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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.


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.

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.

Total Employment Change from 2008 Reveals Imminent Crisis

Posted by on February 21st, 2012

Increase in unemployment under National

Increase in unemployment under National

The Household Labour Force Survey Survey report of the December 2011 Quarter released last week revealed that our unemployment rate slipped slightly to 6.3% from 6.6%. While a rate of 6.3% in itself doesn’t necessarily mean we have reached crisis levels, the focus on the overall unemployment rate does conceal detail about our employment situation that if brought to the surface will shine light on what I believe is an immiment crisis looming in our economic horizon.

Since JohnKey’s National took office in November 2008, 53,000 New Zealanders have joined the unemployment ranks. That’s a 54% increase in the number of people unemployed to a total of 150,000. For these people, National’s promise of a ‘brighter future’ has utterly failed to materialise, especially if you have a mortgage and teenage children you are supporting through school.

While the impact of the recession cannot be ignored, the number of people unemployed has actually increased since the recession officially ended in mid-2009. The official unemployment figures only tell part of the story. Many more people are without work but are not counted as being unemployed. Many are described by the Salvation Army as being “discouraged unemployed”. They would like to work and would accept a job offer if given, but they would not be deemed as actively seeking work because for instance looking for work through a newspaper does not meet the threshold of “actively seeking work”. The number of Kiwis jobless has increased by almost 100,000 under National’s watch to now 261,300 people as of December 2011. In the meantime 59,964 people are receiving the Unemployment Benefit as at December 2011 a fall of 7% from 67,084 as of the December 2010.
So is this it? Is this the brighter future promised to all New Zealanders?

Number of people jobless

Trade policy released

Posted by on October 28th, 2011

I released our Trade policy this evening, as promised. Trade is a bipartisan issue because both National and Labour recognise that we are too small and our electoral cycle is too short to risk our exporters’ efforts and foreign direct investment in our industries, by potentially pulling the policy rug out from under them every three years. So we both promote New Zealand’s trading interests overseas equally.

So it will come as no surprise that we wish to build on the international market access we have gained in recent years, particularly in Asia after the successful FTA with China, signed by Phil Goff.

Labour will support the Trans Pacific Partnership negotiations as they proceed but Pharmac remains a bottom line for us. It works for the public good of New Zealanders and should not be compromised, despite pressure from large multinational pharmaceutical companies.

We need more openness and better engagement of civil society in our trade relationships, and so we will establish a Trade Advisory Commission to give contestable advice to the Minister about trade relationships. This Commission would comprise union, business, exporter, academic and NGO interests.

Where we differ from the National Party however in the Trade area is in the fundamentals of monetary policy which underpins the environment in which our struggling exporters work. We will alter monetary policy by introducing a Capital Gains Tax which will moderate interest rates, which will in turn take pressure off the exchange rate. We will broaden the Reserve Bank’s objectives to include employment and the health of the export sector amongst other things in its brief. We will put an exporter on the Board of the Reserve Bank to represent their interests.

And more besides……to see the whole policy, go here.

Budget FAQs #5: Growth Hockey Stick

Posted by on May 19th, 2011

The New Zealand economy has failed to fire under National.  As a result successive rosy Treasury forecasts have been revised downwards.  The starkest example is between last year’s May Budget and December Half Year Update.  

  2010 GDP Track Revision

Implications: The  growth upturn “hockey stick” just keeps getting pushed out into the future.  The so-called GST tax switch had no discernable positive impact on growth.  And the same rosy forecasts will be embedded in today’s Budget.  On this track record Budget 2011 growth  projections will not be worth the paper they are written on.

When the 2009 growth projections are added the picture gets even more interesting.  As this graph shows the actual GDP growth track has been so bad that it is back down to the proections made by Treasury during the darkest days of the 2008/9 global financial crisis.  

   2009-2010 GDP Track

In other words, despite the international crisis having passed 18 months ago and NZ receiving record prices for our agricultrual commodities, our economy has performed so badly that it is back down to the track Treasury predicted during the darkest days of the crisis.   Quite simply, whatever the Govt has been doing is not working. 

In a future post we will decompose the relative impact on debt of this under-performance and otehr factors like earthquakes.

There is no coherent plan from National on how to manage debt reduction alongside needed investments in economic and export development, closing the savings gap, repairing the damage to middle New Zealand, and giving all Kiwis hope and confidence for the future.

Labour has an integrated economic strategy that will achive that withi a fully costed programme that will reduce net debt over a 10 year economic cycle.  You can see the direction we are heading in set out in a recent speech I gave to Business NZ  here.

