Reaction to Labour’s monetary policy u-turn

November 20th, 2009 at 10:00 am by David Farrar

Matt Nolan translates what Labour is proposing:

Labour goals were:

  1. a stable and competitive exchange rate;
  2. reduced interest rates for businesses and home owners;
  3. continued priorities of price stability and low inflation;
  4. to guard against expectations of price rises.

So, with goal 1 they want to reduce the flexibility of NZ$ prices, which will lead to higher unemployment and a worse allocation of resources.  Furthermore, they want to keep the dollar low which implies subsidising exporters to the cost of households in the short-term.

With 2 they want to punish savers.

And with 3 and 4 they want to contradict themselves – as by limiting price flexibility and holding the exchange rate and interest rates down they WILL drive an increase in inflation expectations, dump price stability, and remove any chance of a low inflation environment.

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24 Responses to “Reaction to Labour’s monetary policy u-turn”

  1. Pita (373 comments) says:

    Looks like Muldoon’s songbook has been dusted off!

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  2. Right of way is Way of Right (1,122 comments) says:

    So it’s official then. Labour Party Policy is find out what the Government is doing, then do the opposite, because we are the opposition.

    Stimulus……Response…….Stimulus……Response……..

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  3. Chthoniid (2,047 comments) says:

    At best, a populist gambit that Goff has no intention of following through on.

    At worst, it looks like a way to revert to the fiscal indiscipline that become the Clark-Cullen hallmark, while trying to avoid the negative consequences of this.

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  4. mickysavage (786 comments) says:

    what is wrong with a stable and competitive exchange rate? This will actually increase employment as the export sector gets back onto its feet and has the confidence that it will not be whacked by the next surge in value.

    Kiwisaver was all about trying to make kiwis save more. Our current rate is appalling. Could it get any worse?

    3 and 4 are not contradictory they are different things that the Government should be trying to achieve.

    And it is better to be fixated on inflation and have no other goal in mind?

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  5. ben (2,380 comments) says:

    Great. Labour’s initiative is to take back control of the one aspect of public policy that is out of its reach.

    Mickysavage: as Nolan has explained, stable exchange rate imply unstable export prices and higher inflation.

    And it is better to be fixated on inflation and have no other goal in mind?

    When government is involved? When you’re talking about government pulling the levers on something as complex as an economy?

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  6. Inventory2 (10,342 comments) says:

    Indeed Pita – which is most ironic when one considers that variety of roles filled by Phil Goff and Annette King between 1984 and 1990 (The Lange/Palmer/Moore government, best known for Rogernomics)

    GOFF: # Minister in Charge of Government Life Insurance Corporation 26 July 1984-6 April 1987
    # Minister in Charge of the Public Trust Office 26 July 1984-6 April 1987
    # Minister in Charge of the State Insurance Office 26 July 1984-6 April 1987
    # Minister of Housing 26 July 1984-24 August 1987
    # Minister for the Environment 19 February 1986-24 August 1987
    # Minister of Employment 6 April 1987-14 August 1989
    # Minister of Tourism 24 August 1987-12 September 1988
    # Associate Minister of Education 24 August 1987-14 August 1989
    # Minister of Youth Affairs 24 August 1987-14 August 1989
    # Minister of Education 14 August 1989-2 November 1990
    # Minister in Charge of the Education Review and Audit Agency 14 August 1989-2 November 1990

    KING: # Parliamentary Under-Secretary to the Minister of Employment 24 August 1987-14 August 1989
    # Parliamentary Under-Secretary to the Minister of Social Welfare 24 August 1987-14 August 1989
    # Parliamentary Under-Secretary to the Minister of Tourism 24 August 1987-14 August 1989
    # Parliamentary Under-Secretary to the Minister of Youth Affairs 24 August 1987-14 August 1989
    # Minister assisting the Prime Minister to liaise between Cabinet and Caucus 14 August 1989-2 November 1990
    # Minister of Employment 14 August 1989-2 November 1990
    # Minister of Youth Affairs 14 August 1989-2 November 1990
    # Minister of Immigration 9 February 1990-2 November 1990

    It would seem that Phil Goff and Annette King would like the electorate to forget that they were ever part of the Rogernomics era. Much as they would like however, they cannot rewrite history. Goff in particular was one of the more enthusiastic supporters of the former Finance Minister.

