that says it all really.

Almost as soon as the Finance Minister had resumed his seat the Prime Minister jumped up to proclaim “I definitely think we are on the right track”.

The “right track”? Seriously?

Every fair-minded Kiwi can see that 7.3% unemployment is unacceptable. People know that declines in job ads, and over-speculated currencies, and unaffordable housing, and manufacturers in crisis, and the exodus of young people to Australia might be the result of right-wing policies. But the policies are not right.

Under National, the only track New Zealand is on is the right-wing track to ruin.

Minister for Abuse needs to read David Shearer’s speech

Posted by on October 18th, 2012

It was great to be with finance spokesperson David Parker and local Wigram MP Megan Woods in Christchurch today to see our leader David Shearer deliver his Jobs that work for you speech.

New Zealand has suffered through four years of economic vandalism under the National government. Manufacturing and exporting is in crisis, thousands and thousands and thousands have been chucked on the unemployment scrapheap, and new records have been set almost every month for the numbers of disappointed New Zealanders moving to Australia.

Through it all National ministers have alternated between denying the facts and pretending there’s nothing that can be done.

Well David Shearer knows what New Zealanders know – the government has a responsibility to turn the country’s decline around, and David and Labour are intent on doing it.

Some of David’s bold and responsible proposals include:

  1. Expanding the scope of the Reserve Bank so the Governor can look at important economic wellness measures other than inflation,
  2. Expanding KiwiSaver to build the pot of capital for businesses to access to grow,
  3. Getting Government agencies to focus on purchasing from New Zealand suppliers,
  4. Launching a ‘one in a million’ target for significant government contracts. This would mean companies who win big contracts would be required to take on one apprentice or one trainee for every $1 million contract received.
  5. Pro-growth tax reform, including a capital gains tax to get investment flowing to real jobs and exports (not property speculators).
  6. Putting more checks and balances in place for employers who’d hire workers from overseas instead of job-seeking Kiwis.

No sooner had David finished speaking then guess who launches a petty and spiteful attack – Minister for abusing all and sundry and Finland, Gerry Brownlee.

Brownlee might have helped himself if he’d bothered to read David’s speech. He might have gotten some of his facts straight but, more importantly, it might have made him pay attention to the jobs crisis. Brownlee should read the speech because it’s full of ideas and his National government have none.

The minister seems to believe David was laying out a peculiarly Christchurch policy. Christchurch’s recovery is crucial – that’s why the entire Labour Caucus visited there this month, and it’s where we heard more about how major employers are shutting up shop and trainee teachers have no jobs to go to next year.

But if Brownlee had read David’s speech he’d know it’s a strategy for all New Zealanders and all of New Zealand. If ever evidence was needed of the myopic and selfish thinking in the National Party, it’s found in Mr Brownlee’s seeming inability to care about anyone past the end of his own gate.

Brownlee went on to paint a picture of growth in jobs which is completely at odds with reality. He misled his readers by quoting from an old job ads report while deliberately ignoring the current figures published by MoBIE – a government department which he has some ministerial responsibility for!

For Gerry Brownlee’s education, the official government figures show there was a 5.4% drop in online skilled job ads in September – including a 1.4% decline in skilled job ads in Canterbury. Brownlee cited positive job ads figures for Taranaki and the Bay of Plenty, but the official figures say skilled job ads in those regions crashed a horrific 9.9% last month.

Having already humiliated New Zealand in front of the world with his abuse of Finnish people this year, Brownlee should have learned to do his homework before attacking people. He should have focussed on the things that matter to ordinary New Zealanders, like whether they’ll have a job next week.

Now his abuse is exposed for the world to see all over again.

Gerry Brownlee should apologise to David Shearer, and he should read David’s speech because it’s full of excellent ideas and the National government has failed.

Ostrich economics

Posted by on October 18th, 2012

There’s a crisis in manufacturing and the National government seems not to have noticed. But doing an “ostrich” doesn’t alter what’s happening in the real world.

This year Labour’s economic team have met with exporters and manufacturers all around the country. We’ve heard over and over again how those sectors are in crisis because of the National government’s hands-off-and-hope policies.

Even if you’re not in exporting or manufacturing yourself, while you live in New Zealand you’re affected by those sectors’ decline. 40,000 manufacturing jobs have been lost since 2008, and because unemployed people have nothing to spend they’re not reinvesting in their local communities. The facts are that there was a 14% decline in simply transformed manufactured exports and a 10% decline in elaborately transformed manufactured exports from the 2008 to the 2012 financial years.

Things are getting worse too. Just yesterday we found out job ads fell 4.5% in September (with a 5.4% decline in skilled job ads), so yet another record might be set for Kiwis giving up and moving to Australia.

Exporters and manufacturers aren’t just talking to us about their problems – they’re pleading to anybody who will listen. Unfortunately the National government are so arrogant they won’t give fair hearing to people who don’t subscribe to their dated ideologies.

In the face of government inaction Labour, the Greens and New Zealand First have come together to hold a parliamentary inquiry into the manufacturing crisis. We’ll keep you updated via Red Alert as that progresses.

Exporters and manufacturers have repeatedly told us their #1 problem is the unsustainably high and over-speculated Kiwi dollar. New Zealand contributes about 0.23% to world GDP, but our dollar is among the most traded globally. It seems that New Zealand’s money has become a plaything for John Key’s New York currency trader mates.

The government’s monetary policies have a huge impact on the dollar. Labour supports an independent Reserve Bank Governor, but we completely reject National’s apparent dogma that an independent Governor means the government has no responsibility for the economy.

The government are responsible for the wording of the Reserve Bank Act, not the bank’s Governor. The current Act makes controlling inflation the primary responsibility of the Governor – to the deliberate exclusion of consideration of other important measures of economic wellbeing, such as the current account and value of the dollar. Exporters tell us that’s madness and we agree (and so do the Greens and New Zealand First).

The National government are responsible for agreeing the inflation policy target range. In recent years that policy agreement has targeted 1% to 3% inflation in any one year. That’s the agreement that finance minister Bill English has signed.

But now the IMF is forecasting for New Zealand’s current account deficit to be the worst in the developed world next year  – and with inflation at 0.8% for the year below the target range. So the bank isn’t delivering the single target that the National government has given to it. And all the while New Zealand’s economy is collapsing around us and ordinary Kiwis are losing their livelihoods and leaving the country.

A thinking and responsible government would take from this that something must change.

But yesterday when David Parker and I questioned Bill English in Parliament, the minister barely even addressed how inflation is forecast to drop below his target range – let alone concede there is a problem (or announce any rethink of his obviously failed policies).

How much economic misery does New Zealand have to endure? Will there be any jobs left by the time Labour is elected at the next election? Will there be any young people left on this side of the ditch to fill them?