For the wonks among you, here is the underlying data – all the Government’s own numbers.

  GDP per capita, 95/96 dollars    


Half Year Update 2009

Budget 2010

Half Year Update 2010






































































 Sources: Budget relevant documents and Statistics NZ series

Bank of England boss criticises banks.

Posted by on March 7th, 2011

Merv King the Governor of the Bank of England is a pretty extreme example of what I consider a crude monetarist. But in this interview with The Telegraph he points the finger at bankers. With good reason.

Now, the Governor is off on why all this has a moral dimension: “The more I’ve thought about how labour markets work, the more I’ve realised that there are hardly any jobs whose tasks you can describe exactly. Nowadays, most jobs have the property that employees can choose to do them well or badly, so employers need to think about the long-term welfare of the staff not just pay today.” It follows that moral attitude is vital. Industry often understands this well. Nissan in Sunderland asks all its workers for ideas to raise productivity, and, says Mr King, it benefits.

The Governor makes a point of visiting manufacturing and service industries all over the country. Such firms pay far lower rewards than financial services but have “an incredibly successful record. They care deeply about their workforce, about their customers and, above all, are proud of their products”. With the banks, it’s different: “There isn’t that sense of longer-term relationships [hence the demise of the local bank manager]. There’s a different attitude towards customers. Small and medium firms really notice this: they miss the people they know.”

He also thinks that there is “too much weight put on the importance and value of takeovers”. They make short-run profits but “it doesn’t make sense to destroy a company with a reputation”. Since the Big Bang in the late 1980s, Mr King goes on, too many in financial services have thought “if it’s possible to make money out of gullible or unsuspecting customers, particularly institutional customers, that is perfectly acceptable”. Good businesses “keep a clear vision of who their customers are, and are run by people who don’t think they should simply maximise profits next week”. But in the past 25 years, banks have increasingly “taken bets with other people’s money”.

That is bad enough, but it gets much worse “if the rules of the game are that they get bailed out if it all goes wrong”. In this weird atmosphere, banks eventually stopped trusting one another. “Financial services don’t like the word ‘casino’, but instruments were created and traded only within the financial community. It was a zero sum game. No one knew which ones were winners when the crisis hit. Everyone became a suspect. Hence, no one would provide liquidity to any of those institutions.”

So what that does that mean for us. Heads the overseas owners of banks win and our balance of payments suffers and tails New Zealand businesses, individuals and the taxpayer cover their losses. And our balance of payments suffer.

Hat tip Lloyd Morrison

The Financial Elite have Gambled away our Future

Posted by on January 29th, 2011

Yesterday’s Press Editorial welcomed the PM’s announcement on the beginning of National’s privitisation programme for our country’s assets with the words “John Key was able to demonstrate…the value of his background in the financial industry”.  Excuse me?  Did the Press miss the Global Financial Crisis, where “the over-paid heroes of Wall Street and the City worshipped the gods of globalisation, financialisation and speculation”?   The quote is a teaser for the best of the five books I read over the summer break: “The Gods that Failed: How the Financial Elite Have Gambled Away our Futures” by Larry Elliott and Dan Atkinson.  The first edition of the book was subtitled: “How Blind Faith in Markets Has Cost us our Future”.  The second edition (published in 2009) has an extra chapter, which as one reviewer said could have been titled: We Told You So.  The authors of this book are economics editors, Elliott with the Guardian and Atkinson, the Mail on Sunday.

The metaphor that drives the narrative is inspired by the twelve gods of ancient Greece that lived on Mount Olympus.  Elliott & Atkinson have styled the super-financiers and the international organisations, (central banks, IMF, World Bank, WTO), the “New Olympians” and the twelve gods of the modern Mount Olympus: globalisation, communication, liberalisation, privatisation, competition, financialisation, speculation, recklessness, greed, arrogance, oligarchy & excess. 

“Greek mythology provides plenty of raw material for a book about the failings of modern financial markets.  There is the story of King Midas, who found the ability to turn all he touched into gold a curse. The tendency of markets to veer between the wild optimism of booms and the manic depression busts is akin to the life led by poor Persephone, condemned to live every six months of every year in Hades. But Pandora – a gift from the gods whose beauty belied her baleful influence on the lives of mortals – makes the best metaphor.”

As they said August 9 2007 was the moment the lid came off the modern version of Pandora’s box.  And the rest is history, which is why I believe this book must be read, because unless we learn the lessons of history, we condemn ourselves to repeating it.

