A meaningless change says ANZ

Stuff reports:

Adding employment to the Reserve Bank’s targets may be no more than a “cosmetic” change, economists warn.

On Monday Labour formally proposed adding a “commitment to full employment” to the Reserve Bank’s role of controlling inflation.

While the change is meaningless, it is still significant that Labour are pushing it.

ANZ chief economist Cameron Bagrie said even under Labour’s proposals, the changes may have little practical difference in decision making.

“It’s obvious there’s going to be some changes, but I think where we’re headed there’s going to be some cosmetic surgery, and not much more than that,” Bagrie said.

When it comes to monetary policy, the Reserve Bank has one tool, the OCR, and one target, inflation.

Bagrie said giving the central bank a target of full employment was not uncommon around the world, but was impossible to execute.

“When you’ve got one instrument, you can target one thing. We can talk about giving them a dual mandate, but when push comes to shove, the inflation target will end up dominating.

“It is mathematically impossible to target two variables with one instrument.” 

ASB chief economist Nick Tuffley said the experience across the Tasman, where the Reserve Bank of Australia (RBA) has employment and inflation targets, was that employment tended to be overlooked.

“It’s pretty clear from the way they [the RBA] behave that what they’re focused on is inflation outcomes.”

There were times in the economic cycle when controlling inflation may send interest rates in the opposite direction to the aim of maintaining full employment.

“You end up having your stated aims opposing each other.”

People used to think that you couldn’t have low inflation and low unemployment. The history of the last 30 years is of course you can. Increasing inflation does not create more jobs in the long term – at best it has a short-term impact. So adding full employment to the target means little, as the Bank will still aim to keep inflation low.

Basically it is just a feel good self pleasuring device for politicians, to add full employment to the goals. It will be as successful as when they told TVNZ to be both a commercial broadcaster and a public service broadcaster – it failed at both.

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