Exodus honesty

Posted by on September 21st, 2012

166,000 loved ones gone to Australia since Key became PM – and counting…

Yet another all-time record has been set for the number of Kiwis leaving for Australia. The National Government just cannot continue with this dishonest head-in-the-sand approach to what can only be described as an exodus.

The latest figures show a net loss of 39,956 people to Australia in the year to August 2012 – the biggest loss ever.

More than 166,000 Kiwis have given up on a future in this country and moved to Australia since John Key became the Prime Minister. That’s the equivalent of three Invercargills and then some!

In 2008 National candidates promised over and over again to reverse the brain drain. But since they’ve gotten into Government they’ve: cut wages, cut access to education, cut services, increased GST on the poorest so they could pay for tax breaks for their mates, and thrown thousands and thousands and thousands of New Zealanders on the unemployment scrapheap.

It just seems National is unwilling to take the steps that New Zealanders know are needed to get out economy moving again. Things like:

  1.  Rebuilding our export and manufacturing heart through monetary reforms that will drive a more stable and realistic exchange rate, instead of heading for dollar parity with the US dollar,
  2. Creating more local savings available for positive local businesses to grow and employ Kiwis who might otherwise jump the ditch, through measures like universal KiwiSaver and pro-growth tax reform,
  3. Revving up our innovation engine through R&D tax credits, increased direct investment, and better linking out research institutes, universities and businesses together,
  4. Building high performance work places that enhance productivity and pay good wages with decent conditions. Finance Minister Bill English actually seems to love the idea of a “low cost” and low waged economy. Everyone else wants New Zealand to be a high value economy,
  5. Actively partnering with regions and industry sectors to create sustainable growth and strong communities all around New Zealand.

Unless we do these things, unless we have the courage to make changes, then the terrible slide currently underway will continue and the numbers of skilled young Kiwis giving up on a future here will continue to grow. These are not just words. We are talking about real humans struggling through an economic crisis, and unless New Zealand has a government that is prepared to act strongly and decisively to deal with it then we are on a road to ruin.

Ultimately this emigration crisis cannot be sustained, either by New Zealand or by Australia.

There is a terrible hollowing out of young people who want to make a contribution, and this will jeopardise Kiwi healthcare and superannuation in the decades to come.

Even the Australians are fed up. Across the ditch Government MP Kelvin Thompson is working to stop the free movement of people between our countries. If he is successful, without any jobs or hope at home, then the result could potentially be serious unrest in New Zealand.

John Key has had four years and the evidence is clear. National’s dishonest promises are not matched by workable policies. That party need to pull their heads out of the sand and look at how out of whack they’ve gotten New Zealand with the OECD orthodoxy.

How many Kiwis need to head for the departure lounges before this Government wakes up? How much damage has to be done to New Zealand and our shared future before they take off the ideological blinkers?

How much hope needs to be destroyed before National takes the responsibility they promised to take when they were trying to win the election?

They don’t care about your job

Posted by on September 13th, 2012

Sometimes the National Party’s arrogance and contempt for ordinary people just blows me away.

This week the news coming into Parliament has been horrible and unrelenting. We have received report after report after report of lost jobs and lost hope.

The thousands of layoffs haven’t happened because Kiwis workers haven’t been putting in their fair share of work. Normal wage earners are working longer hours than they were a few years ago – they’re just getting less back for it.

What’s actually happening is working New Zealand families are being victimised by ideological National Government policies which force contraction and ever-more job losses.

Steven Joyce is the economic development and employment minister. It’s his job to grow the economy and grow jobs. But he doesn’t seem to care enough to even get the basics right.

There are several recognised measures of unemployment in New Zealand, including the Household Labour Force Survey (HLFS) and the Linked Employer Employee Data (LEED).

Statistics New Zealand says LEED is the best measure of what’s really happening in the jobs economy. But today Steven Joyce decided the HLFS is the best measure – if only because he thought a focus on the HLFS would make the dire unemployment situation look slightly better. It doesn’t.

If Joyce consistently quoted from the HLFS that would be one thing, but he never seems to. Just this past Tuesday the minister told Parliament that quarter of a million jobs are being created every year under National. It’s complete rubbish, and today I called him on it, but Steven Joyce is not the kind to be accountable and answer questions.

Next we discovered Joyce is not only unsure what the LEED is called but, much worse, he doesn’t even know that certain self-employed people are covered in the data set! This is absolutely basic stuff for an economic development and employment minister, and when someone in his position gets it so wrong the outcome is ordinary Kiwis lose their jobs.

Evidently Steven Joyce just doesn’t care. Finance Minister Bill English doesn’t care either because he does the same thing with jobs data. John Key certainly doesn’t care because he’s on record for criticising the HLFS as “notoriously volatile”, so he sets the tone which allows these ministers to get away with it.

However, as Radio New Zealand covered today, Statistics New Zealand was very clear. From 2008 to 2011, 452,000 jobs were created but 465,000 jobs were lost. The result was a net loss of 13,000 jobs. It’s ordinary working families who are paying the price.

A change in New Zealand’s government cannot come soon enough.

The cult of National Party economics

Posted by on September 12th, 2012

“Economics” is a term which is often misused, most particularly by those on the right-wing of politics.

“Economics” is not a religion. “Economics” does not sit on a throne and dictate how humans must arrange their lives. Economics is only lots of models and measures which different people in different contexts have applied to things they were studying.

A good/useful economist behaves like a scientist. They adapt their models and add new measures and methods in a never-ending drive to improve their understanding. The good economist recognises there is no final truth in economics.

Bad/useless economists behave differently. They use meaningless phrases like “economics says”.  They nod at each other and quote Margaret Thatcher: “There is no other way”. They prioritise the imperfect economic tools over the perfectly-human people who use tools.

In the 1970s a group of economists at the University of Chicago reworked a few of the classical economic models – and ignored the rest – and decided they had hit on a new truth about the role of government in the economy (or, more accurately, a belief that government has no role in the economy). Effectively the “Chicago School” economists founded a religion.

This might have been just academic if it weren’t for the likes of Thatcher in the UK, Ronald Reagan in the USA – and Roger Douglas and Ruth Richardson and certain Treasury officials right here in New Zealand in the 1980s and 1990s.

Those politicians became true disciples. But, just like the Chicago School, they only picked and chose those small bits from the economics field which matched their existing prejudices. To use an economics analogy they loved Adam Smith’s The Wealth of Nations but never made the time to read The Theory of Moral Sentiments – let alone Keynes’ General Theory or John Rawls’ A Theory of Justice.

Today The Herald carried an excellent piece from Peter Lyons. Peter teaches economics and he’s been following the often dramatic changes in New Zealand’s economy for more than 30 years. He clearly understands the Chicago religion, but he’s weighed up the evidence and – quite properly my opinion – he doesn’t buy into it.

Unfortunately for ordinary New Zealand families the ministers who are driving economic and finance policies in the National Government do.