This book is well-researched and easy to read.  It contains a chapter called ‘Last Tango on Wall Street” which has a very simple explanation of how the New Olympians (our Prime Minister’s background the Press values so highly) found ways to make money out of nothing – creating securitised financial products like “collateralised debt obligations” out of the subprime market and then hiding the risks behind AAA rated institutions.  The New Olympians made personal fortunes with bonuses they never had to repay when it all turned to custard.  And they were happy to see the taxpayers pick up the tab for their trillion dollar insanity. 

I conclude with this quote: ‘Speculators may do no harm as bubbles on a steady stream of enterprise.  But the position is serious when enterprise becomes the bubble on a whirlpool of speculation’.  That was John Maynard Keynes in 1936.  When will we ever learn?

S&P: National on negative watch (part II)

Posted by on November 23rd, 2010

Part one of this post showed that S&P placed NZ on negative watch because of the savings gap, the huge (mainly private) net international debt and our under-diversified export profile (and consequent vulnerability).  It all adds up to lenders perceiving potentially greater risks and seeking compensation through higher interest rates.

How did the Government react to the news?  Did it front the issues and explain its “plan”?  Not in your life.

Alex Tarrant at did a great job of covering John Key’s rather bizarre, meandering post-Cabinet press conference here.’s coverage if the political debate is here.

Mr Key manages to contradict himself three ways in two paragraphs:

“Nothing has changed from our point of view, in fact if anything, our position looks stronger from our point of view (really?)…

We accept that we’ve had to take the earthquake on our balance sheet, accept tax revenues have been a bit weaker this year than we had anticipated…(corporate was 22.4% below 2010 forecasts, gst 15.8% below!)”

So… nothing has changed, we are stronger, but we are weaker.  Classic.   He must have been eyeballing three different journos and guessing they wanted three different answers, so why not try to please all of them at once?

The coup de grace is his attempt to pass it all off as Ireland’s fault.  True, the Irish are in a bit of a bog, but lets assume S & P can tell the difference between the land of the long white cloud and the emerald isle. 

Back in the real world, one thing is for sure, S&P won’t be amused if Messrs Key and English try to talk their way out rather than addressing the fundamental issues: how about trying to grow savings, diversify and lift exports, and reduce private international debt?  Who knows, they could even turn it into a plan?

S&P: National on negative watch (part I)

Posted by on November 23rd, 2010

National’s counter-spin on yesterday’s placement by Standard and Poor’s of New Zealand’s sovereign credit rating on negative watch shows increasing desperation, the latest of a torrent of bad economic news.  I comment in two parts: the announcement and the counter-spin.

First the announcement’s overview:

  • “We perceive New Zealand’s projected widening external imbalances and the country’s weakened fiscal flexibility as increasing risk to the sovereign.
  • New Zealand’s vulnerability to external shocks, stemming from its open and relatively undiversified economy, also raises risks to the country’s economic recovery and credit quality.”

The S&P Report’s rationale makes the drivers even clearer:

  • widening external imbalances
  • weakened fiscal position
  • under-diversified economy
  • high external liabilities
  • a return to high current account deficits averaging 5.9% of GDP over the next three years.
  • and crucially, that “net external liabilities … predominantly reflect dependance by households on foreign capital to fund consumption and property investments”

In other words: New Zealand does not save enough, it has too much private debt, and that debt was used to fund the wrong things (property speculation not real business investment).  New Zealand’s exports are under-diversified and New Zealand will continue structural bleeding on our external accounts after the immediate recession.

The logical repsonse to these problems should be;

  • strong action to close the savings deficit (if possible by building good household saving behaviour)
  • diversify and increase exports (presumably moving beyond a narrow range of bulk commodities)
  • managing the fiscal position to encourage sustainable growth, employment and healthy tax revenues without blowing the fiscal deficit.
  • ensuring monetary policy supports the direction of reform rather than acting against it.

It obviously should NOT include:

  • borrowing more for tax cuts to upper income earners that neither create powerful stimulus nor correct the underlying imbalances
  • reinforcing exisitng bulk commodity exports while reducing investment in innovation and R&D to divesify and add value to the export base
  • cutting back Kiwisaver; cancelling prefunding for the NZ Super Fund; and taking two years to set up a Savings Working Group (and even then proscribing a range of strong policy options)
  • pretending monetary settings are ideal when exporters face extreme currency volatility

Bill English and John Key declared S&P lifting their previous negative outlook as a” verdict’ on Budget 2009.

