Don Brash and his Task Force, with their
bizarre ragbag of extreme nostrums from thirty years ago, have – in at least one respect – done us all a favour.
We now know that we can safely consign to history the doctrines that have dominated our economic policy for so long.
If we are to make any sense of the goal of closing the gap with Australia, we need to look forward rather than backwards.
Even without the Task Force, it
has become clear that the landscape of economic debate has changed substantially. The global recession
has forced an “agonising reappraisal” of what works and what doesn’t. Phil Goff recognised
this when he proclaimed that the consensus of the last 25 years was ended; and the Prime Minister was not far behind him in
quickly acknowledging that the Brash Task Force report would be largely ignored.
So, the search is now on for a policy agenda that will make the difference.
In that search, there is an immediate obstacle to overcome. We have been told for so long that “there
is no alternative” that we are inclined to think that any departure from the former orthodoxy will require something
dramatic and revolutionary. Nothing could be further from the truth.
The effective and sensible course that this country should now follow
requires nothing more than the application of common sense and tried and true policies. It is only the
absence of any real debate in New Zealand about economic policy over the past 25 years that has made them seem unfamiliar.
The first step we should take is to re-focus
our macro-economic policy. The Brash theory has been that, if we focus exclusively on controlling inflation
and leave the rest to market forces, everything else will fall into place. The problem has been that the
counter-inflationary instruments we chose – ever higher interest rates and a consistently overvalued exchange rate –
distorted the operation of market forces and did enormous damage to our productive economy. Little wonder
that, by loading the dice against ourselves so that we made it difficult to develop export markets or to resist import penetration,
we fell behind those who did not handicap themselves in this way.
What we need now is a better balanced, broader-based policy which treats inflation not as the sole
focus of policy but as just one of the targets we should aim at. We need a macro-economic policy that aims
at full employment, so that we fully use our resources, and above all maintains and improves the competitiveness and therefore
profitability of New Zealand industry.
requires both monetary and fiscal policy to be integrated so that a stable level of demand is maintained and New Zealand’s
competitiveness in world markets is improved. Interest rates and the exchange rate should be allowed to
do their proper job and set accordingly. Government has a role to play in doing those things that private
industry finds difficult. Other countries, like Singapore – more successful than we have been –
have shown how this is done. Only if we can set ourselves on the path of export-led growth can we expect
to arrest the long decline in our comparative economic performance.
Oddly enough, this approach places more faith in the capacity of the market to show the way forward
than the Brash-inspired distortions implicit in manipulating interest rates and the exchange rate for counter-inflationary,
non-market purposes for which they are not intended. Only if our producers – in industry and agriculture
– are able to compete effectively in world markets, including our own, can we expect them to make a return which will
finance the investment in our productive capacity which is the key to better productivity and rising living standards.
None of this means that we should abandon the
fight against inflation - far from it. To stop prostituting the whole of macro-economic policy to the single,
narrow task of controlling inflation does not indicate that we need not bother about it. It simply means
that we should use all the instruments of macro policy for wider purposes – the health of the economy as a whole –
and deal with inflation through measures specifically targeted at inflationary pressures.
There is no shortage of appropriate measures available, if
we are prepared to analyse carefully what stimulates inflation. It is increasingly clear that, with the
prudent management of public finances over the last decade and the demands necessarily now made on public spending in recessionary
times, it is not – as Don Brash continues to maintain - government spending that is the culprit.
What we need to target is the excessive investment
in non-productive assets, like housing, that is both the consequence and cause of the bias in our economy against productive
investment. The fastest- growing element in our domestic money supply has been bank lending on housing.
That is where we should be concentrating our counter-inflationary attention; it is no accident that the tax treatment
of housing as an investment and the restraint of bank lending are rapidly moving up the agenda.
A less doctrinaire and more commonsense approach to economic
policy would, as a start, give us a level playing field on which to take on the Aussies – and, as we know, that’s
all we need to give us a fighting chance.