In the dogmatic world of John Key, Bill English and Steven Joyce there are no lessons to be learned from the Global Financial Crisis. They appear not to care that their obviously failed policies have seen thousands upon thousands of New Zealanders lose their jobs, their livelihoods and their hope of making a future in New Zealand. They maintain their ‘not my responsibility’ passive government approach when the soaring and over-speculated dollar is killing manufacturing, killing exports, killing the regions and killing hope. It seems it doesn’t even matter to them that Kiwi children are going to school without food because their parents can’t afford to provide it.

While the USA, the UK and the New Zealand people have moved on, all the National Government does is preach failed ideologies.

Read Peter Lyons’ story. Then join the Labour Party. Get involved and help us with our clean, green, clever and evidence-based economic plan, please.

Because, for New Zealand’s sake, we must get rid of this ideological and destructive National government as soon as we can.

Meeting with Joseph Stiglitz

Posted by on September 12th, 2012

I have just returned from a trip to the US and UK to discuss my ideas on monetary policy with some of the best economic minds in the world, including former World Bank chief economist Joseph Stiglitz, Harvard academic Jeffrey Frankel and IMF chief economist Olivier Blanchard.

I believe Stiglitz is one of the great living thinkers in the world and so I was looking forward to seeing him again. It’s not often you get the opportunity to canvas views with a Noble Prize recipient.

Stiglitz’s views on life and economics really are holistic. While we started on monetary policy, we soon moved on to inequality and more general economic issues that concern him.

I was not surprised he thought inflation targeting and central bank practices have been deeply flawed, as he has published his views previously.

The following excerpts from his chapter of In the Wake of the Crisis (2012), IMF book which I referred to yesterday:

 “The crisis has brought home something that should have been recognised even before the crisis: managing inflation is not an end in itself but a means to an end. The end is a more stable economy – not just price stability but real stability – and an economy that is growing faster in a sustainable way. We ought to be concerned about how the economy affects ordinary individuals. And here, employment and wages are critical.

The perspective that low and stable inflation leads to a stable real economy and fast economic growth was never supported by economic theory or evidence yet it became the main tenet of central bank doctrine. This idea has been destroyed by the crisis – and it ought to have been…….Focusing on inflation has diverted attention away from something that was far more important, the far larger, first-order consequences of financial instability. Indeed the price misalignments (from inflation) were not even of second-order importance. They were more like a tenth order of significance relative to the losses resulting from the (GFC)…. . The crisis has shown that financial stability is far more important than price stability.

The idea that inflation targeting will lead to financial stability or that focusing only on price and financial stability is sufficient for maintaining a low output gap and stable and robust growth is fundamentally flawed. (In extreme cases, where the issue is not 3, 4 or 5 per cent inflation but more like 10 per cent inflation, central banks must focus on inflation as well…) 

He emphasised something I read in his latest book The Price of Inequality (2012). He said those who pushed inflation targeting tended to have an ideological commitment to limited government.  They wrongly believe this always leads to economic efficiency and optimal growth.  They are just about blind to the morality of inequality.  Stiglitz thinks inflation targeting was born as much of political philosophy as economics. Milton Friedman is the example he used. I mentioned the Frederick Hayek school of thought, which is similar.

For those who think monetary policy has not had other associated political objectives in New Zealand, remember that Dr Don Brash is a Hayek disciple. I am wary of ideologues. Dr Brash’s fervour and personal belief in the righteousness of his own views was so strong that he politicised the ostensibly non-political role of the Reserve Bank including by negotiating a safe place in parliament via the National Party list while he was still governor.

It is not hard to see who the winners have been in New Zealand through our focus on inflation targeting, with some asset classes profiting from the capital flows which have contributed to house and farm price inflation to the detriment of many of our exports. How have we allowed ourselves to persist so long with a singular focus on the consumer price index while ignoring effects on a cost centre which is such a big part in most people’s budgets – the cost of housing. To allow housing costs to run away while we focus on the price of bread and clothes has never made sense to me. Neither has it made sense to allow the Reserve Bank to have no responsibility for effects on our exchange rate, current account deficit and rising net international liabilities.

The primacy of inflation targeting which New Zealand has required the Reserve Bank to pursue has, in my view, contributed to our protracted current account deficit, asset bubbles, low growth, rising private indebtedness and low productivity growth.  Stiglitz has no doubt inflation targeting has failed to achieve economic stability, or maximise sustainable growth, and has contributed to inequality.

As attractive as the simplicity of inflation targeting may have been, it hasn’t worked to put New Zealand, the USA, or the UK, or most European economies in a strong place.

Stiglitz said Friedman and others of similar political ideology, had previously favoured the gold standard, and when that did not hold up, sought refuge in monetarist control of the money supply. When that narrow tool also failed, they moved to something a little more complicated – but still narrow – inflation targeting.

He said inflation targeting always suffered from fundamental limitations, including the fact that it reacted to some supply shocks in a pro-cyclical manner, was blind to asset price bubbles and credit growth, and that the Treasury Bill Rate and the lending rate where only loosely coupled. He said these limitations were and are fundamental, and “still have not been unambiguously owned up to”.

He wanted to move on to inequality, and we did.

His doctoral thesis at MIT was on inequality, its evolution over time, and its consequences for macroeconomic behaviour and especially growth.

Stiglitz got his Nobel Prize in Economics for his work showing that inefficient economic outcomes are not limited to what were previously thought to be rare instances of market failures, and are much more widespread. Markets are not always efficient, for lots of reasons. He proved that government interventions, including taxes, can and should be used to improve the economy.

He finds it ironic that the very time he was proving the economic case for government interventions, the political mood was for smaller government, based in part on the mistaken believe that markets would work better only if the government withdrew.

History of the two decades, when this ideology had ascendency, shows it did not work as well as what went before.

The message in his latest book is that the economy needs to work for ordinary people. He laments the disproportionate control achieved politically, and the economic rents extracted, by the most wealthy vested interests.

His book on inequality explains why “our economic system is failing for most Americans, why inequality is growing to the extent it is, and what the consequences are. The underlying thesis is that we are paying a high price for our inequality – an economic system that is less stable and less efficient, with less growth”. He says economic rents extracted by the top 1% are eroding the living standards of the majority, that values in society are being seriously eroded and that the control of political and economic institutions by a small minority imperils democracy.

He sees similarities between the fall of unfair regimes in North Africa and Arab states with the complaints of the 99% or the occupy movements that took the streets in developed countries 2011.

The message from Stiglitz is similar to Paul Krugman’s; to that of Pickett and Wilkinson in The Spirit Level; and to Tony Judt’s in “Ill fares the land (to hastening ills a prey, where wealth accumulates and men decay)”. Similar to the analysis in Hacker and Pierson’s Winner-Take-All-Politics: How Washington Made the Rich Richer – And Turned Its Back on the Middle Class. All books he quotes, which I am pleased to have read too.

