David Cunliffe today gave a speech to the New Zealand Initiative, an economics think tank. The talk outlines the Labour Party’s economic policy. It displays so much economic confusion that it will take several posts to get through it all. Today I want to identify a fundamental conflict between Labour’s economic goal and its proposed monetary policy.
Mr Cunliffe begins his speech by saying that New Zealand businesses produce too much low value stuff. Labour wants to “support New Zealand business in the journey from volume to value”.
Personally I’m very wary of any politician that makes a sweeping statement about what NZ businesses need to do. There is no one correct answer. For many businesses, volume is best, for others value is best. Having the Government declare businesses produce too much low value stuff is easy to do from an academic viewpoint – but the businesses out there fighting for market share tend to be the best judge of what works for them.
He then claimed that “the biggest obstacle to our exporting businesses is the consistently over-valued and volatile exchange rate. Labour has long signalled it will review monetary policy to ensure our dollar is more fairly valued to help business and lower our external balance”.
The translation of this, is Labour is campaigning for higher inflation and price increases for everyone.
A devalued dollar helps exporters sell more overseas by reducing the price foreigners pay for our goods. For example, if the NZ dollar fell from US$0.85 US$ 0.70, what an American pays for a NZ$1,000 widget would fall from US$850 to US$700. So Americans would buy more of those NZ made widgets. But, of course, the value of those widget sales would have fallen. The reduced exchange rate increases the volume of what we sell overseas by decreasing its value – the exact opposite of Mr Cunliffe’s goal.
That is a total contradiction which exposes Labour’s economic policy to be slogans around a few tried left wing canards. Their monetary policy is, as Dr Whyte points out, in total opposition to their economic policy.