Alan Bollard is
a big man – well over six feet [around 1.9 m?] tall – but even his shoulders are not broad enough to bear the
burdens placed on them. To point this out is not so much to criticise the Reserve Bank Governor as to lament
the role in which he is cast.
He is, after
all, lumbered with virtually the sole responsibility for what passes in this country for macro-economic policy.
He alone must decide every six weeks on the direction in which monetary policy should be taken. He
is given a single instrument – interest rates – and a single target – inflation.
Beyond that, macro-economic policy is virtually non-existent.
Little matter that inflation might be low on the list of economic policy concerns, or that cutting interest rates might
make little difference to anyone in an economy mired in recession. Faced with our manifold problems,
the Governor- with his tiny armoury of largely irrelevant and ineffectual weapons - is on his own.
Little wonder then that – in deciding last week what to do about interest
rates - he should have opted to share the responsibility by talking to the Minister of Finance. There was
after all the small matter of continuing recession, with little sign of the much-touted recovery – and on top of that,
the further blow of the 22nd of February Christchurch earthquake.
There was, however, much tut-tutting that the Governor should have opted, by consulting with his
political masters, to depart from the principle of absolute independence for the Reserve Bank. Many
commentators and practitioners seemed discomforted by the thought that the elected government might be asked to bear some
responsibility for the fortunes of our economy.
The doctrine that macro-economic policy is a simple matter of setting interest rates - a task entrusted exclusively
to the Reserve Bank - is of course greatly convenient for government. It means, in our current situation, that they can disclaim
responsibility for a recession that is now well into a fourth year. Not only is it nothing to do with them
but – according to the doctrine - anything they might try to do would be counter-productive.
The paradox is that governments that are unwilling to intervene in macro-economic
policy, on the ground that the economy is best left to look after itself, are likely to end up being more interventionist
than they expect. As the economy languishes because macro-economic policy settings are inappropriate, governments
typically resort more and more – and with greater and greater desperation – to micro-economic intervention of
find more and more fiddling with tax rates and labour laws, more and more target-setting and micro-management
for science and research and the delivery of education at all levels, tighter and tighter limits on benefits and public spending
programmes – all in an increasingly futile drive to reverse our poor productivity and declining competitiveness.
But, surely, it will be asked, the Governor’s
interest rate cut was a step in the right direction? Well, yes, it had a certain value as a psychological
boost and as a small benefit to those with mortgages – but it is hardly likely to stimulate spending and investment
to the point where the recovery really gets under way. That will require measures of a quite different
nature and order of magnitude.
policy was really the key to recovery, we should surely have seen it by now. We have, after all, had falling
and historically low interest rates for years now, and the economy has hardly stirred. As I and others
argued in 2008 and 2009, using monetary policy as the only stimulus to an economy in a recession is like pushing on a piece
The Governor has, in other words,
done what he can, but what he can do is pitifully inadequate and beside the point. His recourse to involving
the Minister of Finance last week suggests that he might be moving to this view as well.
No one doubts that our problems are endemic and that the Christchurch earthquake
has added to the government’s difficulties. But the failure to take any decisive action over a couple
of years means that the earthquake cannot be identified as the primary cause of our problems.
The government has in effect contented itself with trying
to look after its own finances, and has been happy to let the wider economy look after itself. The paradox
is that public finances are the healthiest part of our economy. Focusing primarily on getting the government’s
deficit down, while ignoring the need for a whole-of-economy perspective, has reflected an ideological rather than practical
priority, and has left the economy ill-equipped to grapple with its problems – among which, sadly, the consequences
of the Christchurch earthquake now loom large.
Surely governments should be held to account for what they are elected for – providing an effective stewardship
of the economy - and the Governor of Reserve Bank should no longer be abandoned to his lonely and irrelevant vigil?
This article was published in the
NZ Herald on 16 March.