His main concern now is inequality. He shows how this is both unfair, worsening and causes all but the very wealthy to be worse off (and threatens the stability of their long term interests too).

On New Zealand’s circumstance, over the last three decades the increase in the Gini co-efficient (which measures high incomes as a factor of low incomes) has risen at a higher rate than in most other countries. Had we started out as unequal as the USA, we would be worse than them by now.

We talked about the need to tax all forms of economic income fairly. He is attracted to the Gareth Morgan idea of a capital tax at say 2%, as being fairer and more economically efficient than a realisation based capital gains tax. He dislikes the many tax exemptions that persist in the USA for those already wealthy.

The need for an economy that provides jobs and incomes leads back to the work of Swedish economist Goran Roos, which I spoke about before I left. Macroeconomic settings are fundamentally important, but microeconomic levers must be considered as well.  Roos is coming to the Labour Party conference in November, which will add another dimension to Labour’s consideration of where we want to lead New Zealand.

Joseph Stiglitz has an interest in New Zealand. He respects our public investments in our health and education systems, our freedom from corruption, and of course our principled stance in refusing to participate in the war in Iraq.

Let’s hope we can get him back down to New Zealand again in the future to help us steer our way back to the prosperous economy and fairer society we once enjoyed.

It is time for me to get back to New Zealand and to advocate for the changes I know we need for that future.

It has been gratifying to meet with leading thinkers in economics and find their thinking in so many ways aligns with current Labour economic policies. We are interconnected globally, and what we do in New Zealand is of interest to others.

I have been inspired by the meetings on this trip, and am grateful for the open and helpful way in which those we have met have given of their time and expertise.

Filed under: economy, finance

Olivier Blanchard – Putting a twist in monetary policy

Posted by on September 10th, 2012

I am travelling to the US and UK to discuss my ideas on monetary policy with some of the best economic minds in the world, including former World Bank chief economist Joseph Stiglitz, Harvard academic Jeffrey Frankel and IMF chief economist Olivier Blanchard.

Olivier Blanchard says:

  • Overvaluation of exchange rates “can be very damaging and we can need interventions to deal with such outcomes”
  • We “need a twist to monetary policy”
  • Friction in the wheels of capital flows make exchange rate interventions work better

Our third to last meeting was with Olivier Blanchard, Chief Economist at the IMF.

If any further evidence is needed of how far the world has moved on as a consequence of the limitations and side effects of inflation targeting exposed by the GFC, then writing out of the IMF since should suffice.

The most senior of economists in powerful positions write and talk in accessible language. They don’t use jargon as a barrier to discussions and are genuinely interested in our experiences, as well as interested in offering their own views.

Olivier Blanchard is one such man. He is both erudite and engaged. He was taking notes, as we were.

In advance of the meeting I had read the book “In the Wake of the Crisis – Leading Economists Reassess Economic Policy” edited by Olivier Blanchard, David Romer, Michael Spence, and Joseph Stiglitz. I recommend the book.  Those like Steven Joyce who superficially defend the status quo – and accuse me and others who have challenged it as voodoo economists – could benefit from reading it.

The preface, first chapter and concluding remarks are by Olivier. Read as a whole, there can in my view be no doubt that inflation targeting has been exposed as seriously deficient.

Page one of the preface asks: Is inflation targeting the right way to conduct policy, or should the monetary authority watch a larger set of targets?… Should there be limits on current account imbalances? …..Should countries use capital controls? ….  Should there be better mechanisms to deliver global liquidity?…

The book addresses these issues by presenting contributions from 23 leading economists, all of whom present their critiques in less than 10 pages.

A number refer to how developing countries and increasing numbers of developed countries are intervening to influence their currencies. The old view that you lose control of inflation if you address currency is debunked by a number of the contributors from both developing and developed countries. See for example the chapters by Guillermo Ortiz (Mexico) and Rakesh Mohan (Yale, and former deputy governor of the Reserve bank of India).

Mohan says sound economic management requires a combination of sound macroeconomic policies (both fiscal and monetary), plus exchange rate flexibility with some degree of management, and a relatively open capital account, but some degree of management and control is needed.  This balanced approach is referred to with approval by Olivier in his concluding chapter.

The enormous blind spot in central bank policy around the world – which largely ignored asset price bubbles – receives repeated criticism.  Some, like Stiglitz, think central banks were, and are, largely populated by, and captured by, the interests of bankers. Labour’s policy of broadening the membership of the Board of the Reserve Bank to include the interests of exporters and labour will help remedy this, as will the broadening of objectives. (Given the Stiglitz view that the consequences of monetary policy are disproportionately visited upon the vulnerable, maybe we should add representation of women, who so often bear the consequences of adversity-facing families).

Otmar Issing (Goethe University, Frankfurt) points out that it cannot be right that central banks intervene asymmetrically to deal with asset prices, ie only when they go down.

“All concepts of inflation targeting are based on inflation forecasts in which money and credit do not play an active role. They are a passive  part of the forecast but are irrelevant once it comes to monetary policy decisions. …[Central banks had the view that they] should not target asset prices, should not prick a bubble, and should follow a mop-up strategy after a bubble has burst. ….. If asset prices collapse after a bubble bursts, then the central bank come to the rescue…”

Olivier agreed the one-way interventions by central banks have distorted asset prices (which is not to say that he opposes current central bank interventions to support economies).

Stiglitz noted monetary policy has protected bond and asset values for a subset of the population, while inflation targeting has visited the costs of readjustments caused by higher interest rates in other parts of the cycle upon the unemployed, the under employed and wage workers.

The themes of credit expansion and asset bubbles was emphasised by Olivier Blanchard when we met. Reserve banks post the GFC are starting to use prudential tools not just to protect the financial sector from collapse, but also to influence economic outcomes. He thought the separation of interest rate decisions from so-called prudential measures “is arbitrary”. I agree – which is one of the reasons we in the Labour party support the decisions on both prudential rules and interest rates being integrated and being for the board, not the GBvernor.

As Issing said in his chapter, price stability and financial stability must not be seen as a trade-off. Stiglitz puts it slightly differently, he says that the huge societal consequences of financial imbalances/collapses ought never be subjugated to a narrow focus on inflation.

I would add that even short of financial instability, a setting which sees little problem in the country’s balance sheet getting worse and worse through prolonged current account deficits (funded by asset sales to foreigners and increased overseas debt) must be wrong.

At our meeting Olivier was interested in New Zealand’s experience where interest rate differentials drove liquidity into New Zealand via the banking channel, which was borrowed and consumed, and further drove up our exchange rate to the detriment of all exporters.