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  7. peteremcc (344 comments) says:

    Also check David Cunliffe’s post where he wants lower interest rates AND higher rates of savings:

    http://blog.labour.org.nz/index.php/2009/11/19/monetary-policy-reform/

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  8. peteremcc (344 comments) says:

    micky,

    prices change, that’s how markets work.

    if you fix the exchange rate (or make it less flexible) then you simply alter where the price changes take place – they get forced into domestic prices.

    you shift the pain from businesses and farmers to mum and dad when they go grocery shopping.

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  9. peterwn (3,273 comments) says:

    Labour – in desperation trying to fill the political niche left by the demise of the Social Credit party.

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  10. Inventory2 (10,342 comments) says:

    Indeed peterwn – I remember many, many years ago seeing a bumper sticker which read “If Social Credit is the answer, it must have been a stupid question” :-)

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  11. tvb (4,424 comments) says:

    This policy is meaningless because the Labour Party is meaningless. Further there is nothing in its place. I assume there will be no policy target for inflation from Labour and some vague way of manipulating the exchange rate. Of course most people understand a Government manipulating the exchange rate provides a safe one way bet for the speculators which costs the taxpayers Billions. Also by not pursuing price stability people who lend us money will think the Government will try and inflate its way out of debt (of which there is much) and will DEMAND a premium interest rate. This policy against the background of high public debt, no commitment to inflation and free wheeling spending ways means high interest rates for borrowers IF there is a Labour Government. There is NO free lunch.

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  12. s.russell (1,642 comments) says:

    Sorry DPF, but I think your criticism of Goff here is misplaced. The four goals you cite are all good ones. The catch is having a policy that achieves them, and Labour does not.

    The huge swings in the exchange rate (especially against the US$) have been very damaging to New Zealand. Just when a good export business gets going it gets killed by a rocketing exchange rate. Just when a good import substitution business gets going it gets killed by a plummeting exchange rate. Knowing that such swings have happened and will very likely happen again is a huge turnoff for investment.

    You (and others) are right to say that a fixed or inflexible exchange rate would have other (probably worse) effects. But Labour has not (yet) proposed this. They have not proposed anything, just (uselessly) observed that such big swings are undesirable.

    I doubt that Labour will come up with a better solution than the existing regime, but the goal is a worthy one.

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  13. Richard Hurst (859 comments) says:

    What will desperate Phil do next to try and get some attention?

    Options being considered by Labour strategy team include:

    1. Streaking through parliament

    2. Shaving his head for a charitable cause

    3. Appearing on reality TV show

    4. Have an affair (use that women that took down Dick Worth)

    5. Blitz the Women’s mags with some sort of tragic story involving family

    6. Barricade himself in office in protest at selected issue ‘Jim Anderton’ style

    7. Follow Mallards advice and hit someone.

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  14. Chthoniid (2,047 comments) says:

    The problem is that the big swings against the USD haven’t been driven by our monetary policy, rather they’ve been driven by uncertainties about the depth and longevity of the US recession, and hence sentiments towards risks. Against the AUD we’ve depreciated.

    Stable-and-competitive exchange rates is a pretty opaque term in this context, and from the current base line, would imply some kind of management or intervention to maintain it at this ‘vague and unspecified level’.

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  15. emmess (1,428 comments) says:

    Stardate 2012

    This is Captain Phil B Goff of the NZ Economy

    Captain: Governor, set unemployment to 3%,inflation to 3%, OCR to 2%, exchange rate to 50 US cents, Government spending growth to warp speed
    Governor: I canny hold her no more Cap’n, she’s gonna blow

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  16. Viking2 (11,471 comments) says:

    Well sorry but Goff’s point was that a policy that was designed and implemented 20 years ago and has been found wanting plenty of times, failed to achieve wealth for NZer’s should be reconsidered. Not by having white wash inquiries as has been the case but by looking at the whole premise that using interest rates is good for anything except the Bank Governors bonus. And I happen to agree with this.
    I guess most of you just decided to make a noise rtather than read what was said. Duhhh

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  17. freedom101 (504 comments) says:

    The root cause of the inflation pressures which result in high interest rates are:
    – an inflexible economy (ie demand and supply get out of kilter) – Labour regulated all sorts of things including, crucially, the Labour market
    – Government spending in monopoly markets – Labour put up government charges massively – ACC, Road User Charges etc etc. This all feeds inflation.
    – Greatly increased govt spending generally – up 70% under Labour when inflation was 40%. This diverts spending from the competitive economy to the monopolistic government sector.

