Matt Nolan walks us through why quantitative easing to pay for the Christchurch Rebuild isn’t particularly good policy. If we need a monetary push, the place to start is interest rates – and then only if RBNZ thinks we’re going to be below the 1% lower inflation bound over the medium term. If we need a fiscal push, which is highly debatable, doing it through earthquake spending might not be as helpful as the Greens might like – especially as regulatory bottlenecks and regulatory capacity constraints in Christchurch seem to be holding things up at least as much as money.
Let’s recall how standard public finance says to pay for things like earthquakes. If the status quo ex ante had about the right mix of spending and taxation, then you cut spending in non-earthquake areas, increase spending on earthquake rebuilding, perhaps slightly increase taxes in the short term but definitely take on debt to spread the rebuilding costs over the longer term. This is bog standard public finance. Paul Krugman and Steven Landsburg agree. I walked through the argument slowly a while back.
What do we get if the government prints earthquake bonds and RBNZ prints money to buy them? Here’s Nolan:
I suspect Matt’s “that’s fine” at the start is more recognition that the policy at least is honest rather than that it’s a good idea. Borrowing for major one-off capital expenditures is far better than a one-off tax.
Matt’s also a little harsher about those peddling crank economics than he’s usually willing to go:
The Greens, and Ganesh Nana, are wrong in stating that the RBNZ has failed. Distinctly and totally wrong.
Bernard Hickey was calling on Twitter last week for a review of the desirability of central bank independence. Matt and I got a bit testy. This is one of those issues where re-politicising whether the central bank should be independent has almost the same effect as removing independence: if RBNZ believes that its independence is conditional not on meeting the PTA but rather on making a mob of monetary cranks happy, then it might be tempted to start skewing its policy. And even if it doesn’t, if people think it might be, that also starts wrecking expectations. There’s reasonable latent public demand for bad monetary policy. Feeding and encouraging the trolls is a remarkably dangerous game. It’s fine to debate what optimal monetary policy is. But suggesting that because RBNZ isn’t following your preferred one, we ought reconsider central bank independence… that’s intellectual vandalism on par with saying we should do away with Pharmac because you didn’t like the Herceptin decision.
- Good: trying to convince RBNZ of your views on monetary policy.
- Bad: whipping up the hooples to break central bank independence.