I have been banging on about this for many years, and think it is now abundantly clear that in New Zealand, and overseas, central banks – who had the independent power and responsibility to curb this – failed. It is time that they – and not politicians – get some stick about this. It was an abysmal failure and has left New Zealand with high debt. Yes, governments of Labour and National could have helped by introducing a CGT, but that does not absolve our Reserve Bank from responsibility.  They should have acted. They say they now can without any change in the law, so why didn’t they?

Olivier, and the commentators in the book, point out that the countries worst affected by the GFC in general had not run fiscal surpluses in the good times. Michael Cullen and Helen Clark – take a bow. Those surpluses and the strong government balance sheet which resulted have shielded New Zealand from the fate suffered by many other western countries.

On the subject of Dutch disease, we explained how the effects of a high and volatile currency are concentrated for the non-dominant export sector.  He of course understood this, but was interested in our views about how this makes it hard to broaden our export base. He was interested in Selwyn Pellet’s hydraulics analogy. The greater the dominance of an export sector, the greater the hedge received by that sector, and the more concentrated the negative effect for the non-dominant sector. A small hedge spread across a wide base translates to a much larger negative effect concentrated upon the minority.

Olivier commented that it is not the short term volatility that is the greatest problem – short term volatility can be hedged via financial instruments.

Olivier said the overvaluation of exchange rates “can be very damaging and we can need interventions to deal with such outcomes”

He agreed countries need to attend to the competitiveness of their exchange rates. He referred us to a recent IMF staff discussion paper:  “Two target, Two Instruments”, which again is worth reading.

He said the effects of a high exchange rate relative to fundamentals means that we “need a twist to monetary policy” as well. To make interventions for the benefit of exchange rates work it may be wise “to introduce friction in the wheels of capital flows, which make exchange rate interventions work better”. “Untrammelled flows of capital are bad”. Brazil, Switzerland, Turkey and Chile all provide examples of different responses (so of course does China, but in a much more controlled way).

I raised with Olivier the statements recently made by our outgoing Reserve Bank Governor that the focus on and remedies being used in the likes of Europe are distorting settings to the detriment of other countries. I said I shared that view. He noted this, and I suspect will look up Alan Bollard’s comments.

So, in terms of inflation targeting and leaving exchange rates alone, the IMF has moved on – probably more than the prevailing (not unanimous) views at the OECD.

It has become clearer and clearer to me as this trip has proceeded that the primacy of inflation targeting as we have known it really is dying and should be called dead, as Ambrose Evans Pritchard said to me in my first meeting this trip.

As was mentioned by more than one of the contributors to the IMF book, proponents of inflation targeting like Lars Svenson (the man chosen to critique and approve NZs approach some years back) seem to justify any change needed as being consistent with the original idea. Annual inflation targets morphed into ranges, the period from a year and a half, then to  two, and now to six or seven years. To the devotees, “if flexible inflation targeting has not worked as expected, either it was not applied properly or some information was missing. But the strategy was fine. In this way, you can continue with such concepts indefinitely, making mistake after mistake.”

We finished up with a discussion about the effects of income and asset inequality. He noted that while we are seeing income inequality between countries decrease, we are seeing income and asset (ie wealth) inequality rising within countries. On that count we know from our own statistics that New Zealand is performing badly.

These discussions do lead to value judgments about the political economy, and it was evident the head economist at the IMF was reluctant to become too involved in these. At one level I can see why this might be delicate territory for the head economist at the IMF.  However, the reality is that economic settings and international rules around banking, trade and investment do have societal effects including to wealth distribution. I find the reluctance of the economists from advisory bodies like the IMF to express opinions about these outcomes political in its own right, given that for many years they have promoted ideologies as well as policies which most definitely have these effects.

Anyway, the limited consideration of these effects (as opposed to discussions about economic efficiency) at the IMF and OECD is one of the reasons I am looking forward to my meeting with Joseph Stiglitz, because he faces no such constraint.

I was impressed with Olivier. He has self-confidence but was ready to listen. He has led the IMF forward. He is cautious, but encourages wide ranging debate. Through incremental change he has moved things on substantially.

Jeffrey Frankel on the Asian solution

Posted by on September 7th, 2012

I am travelling to the US and UK to discuss my ideas on monetary policy with some of the best economic minds in the world, including former World Bank chief economist Joseph Stiglitz, Harvard academic Jeffrey Frankel and IMF chief economist Olivier Blanchard.

Jeffrey Frankel says:

• He prefers nominal GDP over CPI for inflation measurement

• Inflation targeting hasn’t stopped asset bubbles

• Asian economies show exchange rate focus doesn’t come at expense of inflation

Jeffrey Frankel is a Professor at the John F Kennedy School of Government at Harvard, holding the chair in capital formation. He is a prolific writer and has published widely on the subject of monetary policy and exchange rates over a number of decades.

Professor Frankel reminded us that times change, saying the world had at different times given primacy to targeting exchange rates, then money supply and then inflation. Each one of these has led to shocks in the past. He could have added to that list, even earlier, the gold-standard.

He has previously written that:

• no single currency regime is best for all countries

• no single currency regime is a panacea

• even for one country, no single currency regime is necessarily best for all times

As he has written, life always involves trade-offs. Countries have to balance the advantages of more exchange rate stability against the advantages of other flexibility. He notes that: “‘Fixed versus floating’ currency debate is an oversimplified dichotomy. There is, in fact, a continuum of flexibility”. Options include.

• a currency union

• a currency board

• a truly fixed exchange rate

• adjustable peg

• crawling peg

• basket peg

• target zone or band

• managed float

• free float

Prof Frankel is interested in New Zealand but he was understandably reluctant to advise what he thought would be the best settings for New Zealand in the absence of in-depth knowledge of our exact circumstances. He did note his preference for grounding inflation measurement in nominal GDP rather than the CPI, and that he favours product price targeting for some commodity exporters.

He said that the GFC showed that central banks pursuing inflation targeting had commonly failed to properly take into account asset price bubbles, but said the answer to that probably lay in prudential policies (such as those I have mentioned in earlier blogs) rather than interest rates.  I said that was my view too, noting that the carry trade was a large part of the problem in New Zealand.

Prof Frankel said that Asian countries have shown that it is possible to successfully influence exchange rates for lengthy periods while not giving up on monetary independence. “Central banks can maintain the exchange rate lower for longer – 10 years plus, or at least longer than some of my colleagues would suggest – without giving up their credibility on inflation”.

On the principle of the supposedly impossible trinity (ie that a country must give up on one of three goals – exchange rate stability, monetary independence, or financial-market integration; it cannot have all three at once), Prof Frankel has said that as financial markets are becoming more integrated internationally, the choice has narrowed towards giving up exchange rate stability or monetary independence. “But this is not the same thing as saying that one cannot give up on both, that one cannot have half-stability and half-independence.”

That is, exchange rates can be influenced for longer periods than have been traditionally acknowledged by most economists, without losing the battle to control inflation. This has of course advantaged the exporters from countries that have achieved this, and contributed to current account surpluses.