    In short, Goff’s attack on the Reserve Bank Act is no more than shooting the messenger. The problems are closer to home than he is prepared to admit.

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  18. dime (9,972 comments) says:

    HAHAHA this shit is funny now they have no power

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  19. bchapman (649 comments) says:

    Don’t worry, I suspect de-coupling inflation and the OCR will become everyone’s policy eventually- out of neccessity. If oil, food and transport prices spike which they have every chance of doing over the next decade, raising interest rates associated with low government investment will pretty well kill off employment and economic growth, a pretty intolerable situation for any government hoping to get re-elected. The only solution then would be to lower the OCR and try and force the dollar lower.

    1989 Reserve Bank Act has had its day.

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  20. labrator (1,850 comments) says:

    Nice to see the consensus here is Labour = bad. There’s plenty wrong with our monetary policy and I’d like to see some more open debate about it. Read some of “Rodney’s ravings” (not Mr Hide) over at sra.co.nz for some interesting facts and opinions. I particularly like this one entitled MONETARY POLICY MADNESS And Your Chance To Stop It.

    I can’t quite work out the reason why most here seem to think that the current Reserve Bank Act is some sort of free market silver bullet. It is just one guy deciding what the base interest rate should be to meet one political determined target which it seems all Reserve Bank Governors have managed to fail badly at doing.

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  21. stephen (4,063 comments) says:

    one political determined target which it seems all Reserve Bank Governors have managed to fail badly at doing.

    Isn’t the target inflation of 1-3%? Since 1990 CPI inflation has averaged “around” 2.5%
    http://www.rbnz.govt.nz/keygraphs/Fig1.html

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  22. Matt Long (90 comments) says:

    I find myself agreeing with Fool, of course he is in Opposition so can say anything he likes.
    A stable currency – actually importer like a stable currency too, how many importers are enjoying being stuck with product they bought when the dollar was low.
    A competitive currency – sadly for consumers in the end if all our productive capacity moves overseas to places like China who manage their currency low, the only money they will have to spend is more borrowing.
    Contrary to popular belief you can’t do this forever, and no, Kiwi Saver does not magically save the future economy.

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  23. Viking2 (11,471 comments) says:

    Anyone noticed how businesses are being starved of cash currently? Figures out each month show that bank lending to businesses is in a sharp decline. Now why would that be I wonder? Could it be that now Bollard can’t control interest rates with any effect he is using his power to insist the banks hold more cash and force their customers to make more cash available for their businesses.
    Won’t be long and we will see clowns like Riley running around moaning because business can’t access funds to grow their business and if they can the rate is way high.
    Do you think the Nats. will take notice of business or have they moved so far left that their socialist leanings now prevent them from supporting business as they should?

    What do you all think that introducing a carbon tax into our economy will do for inflation? Make the cost of goods and services higher, absolute certainty, increase the take home pay of the working person, absolutely not, so will the working man be better off or not? Same pay higher costs, lower standard of living, (yep lower than it is now), and all this when the last PM and this PM have vowed and declared, even promised to raise the standard of living for all NZer’s.
    What’s the Governor going to do the day carbon taxes start. Raise the interest rates because the rate of inflation is going to go up.
    They already moan and complain NZer’s don’t save enough, well this is going to make it worse on both counts.
    Higher inflation and higher interest rates.
    what a bunch of outright dickheads. Doesn’t matter much to them though does it. Good Govt salaries and all that. Never mind the Kwiwi at the bottom of the food chain.

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  24. homepaddock (408 comments) says:

    Inflation is theft and the people it hits hardest are those on low, fixed incomes.

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