They should be straight-up enough to accept that S&P has now reversed its verdict.

After 18 months of National Government policies National can have only itself to blame.

In part II of this post we’ll check whther their rhetoric matches this reality.

Unlocking Our Potential

Posted by on October 4th, 2010

The Canterbury Earthquake, terrible though it was, reminds us of the courage and resilience of New Zealanders in a crisis. 

 If only the same courage and strength could be tapped as part of our normal ‘economic development’, NZ would be able to unlock enormous untapped potential.

 That same courage was evident in many of our forebears: those who voyaged to NZ by waka or ship, and those hacked down the bush to form arable pasture (often on slopes so steep it should not have been touched, but their courage was undeniable).  

 Tapping into that same strength of character to unlock future potential is part of the task that lies before us. 

 Our world is changing.  The old solutions will not work for tomorrows problems.  The old certainties have gone.   The era of guaranteed markets in the UK for our sheep and beef has gone.   The era of free and easy credit has now gone.  

 We are told we face a ‘decade of deleveraging’.  All around us we see growing signs of despair.  

 Just as in the 70’s we were called upon to diversify our markets, in the 80’s to deregulate our economy, and in the 00’s to rebuild our torn social fabric, Labour is now called upon to rise to a new challenge in a new era. Just as Mickey Savage did in the 1930s, we are being called upon to find a better way.

 NZ is currently meandering through the aftermath of the global financial crisis.  We are beset by malaise.  We lack confidence.  We appear unable to define our own future, and even lack awareness of our own potential and character.

 So NZ falls back passively on its proximity to larger Asian growth centres, its traditional bulk agricultural base, and its relationship with its nearest neighbour Australia.

 These are undeniable strategic advantages, but if any are a substitute for owning our own future, they will ultimately undermine our national wellbeing and identity.  

 Our relationship with foreign investment has to change.  As it stands we are becoming more and more deeply indebted to foreigners.  We have been through a phase of selling state assets to cover the interest.  We are now selling our land at the rate of dozens of rugby fields a day.  But still our national debt keeps rising. 

 It was not primarily ‘the government’s’ fault.   Most of this debt is private debt.  Most of it fuelled the private binge on property consumption (it was never really ‘investment’ despite the temporary up-cycle in which much of it happened).

 That we need more foreign investment is undeniable, but it must be channelled into genuinely value-creating and productive activity and not simply transfer the ownership of existing assets to foreigners making our future income deficit worse.   

 A new conversation must begin – one that starts from the proposition that we wish to own and govern our own affairs.

Kiwibank forces Aussie banks to drop rates

Posted by on August 14th, 2010

Radio NZ reporting that Aussie banks are dropping their mortgage interest rates for a second time in a week to try and match Kiwibank. Can’t get link yet.

Doesn’t bode well for economic expectations but makes nonsense of Ralph Norris’ (NAB/BNZ) claim earlier this week that Kiwibank rates were too low.

About time Key gave Kiwibank the small capital boost it needs to move business lending rates down in a similar way.

I’m sick of the one way funnelling of cash west over the ditch.

The Naked Economist: Part 2

Posted by on June 30th, 2010

So what does the end of the Washington Consensus mean for economic policy?

Firstly, borne out of the Great recession, there are no certainties – including whether the recession is yet over or, as increasing numbers of pundits from Krugman and Stiglitz on down are warning, we are in for a further deflationary spiral. 

Assuming no immediate major further meltdowns, we can probably draw some interim conclusions.

First, stable inflation will continue to matter, but should not be the only policy target.  It follows that monetary policy cannot rest on one tool, the OCR.  The number of tools should always exceed the number of targets.  

The OCR is a poor tool to target excess risk taking or asset bubbles.  IMF Chief Economist Blanchard recommends combining monetary and regulatory policy, such as countercyclical liquidity and prudential ratios, and directly targeting problem sectors such as housing. 

If this sounds familiar, no wonder.  The Governor of our own Reserve Bank has been quietly moving towards this in line with the other G20 central banks.   Isn’t it ironic that in New Zealand the only institution really defending the old status quo is the Beehive. 

Second, realistic stable exchange rates are crucial to small, open, trading economies.  This is what our export sector has been saying for years.  Now the IMF recommends central banks use reserve accumulation and sterilised intervention to do just that.  Labour has pledged to investigate reasonable means to help reduce the volatility of the NZ dollar, one of the most outrageously over-traded currencies on the planet.