I would note this is exactly the opposite experience to what has occurred in New Zealand.

Along with his extensive knowledge in this area another research interest of his is how to achieve politically acceptable national greenhouse gas emission targets in order to attain global CO2 concentrations of 460ppm. This man is a force for the good.

New Zealand’s monetary policy “totally crazy”

Posted by on September 6th, 2012

I am travelling to the US and UK to discuss my ideas on monetary policy with some of the best economic minds in the world, including former World Bank chief economist Joseph Stiglitz, Harvard academic Jeffrey Frankel and IMF chief economist Olivier Blanchard.


My last meeting in Paris was with a senior economist well versed in monetary policy.

He came straight to the point. There was no ambiguity. In his personal view:

  • “It is totally crazy how New Zealand runs monetary policy”.
  • “It is the most pure form of inflation targeting of any small country”
  • The pure type of inflation targeting New Zealand has run “strikes me as madness”

He believes there is a need to focus more on our exchange rate.

He thinks the differential between New Zealand and overseas interest rates has been bad for New Zealand. He also believes the mix of capital investment in New Zealand has been problematic.

He made reference to changes suggested to “the Taylor rule” for smaller countries.

As we leave Europe to get the views from the IMF and various leading USA-based economists, I am struck by these main points:

  • No-one thinks we should ignore inflation.
  • New Zealand’s approach to inflation targeting has been extreme.
  • Even before the GFC, other countries were more concerned about their exchange rate than New Zealand
  • Since the GFC, unorthodox practices have increased, and even the arch defenders of inflation targeting now concede other countries are properly pursuing other interests
  • It is common for other countries to use additional mechanisms to guard against liquidity and asset bubbles
  • Smaller countries are different to larger economies
  • To grow the breadth of our exports we have to counter the additional risks faced by our non-dominant exporters
  • Some answers lie in a more nuanced approach to inflation targeting compared with exchange rates, including the greater use of tools other than the interest rate
  • Other answers lie outside monetary policy in tax and fiscal and industrial policy, the most important of which is to introduce a capital gains tax.

More nuance needed New Zealand

Posted by on September 5th, 2012

I am travelling to the US and UK to discuss my ideas on monetary policy with some of the best economic minds in the world, including former World Bank chief economist Joseph Stiglitz, Harvard academic Jeffrey Frankel and IMF chief economist Olivier Blanchard.


Bob Ford and Peter Jarrett said:

  • Inflation targeting doesn’t need to be pursued exclusively in the short term

CPCPI not the only game in town

  • Many countries have a more nuanced approach to inflation than New Zealand
  • Capital gains tax a fundamental setting required for New Zealand

Bob Ford and Peter Jarrett are in the Economic Division of the OECD. Both have been involved in the OECD Economic Surveys of New Zealand, indeed Peter’s analysis of New Zealand’s tax bias towards property was insightful at last year’s Reserve Bank and Treasury conference.

It is clear that the OECD remains of the view that the absence of a capital gains tax is a substantial reason behind the imbalances in New Zealand’s economy. This must be fixed. There is also support for a land tax (which is not Labour Party policy, but which I note the Chair of the Board of the Reserve Bank, Arthur Grimes, has supported).

Bob Ford emphasised the importance of the control of inflation, and reminded us of the mistakes in the 1970s when pre-inflation targeting and loose policy aimed at driving down unemployment ended up with both high unemployment and inflation. But he says inflation targeting is a long term goal, that doesn’t need to be exclusively pursued in the short term.

The need to look through imported price shocks was acknowledged, which is of course a weakness of CPI inflation targeting. For example, CPI targeting encourages higher interest and exchange rates in response to higher imported oil price rises, at the very time when exporters are less competitive.

We discussed the weakness of recent settings allowing the huge run-up in private debt and house prices. There is a good argument that house price inflation should be included, but it’s difficult to implement as there’s a question of what weighting to give to asset price increases compared to costs of goods and services.

Bob and Peter’s views on implementing targeting while taking into account exchange rates and other issues are more nuanced than the debate in New Zealand.

I was told that Norway is “exquisitely sensitive to exchange rate effects” and Canada is also sensitive to exchange rates. This is also what Ambrose Evans-Pritchard was saying when he said the old primacy of inflation targeting was dead.

A much more interventionist approach comes from Canada and France who use loan terms to control liquidity flows into housing.

Canada and France change the principal requirements, requiring table loan repayments over a maximum number of years. I was told Canada has reduced the number of years a loan can be repaid over, effectively increasing the principal repayments in a way which decreases the ability to pay higher prices for housing. To me this also has effects akin to compulsory savings, in that there is a requirement to repay loans and increase equity.

I’m not advocating any of these approaches directly but given that the higher interest rates we have experienced in New Zealand have driven the carry trade and demand for our currency, we should take these varying examples seriously. The alternative recently pursued in New Zealand, to alter the capital requirements for different lending classes, has different effects, including increasing the costs of business lending.

Our discussion of the difficulties for non-dominant exporters in smaller countries covered the advantages and disadvantages of our currency being pegged to a currency or basket of currencies, and discussed how we are suffering from a rise in the currency relative to the US dollar and Euro unrelated to our exports prices. We discussed the effects of unorthodox practices overseas, an issue which our outgoing Reserve Bank Governor Bollard has recently discussed.

In terms of the effect of our dominant exporter on the currency, Bob Ford recommends New Zealand return to substantial government surpluses of around 2 per cent of GDP, with these to be invested off shore as has been the case with the Cullen fund. He notes the benefit for Chile and Norway of this approach, and thinks government surpluses important given our high levels of private indebtedness.

Of course, in my view better settings for exporters would also aid in the reduction in that private debt.

We left agreeing that the capital gains tax issue is a fundamental setting that needs to be fixed, and were provided with another copy of the April 2011 OECD Economic Survey of New Zealand which made this point.

Do global investment flows actually harm the prospects of locals?

Posted by on September 4th, 2012

I am travelling to the US and UK to discuss my ideas on monetary policy with some of the best economic minds in the world, including former World Bank chief economist Joseph Stiglitz, Harvard academic Jeffrey Frankel and IMF chief economist Olivier Blanchard.


Raed Safadi says:

  • Global trade inextricably linked to global investment
  • Large foreign investment may require restrictions on land and infrastructure investment
  • Concentrations of wealth are going too far
  • Government must give exporters confidence in exchange rate

I’ve had several shorter meetings at the OECD with trade economists, all expressing similar views. I’ll wrap these up into the insights from Raed Safadi, Deputy Director, Trade and Agriculture Directorate at the OECD.          .

Raed focused on the benefits of trade and the links to investment flows. He noted that increasingly sophisticated supply and manufacturing systems integrate both trade and investment. Different inputs are produced in different parts of the world, with investment as well as trade increasingly global. Globalised production and trade is in his view inextricably linked with globalised investment.

