Labour and monetary policy

By Matt Nolan 02/05/2014

Labour has put a bunch of thought into its discussion on monetary policy – and there is certainly nothing wrong with discussing the issues and putting out a policy document, in fact there is a lot right with that.  Furthermore, over their entire document they recognise this is a multi-faceted issue we need to be careful with, I appreciate that a lot.

However, there are still a few glaring issues with the way they discuss monetary policy:

  1. They keep mixing “monetary” policy with longer-term “fiscal” policy.  It is not the RBNZ’s role to determine longer-term fiscal policy – this is undemocratic.
  2. On that note – the “external balance” is not an RBNZ target, and nothing they are suggesting actually helps that.  This is a general issue with medium-long term savings-investment imbalances, and we need to neatly define what the welfare relevant “problem” is before we go swinging around policy and reducing the ability to “judge” the Bank by giving it piles of targets.
  3. They don’t seem to appreciate how much monetary policy HAS changed during the last 25 years as institutions try to adapt to the changing world around us – their view that policy structures are no different than they were in 1989 is totally wrong.
  4. The variable Kiwisaver idea, controlled by the RBNZ, is horrible.  It comes from a good place IMO – they are looking for counter-cyclical tools that are used by an independent body.  But as I’ve explained, this is a particularly bad one, and will hurt the defacto independence of the RBNZ.  In addition, this “tool” won’t help the “external balance” – as the average savings rate should be unchanged.

Labour’s focus appears to be on exporters and manufacturers, as given there discussions with people they believe there is an issue there.  However, monetary policy, and the monetary policy choices of the Reserve Bank, are not the cause of this inherent S-I imbalance which forces NZ interest rates to be on average high.  Investigating why this is, and trying to understand it and base policy on issues in that, is the way forward.  This is why we’ve had a savings working group, a tax working group, and a productivity symposium – as all these structural issues, and the trade-offs they represent, are related.

These whys matter intensely for deciding policy – wasting time trying to mess around with one of the institutions that is working (in terms of keeping inflation in the band, and moderating the drop in output/employment, during the largest external shock since the Great Depression) to look like we are facing the issue is not doing this.