The Reserve Bank Governor, Alan Bollard,
used a speech last week to defend the policy that has been applied in this country for over two decades – a policy that
he inherited and has since perpetuated. That approach to running the economy essentially revolves around
monetary policy – and Alan Bollard’s advice to his critics was that they should accept a monetary policy framework
which takes inflation targeting as its central element as the best means available of achieving good economic outcomes.
His critics are unlikely to be convinced.
It is not just that our economic performance over more than two decades has been less than impressive and has seen
us slide down the OECD tables. It is also that the Governor seems to misunderstand the nature of the criticism.
If we are to take his argument at face value,
he is rather like a pastry chef who - using only flour - produces a flat and tasteless cake and then tries to rebut critics
by insisting that flour is a very important and valuable ingredient. Most
would argue that eggs, butter and sugar might also be helpful – just as, in economics, the Governor’s critics
would say that to rely entirely on monetary policy is to ask it to do too much, including much for which it is not suited,
and its exclusive use therefore prejudices the chances of achieving a buoyant and successful economy.
No one says, in other words, that monetary policy should be
abandoned. But what the critics do say is that we would do better if we used other policy instruments as
The irony is that, if we read
the Governor’s speech carefully, he seems to agree with this. And it may be better to watch what
he does, rather than what he says. Whatever the headlines may say, Alan Bollard indicates very clearly
that he is increasingly looking to other elements of policy, even while still focussing on the very narrow definition of his
responsibilities with which he is saddled by our legislation.
Let us take, for example, the Governor’s plea to the government that it should get fiscal policy
under control by mid-year. We can put to one side whether or not he is right to call for a reduction in
government spending, which seems a little misplaced, given that we are still bumping along on the bottom of the recession.
What is significant is his argument that an effective fiscal policy will reduce the burden that has to be carried by
monetary policy – an acknowledgment that monetary policy needs help from an integrated fiscal policy, even when the
policy focus is as narrow as simply controlling inflation. How much more true would that point be if we
widened the focus to the wider and proper goals of economic policy?
He is also right to call for a re-appraisal of taxation policy, particularly as it affects the taxation
treatment of housing as an investment proposition. This again is a recognition that taxation policy, by
focusing on the micro-economic mainsprings of inflation, might have a useful role in a counter-inflationary strategy.
And, the Governor’s rehearsal of the tighter
regime he has applied to the banks in respect of their lending policies may find its justification on prudential supervision
grounds, but it also has the merit of addressing one of the most significant of factors contributing to inflation –
excessive bank lending, particularly for residential property. Again, the Governor has identified an important
and additional ingredient – beyond interest rates -in a sensible policy mix.
Alan Bollard, in other words, may talk a good fight against the critics of
an exclusive reliance on a monetary policy focused on inflation targeting, but his actions tell a different story.
The call for a new debate about macro-economic policy has not fallen – in his case – on entirely deaf ears.
It should be acknowledged that the Governor made
some points in his speech that even his fiercest critics would support. His rejection of an Anzac currency,
as a means of achieving greater currency stability, is entirely right. A common currency could only work
within the context of a common monetary policy; and a common monetary policy could be applied in a democracy only by a common
government. Unless we see our future as an Australian state, we should maintain our own monetary policy
– and currency.
He was on
less convincing ground when he also rejected the kind of competitiveness target that has worked so successfully for Singapore.
But whether or not he is right in this, he has at least recognised that a debate on these issues is desirable and appropriate.
We are at last making some progress by consigning the mantra that “there is no alternative” to the dustbin
1 February 2010. This article was published in the NZ Herald on 8 February