Third, when investors desert key markets, the case for publicly supplied finance (liquidity provision) can be compelling.  However that implies that there is monetary and/or fiscal headroom available to offset a major recession (not necessarily true of some of the major western economies, worryingly).

It also implies that once recovery is firmly in place stimulus can be eased off in a way that is scially and economically sustainable.  Arguably Cameron’s Tory Budget violates that principle with slash and burn polices that could tip the UK back into recession, and even deflation.

Finally, Blanchard recommends counter-cyclical fiscal policy, augmented where appropriate by automatic fiscal stabilisers such as cyclical investment tax credits or enhanced transfers to low-income households. 

Counter-cyclical fiscal settings are not new to us and were used successfully under the last Labour Government (which reduced net debt to zero alongside full employment).  But automating that process would require careful thought.  One option used in other small open economies like Singapore is a countercyclical savings policy.   

This is all food for thought.  It is high time for our government started thinking.  But increasingly New Zealanders are looking for fresh ideas in the absence of a Beehive that seems capable of new thinking.

In Part 3 I will point to some of the areas, post Budget 2010, where Labour believes a new emphasis is needed.

The Naked Economist: Part 1

Posted by on June 29th, 2010

There has been a quiet revolution underway in economics in the wake of the global financial crisis.  The “Washington Consensus” is no longer a consensus.  The “Great Moderation” has become a Memphis meltdown.

 As in most revolutions, pressure begins gradually.  Someone then states what is already obvious to all: the “Emperor has no clothes”.  Suddenly, orthodoxy crumbles.  As shown by the recent Toronto G20 summit, in 2010 orthodox economics stands suddenly naked. 

 The foundations have been shaking for a while.  Assumptions of “rationality” have taken a hit from “behavioural economics”.  Stock markets over-react due to fear and greed.  Trickle down trickles up.  Asset bubbles inflate then burst, as in 2008.

For me the “no clothes” moment for macroeconomics happened in February this year.  The Chief Economist of the International Monetary Fund (IMF), Olivier Blanchard, released a ‘position note’ entitled “Rethinking Macroeconomic Policy”. 

Early local media pickup focused on monetary policy, noting Labour’s recently announced withdrawal from the previous monetary consensus.  This has been comprehensively confirmed in two speeches last week by Phil Goff and David Parker.

Blanchard’s critique of “What We Thought We Knew” is, however, much broader than earlier local reaction:

  •  Monetary policy had one target, inflation, and one tool, the policy rate (our ‘official cash rate’ (OCR)).  With low, stable inflation the ‘output gap’ (unemployment) would be small and monetary policy would always do its job: spot the Tui billboard moment.
  • Fiscal policy (government spending and taxing) was secondary at best: hopelessly slow, un-necessary if monetary policy was sound, and subject to nefarious political influence. 
  • Some financial regulation was ok but financial intermediation (leverage, derivatives and stuff) didn’t matter much in terms of managing the broader economy. 

Welcome to the Washington Consensus:  “By the mid-2000s, it was not unreasonable to think that better macroeconomic policy could deliver, and indeed had delivered, higher economic stability.  Then the crisis came”.

Recounting “what we have learned”, Blanchard nails with laser-like clarity six home truths for our uncertain new world.

  •  Stable inflation may be necessary but is not sufficient. Housing bubbles, current account deficits and consumptions binges are serious problems.
  • Low inflation limits the scope of monetary policy in a severe recession.  There may not be room to cut policy interest rates far enough to avoid deflation.
  • Financial intermediation matters.  When financial markets are segmented and arbitrage (interest rate pass-through) breaks down, the OCR no longer works as a policy tool.  Our 2009 Parliamentary Banking Inquiry found just that.
  • Counter-cyclical fiscal policy is an important tool.  Take a bow Michael Cullen, who cut Crown debt by saving surpluses then timed perfectly the recession-fighting 2008 Budget.  That gave NZ a buffer to limit the 2008-09 slump.
  • Regulation is not macro-economically neutral. Weaknesses in US financial regulation amplified a local property crash into a global crisis.  More generally, deregulation is no cure-all (not welcome news in the current Beehive).
  • The “Great Moderation” looked good for so long because it coped with small imbalances and had not faced the full consequences of understated systemic risk, especially around financial leverage and exchange rate exposure.

So what does this all mean for the next generation of policy makers?  The next era should retain the best of the previous consensus, while creatively addressing the challenges that previously lay outside it.    

Part 2 of this post will follow shortly.   Comment is welcome on Blanchard’s critique.