New Zealand politicians want everyone elses wages cut

By Matt Nolan 30/09/2014

Our Prime minister, John Key, has decided to say the following:

Prime Minister John Key has indicated he thought the New Zealand dollar’s fair falue was around 65 USc and that it would be logical for the Reserve Bank to intervene to push the New Zealand dollar lower, given it was currently well above where it was fundamentally fairly valued.

Key restated his view that currency intervention was not effective in the long term to try to shift the underlying value of the currency, but agreed it was “fairly logical” for the Reserve Bank to intervene when the currency was so far away from its fundamental value.

Lots of people may think this, most of them without any thought or interest about asking “why” the dollar is where it is, but lots of people do think it.  But a sudden drop in the New Zealand dollar is akin to a cut in wages – all those imports suddenly become more expensive.

Given their standing and thereby ability to seemingly signal intervention in markets, the prime minister and finance minister really need to keep quiet about policy where there is an independent body involved – as it both creates volatility and indicates that such things are a more political issue.  I was pissed off when Cullen did this, pissed off when Key has done it in the past, and I’m pissed off hearing it now.  I don’t care if someone asked the frikken question, part of central bank independence is having fiscal authorities show a bit of discipline with their comments.

I agree with David Farrar when he says:

Now Labour and the Greens could claim what I’m saying in the title to this post – it is National trying to cut wages.  But they’ve just spent the last election campaign saying exactly the same thing.  As a result, this is merely a continuation of the strange politicisation of the RBNZ that has been going on within politics over recent years.  And National doesn’t get off free of charge here either – they spent the election claiming credit for lower mortgage rates, instead of pointing out that lower mortgage rates were due to a slump in the global economy and higher unemployment (things they understandably didn’t want to claim)

Trying to understand why the real exchange rate is historically high is important, as it is only with a constituent cause we can say much about whether it is a” good” or “bad” thing.  Those that treat an exchange rate depreciation as solely good, which is what these kind of pot shot politician comments come out as, are being misleading.  Seamus Hogan has a chat about these ideas in the comments over here.

Remember, the goal isn’t max(exports) it is max(welfare) – where it is consumption that produces welfare.  If the dollar is high because other countries are subsidising exporters (to take an example from those comments) then we know other countries are taxing themselves and transferring income to us – it isn’t clear this is a bad thing.  The exchange rate is a price – if it is “wrong” it is symptomatic of something being wrong … something that structural policy needs to deal with directly, not cyclical monetary policy.  Remember, the RBNZ isn’t really “setting the interest rate” (or exchange rate) it is following around the interest rate that balances savings and investment.

Now the RBNZ is concerned about the lack of response of the currency to a slump in commodity prices, and the the fact that Key is discussing something that the Bank has already said makes this only a small issue (contradicting the Bank on monetary policy would be a lot lot more concerning).  But it is precedent I still despise – as it allows government to gradually slide blame on the RBNZ (instead of their own structural policies) when a high exchange rate is part of the “cost” of some of the actions governments take.  By hiding costs and claiming benefits, policy IN GENERAL loses transparency – not just monetary policy.

0 Responses to “New Zealand politicians want everyone elses wages cut”

  • If we put devaluation in that context then it raises an interesting question of why we allow financial traders to influence currency values. At least Government’s can claim some sort of accountability to those whose incomes are affected by currency changes (either through reductions in the value of wages via devaluation or through the loss of jobs from currency appreciation).

  • Do we really need all that plastic stuff with bells and whistles that we get from imports ? Isn’t it better that more money is coming into the country to our primary producers , which in turn support service industries and jobs to.

    • Isn’t it better that exchange rates are set by the millions of disaggregated decisions of consumers and producers buying and selling dollars based on their own assessments of what they need than that somebody in an armchair someplace gets to decide whether “we really need all that plastic stuff with bells and whistles”, just ’cause he reckons it so?

  • probably Eric.

    I’d add that pumping up the primary producers as Derek proposes is a return to the failed policies of the past. We need manufacturing and service exports – value added stuff – not more milk powder and logs.

    Still, at least he didn’t mention LENR.

  • Buy New Zealand made, do we need a society full of magpies and keas that go for shiny objects ?
    Consumerism is the bane of society, creates inequality and crime.
    We have so much beautiful nature in our country we should get out and explore, instead of promoting plastic crap.
    Oh I need a new I Phone, I need a 3d TV, I need a new car, look at me ..
    Yeah right we need jobs and money, instead of giving it away to the makers of junk.

  • Consumerism creates inequality and crime? Really?

    Acquisition is inbuilt – its a human trait shown across all societies.

    Back to topic – I go with Eric’s “let the market set the rate” argument with the proviso that the market has to be complete – full information and no undue influences. That currently is not the case.

    Even if it were, the problem for NZ is externalities – we are very much at the whim of the economies of our trading partners.

    Among the most important (in my opinion) problems with NZ’s exchange rate is its volatility. It is very difficult for businesses to plan and so invest to service an export priority when exchange rate movements can shift values by 20% or more in any one year.

    I’d be interested in comments from those who know whether rate is more damaging than volatility (or vice versa) in NZs situation.