Why I shouldn’t read the paper
It appears that much of the media (some parts excluded) wants to make the discussion of monetary policy a titianic battle between opposing forces – rather than informing the public of the trade-offs that exist, and the issues that are currently being looked into.
There are two issues currently being debated – only the first one has been influenced by to the financial crisis (although it was an issue that was being looked into well prior to the GFC):
- How should financial regulation, and the goal of financial stability, be put in place?
- Why is NZ’s real exchange rate persistently so high?
The “orthodoxy” in New Zealand has been discussing these issues and trying to improve policy the entire time, in fact there was nothing wrong with the instituional settings we had in place through the Reserve Bank (hence why the PTA was little changed) – many of the problems that have occurred are to do with other things … and many of the “issues” that are being raised are in fact fallacies that show a fundamental confusion about the issue in the New Zealand context (such as the constant confusion about the nominal and real exchange rates, or the view that QE creates a “prisoner’s dilemma” between central banks).
If we had more articles like Brian Fallow’s, that aim to discuss the issues and ideas involved, instead of the type ideological drivel that often appears, we might be able to have an adult discussion on how to genuinely improve outcomes for New Zealanders.
“The orthodoxy” has done a great job of identifying the issues, and gingerly nudging out some potential policy options, but has no coherent policy platform. This is creates a vacuum for policy cranks to occupy the airwaves.
If you read through the policy papers published by Treasury, Tax Working Group, Savings Working Group over the last few years, they do a great of of diagnosing that NZ’s large external imbalances are due to very real and severe distortions inside our economy. (They tend to downplay distortions from outside the economy, although in my view these have been quite material since China entered the WTO in 2001). However, their policy prescriptions tend to be mealy-mouthed because they don’t want to get “political”.
This has had a couple of pernicious effects:
1. A meme among conservative politicians that there’s nothing we can/should do about the imbalances. This is inherently not credible, i.e. if we’re running a 5% CAD in the middle of a soft commodities boom and a slow economy, Occam’s razor would suggest we’re still doing something wrong.
2. Lack of any coherent platform for rebalancing.
It would be very helpful if someone did some modelling showing that IF we assume universal super is here to stay AND no further changes to the PTA THEN here is the least crazy set of policy decisions we could take that would get us back to a sustainable current account deficit of say 0-2%.
(I’m guessing some combination of say maximum LVRs on residential loans, better tax treatment on bank account interest and lower taxes on Kiwisave accounts, offset by spending cuts elsewhere in the central government should make a difference.)
Right now there’s no middle ground between National’s uber-cautious approach and utter radicalism.
Agreed with your second paragraph – we seem to be very much on the same page with this.
However, I still wouldn’t target the CA deficit – the persistent deficit, and
its scale, is indicative of a potential issue. However, we could
sustain deficits of 4-5% indefinitely if we so desired. We could do
even more if NZ businesses discovered some way to invest extremely
profitably.
I think there is a general feeling among the orthodoxy that the solution is:
1) Introduce appropriate macroprudential policies (structural is agreed upon, I’m not sure if there is a consensus for cyclical – and I am still against discretionary persomally).
2) Figure out what is going on in the building industry (which the productivity commision believes it has done) and then solve it.
3) Have a look into the tax system – make sure investments are treated the same way (some will call for a CGT, some will call for a land tax – the key agreement is about the consistency).
Outside of 1, which the RBNZ has been looking into for a long time, these solutions require responsibility from fiscal policy actors – hence why we don’t get any “real” traction.
I would also note that we have seen the tax policy on housing change significantly, and regulation in the financial industry has changed “medium term risk profile” for building. These changes will, and have, changed behaviour … and following this we might see an adjustment in the RER and CA deficit. Yes, the deficit is near 5% again now … but some of this involves building in Canterbury.
As an aside … the investments balance is pretty ugly, and that is a result of the high stock of net foriegn debt. This is surely going to be a constraint in
the future.