An interesting but logical point in many ways. He then said that despite those links, investment in rural land, housing and utility infrastructure assets must be properly restricted (ie to locals).

This view has been expressed by a number of people I have met. It seems this is a growing concern for many.

For example Denmark, a model that many in Wellington aspire to, restricts overseas ownership in their land. A large part of the upward pressure on property prices comes from concentrations of wealth, some of which is imported.

In London, the concern arose for some from the effects of capital inflows from wealthy investors who are protecting some of their capital from risks in their home country. For others, the concern arises from land purchases in developing countries by investors who have the benefit of large trade surpluses.

In all cases, the effect on pricing out locals from owning their own farmland or houses, or the extraction of excessive profits from monopoly services, were concerns. The trade economists I’ve spoken to don’t like concentrations of wealth pushing out locals. This of course coincides with my views, and I was pleased to hear this.

The most extreme examples of how much wealth has been accumulated by the super-rich around the world are regular news in the papers over here. Whether it’s Russian billionaires in soccer clubs, the super-rich pushing art prices to unbelievable levels or dominating media ownership, there is a tone to the reporting which suggests that people and politicians think it has gone too far.

It will be interesting what, if anything, is done to resolve it.

Raed and I also discussed exchange rates. He was surprised, as were others, at the volumes the Kiwi is traded at which are considerably in excess of the size of our economy.

A memorable point he made was his passionate emphasis that an important role of government is to create a stable future outlook in respect of factors important to entrepreneurs to give them confidence to invest. For exporters, that includes confidence about more than inflation and interest. It includes the exchange rate by which exporters live or die.

Put like that, it seems pretty obvious.

Making short term currency trading a riskier business

Posted by on September 3rd, 2012

I am travelling to the US and UK to discuss my ideas on monetary policy with some of the best economic minds in the world, including former World Bank chief economist Joseph Stiglitz, Harvard academic Jeffrey Frankel and IMF chief economist Olivier Blanchard.

 Jorgen Elmeskov says:

Exchange rate competition heating up globally

Turkey’s short term risk policy for investors of interest

Lack of a capital gains tax is a fundamental reason for New Zealand’s over investment in property

Over two days I’ve had a series of meetings at the OECD. This meeting is with the OECD’s Deputy Chief Economist Jorgen Elmeskov and two of his off-siders Jean-Luc Schneider and Boris Cournede.

This was an interesting discussion on the influence of measures to control inflation. The meeting started and ended with their suggestion that, faced with a prolonged current account deficit and high net international liabilities, factors like export competitiveness are proper concerns.

I was glad to see they readily conceded that increasingly governments and reserve banks are focusing on the competitiveness of exchange rates. Something I’m most concerned about.

It was also interesting to note they don’t oppose a medium-term (ie three to ten years) monetary policy “to stand against an inflated currency”.

They had interesting ideas on the effects of serial short term investors on currencies, a big issue for New Zealand. Turkey was a case in point.

By allowing a wider band both for expected exchange rates and interest rates, and expressly announcing their intention to change both the width of the bands and the place they favour within the bands without notice, they are trying to create risk for traders which will push against short term trading in their currency, reducing upward pressure.

Another option was to tax inflows of money which can put upward pressure on the exchange rate. Brazil has done this recently (with support from the Economist magazine). But they noted the politics can be difficult.

We turned to New Zealand. They were aware of our poor savings record, but were quick to say that just because traditional monetary policy settings in the last two decades have seen a blow-out in private debt, that does not mean it will happen again. That, of course, is true but is hardly a stout defence of the orthodoxy.

They agreed the lack of a capital gains tax is a fundamental reason for our overinvestment in property and inadequate savings and investment in non-property assets. They were surprised we did not have one, yet allowed tax deductibility of interest.

They proposed an interesting solution to the ‘Dutch disease’, where dominant resource-based exporting industries boost the exchange rate and lower the competitiveness of other industries.

They said where natural resource exports have currency effects, the resources used should be taxed, not as an increase in total taxation but as a tax substitute. They favour resource taxes recycled into offshore investments (as the Norwegians do) to limit the currency effects of resource extractive industries on other parts of the economy.

An interesting discussion but their knowledge was weighted towards the larger economies that dominate world affairs, and they had few suggestions for how New Zealand’s circumstance could be improved. I did find their knowledge of New Zealand a little scant, after all we are a member of the OECD and help fund it.

Filed under: economy, finance

How did the banks get away with it?

Posted by on August 31st, 2012

I am travelling to the US and UK to discuss my ideas on monetary policy with some of the best economic minds in the world, including former World Bank chief economist Joseph Stiglitz, Harvard academic Jeffrey Frankel and IMF chief economist Olivier Blanchard.


“Banking system is fraught with moral hazard,” says former Kiwi regulator.

“Inevitable that regulators will push retail banks to core functions

I met yesterday with David Mayhew, currently a London barrister working briefs regarding the scandalous manipulation of the Libor rates by Barclays.

David was born and raised in New Zealand before embarking upon a successful career in London. You may know him as a former member of the New Zealand Securities Commission, and he was the Commissioner for Financial Advisors.

He has fascinating insights on what has gone wrong with banking in many parts of the world.

He summed it up by saying that the authorities around the world went along with retail banks fusing with merchant banks, then gobbling up ever larger proportions of income and wealth, because they believed banks were creating value in the economy for the benefit of nations.

Events in recent years show they were not. The profits were fictitious. In the end, many of the banks managed to privatise large increases in profits and then socialise the losses which had been disguised.

He believes the current system is fraught with moral hazard, probably caused by retail banking services being subsumed by the ostensibly more profitable investment banking arms of major banks. The dominance within banks of interests loyal to the investment branch, rather than depositors, meant the fortunes of the banks were divorced from the interests of their depositors. The hazard they caused to retail depositors by investment banking practices was small beer to those who were in control of the banks.

Given that the privileges and profits enjoyed by the big banks from investment banking were allowed based upon the erroneous view that value was being added, it seems inevitable that regulators and economies will push retail banks back towards their core functions, and require them to avoid the moral hazard that bank bailouts have shown arise from highly leveraged and risky investment banking practices.

New Zealand has to date been spared the worst excesses of banking practice around the world, but the fresh look overseas at what separation there should be between retail and investment banking may translate to rules internationally that have relevance in Australasia too.

This is yet another dent in the increasingly discredited “efficient market hypothesis” which underlies National’s economic management. They say let markets rule themselves and a thousand flowers will bloom. Sell off SOEs, deregulate the RMA and all will be okay.

Yet the economies that have done the best in recent decades not only regulate where necessary but also use the power of the state in concert with private enterprise to ensure their economy thrives. The ‘voodoo economics’ derided by Mr Joyce have worked in economies which are now more successful than New Zealand.

What helped the UK bring back manufacturing?

Posted by on August 30th, 2012

I am travelling to the US and UK to discuss my ideas on monetary policy with some of the best economic minds in the world, including former World Bank chief economist Joseph Stiglitz, Harvard academic Jeffrey Frankel and IMF chief economist Olivier Blanchard.

Evans-Pritchard says: “Inflation targeting is dead”

“arbitrage opportunity of New Zealand well known in the UK”

Today I met with Ambrose Evans-Pritchard.  He is International Business Editor of The Daily Telegraph. He has covered world politics and economics for 30 years, in Europe, the US, and Latin America.

I have followed his writing for a number of years. For a period his by-line was ahead of the curve, and his analysis of the GFC and its consequences certainly has been.  So I was keenly looking forward to meeting with him today. I was not disappointed.

We primarily discussed the topic which my study trip concentrates on – monetary policy, and its effects on exchange rates, current account deficits, growth in the real economy and private debt.

Ambrose said the credit inflows from the carry trade caused by New Zealand’s comparatively high interest rates must be a concern. He said that in the UK the arbitrage opportunity in New Zealand was well known.

I said that, in my view, for a number of years the Reserve Bank underplayed the seriousness of this, despite the fact that those credit flows fuelled the consumption binge and asset price bubble that higher interest rates were meant to curb.

I was struck when Ambrose commented that “inflation targeting is dead”. He was interested to know why it has persisted in New Zealand. I said maybe it was because of our experience with stagflation in the 1970s and early 1980s.

Ambrose said Great Britain would be in a far worse position if it had not been able to adjust to its decline in circumstances via a drop in the pound, which has led to resurgence in manufacturing, especially in the car industry. What a boost it would be to New Zealand’s modern manufacturing industry to have a dollar unaffected by arbitrage.

We traversed my view that competitive devaluation is alive in the world. Ambrose said he does not know whether it was an objective of the USA’s quantitative easing, but a consequence has been a 12% pa narrowing of the terms of trade gap between USA and China.

Ambrose believes UK and the USA will embark upon further quantitative easing that will have flow-on effects to the New Zealand dollar. We discussed whether concentrations of wealth born of the huge trade imbalances and settings in some countries means there is a need for greater care or attention to asset price bubbles and whether the globalisation of investment flows  (as opposed to trade flows) is desirable.

We discussed the contrast between New Zealand under Clark/Cullen and the UK under Blair/Brown. Cullen ran budget surpluses, leaving low government debt and countercyclical tax cuts, whereas Brown ran deficits of 3% of GDP when he should have been running a 2% surplus.

That 5% pa of GDP stimulus, and slide in the UK government books, has left a government debt hangover for the UK reminiscent of the debt burden Muldoon left for New Zealand in 1984. I told Ambrose that it took New Zealand a generation to overcome that debt burden, and that my impression, as an outsider, is that the likely length of the consequences of government debt levels in Europe does not appear to have fully sunk in.

Extremely insightful thoughts overall, especially the death of inflation targeting, the carry trade knowledge in the UK and the consequences for asset prices, eg housing, of free flow of investment funds (as opposed to free trade) given huge wealth concentrations of wealth and the trade and current account imbalances in the world.

Next I’m off to the OECD.


I’m going to be sending a few emails about the discussions I’m having while overseas. If you’d like to receive them, please click here.

The uncomfortable truth about inequality

Posted by on August 29th, 2012

The Ministry of Social Development’s latest analysis of household incomes should make uncomfortable reading for the government. It shows that real equivalised median household incomes dropped by almost 3% from 2010 to 2011.

Now that’s some fine economist-speak, but in English it means that ordinary Kiwi families are $900 per year worse off than they were a couple of years ago.

$900 is a huge amount of money. It could buy all the kids’ school uniforms, or pay quite a few power bills. It’s enough for a whole neighbourhood to set up vegetable gardens!

But it’s $900 that your average family doesn’t have anymore. And National’s economic mismanagement is to blame. Their top-rate income tax cuts and GST rises saw top earners boosted up, but the middle and bottom went backwards.

Today in Parliament I asked the acting finance minister, Steven Joyce, about the MSD report. I wanted to get to the bottom of how National can possibly think that it’s fair for ordinary Kiwi families and the poorest New Zealanders to be much worse off under this government, while at the same time the richest New Zealanders have gotten huge tax cuts and are much richer now.

The minister was clearly uncomfortable, and in light of the facts he should be.

As expected, Mr Joyce trotted out the usual list of hollow National excuses.

But it was astonishing to hear him arguing (as the Prime Minister did yesterday, incidentally) that the 3% decrease was actually an increase!

Joyce’s reasoning:

“The point is over what period of time the median household incomes have increased…. The Member has selected a period from 2009/10 to 2010/11.”

Obviously I chose that period because it’s the period that National have been the government.

If we follow Steven Joyce’s logic it’s not important to rationally analyse the success or failure of the government of the day and its policies. It doesn’t matter to him that struggling families are getting poorer.

All that’s important to National is finding any historical comparison point which might make today’s disastrous economic figures look better. Evidently our acting finance minister doesn’t even understand inflation.

This is what National’s “brighter future” means. It’s an unfair and unequal society where the government helps its rich mates to get richer while making everyone else poorer.



English catches up with Budget changes

Posted by on May 31st, 2012

At the start of question time today, I wondered why Bill English didn’t front for questions in Parliament.  I knew his planned trip to speak at the Dunedin Chamber of Commerce was postponed due to airplane issues.  I figured he must be stuck in Wellington with time on his hands.

Perhaps he didn’t want to personally front up and admit he’d got it wrong in a previous interview about the budget. 

So in Parliament today, Revenue Minister Peter Dunne fronted on Mr English’s behalf and admitted the Finance Minister had not understood the Child Tax Credit changes his Government rammed through under budget urgency.  Dunne confessed that Mr English had got it totally wrong in the Post-budget radio  interview on the changes to the child tax credit, labelled ‘the paperboy tax’.

Mr English said in the interview that interest on savings would not be taxed under the new regime – when in fact the opposite is true.

The frightening thing is key government Ministers do not appear to know what was happening in the Budget.

They have already backed down on some of the teacher changes, taking money from contingencies to cover that gaffe. Now they’re admitting they didn’t understand their own tax policy either.

We need pro-growth tax changes in New Zealand. This Government prefers tinkering with a system that is not working, and what is becoming increasingly clear is that they are not even on top of their tinkering.

An interesting idea

Posted by on May 31st, 2012

I’ve just been sent the following paper by Labour Party member Perce Harpham. Perce is exploring the ideas around a fixed weekly or  fortnightly payments, or “Citizens Dividend”. As well as an asset tax.

I don’t necessarily endorse all these ideas, but it’s good to see some healthy debate and new thinking. Keen to hear what you think.


Filed under: finance, Tax