A step back­wards

The Northland Age - - Local Life / Opinion - Rick Clark

The Re­serve Bank got a new Gov­er­nor on March 26, and a set of rather dif­fer­ent rid­ing in­struc­tions from those of his pre­de­ces­sors.

Af­ter nearly 30 years of hav­ing the sole ob­jec­tive of main­tain­ing price sta­bil­ity, it will hence­forth have to ‘con­trib­ute to sup­port­ing max­i­mum sus­tain­able em­ploy­ment’. This change is set out in the new pol­icy tar­gets agree­ment be­tween the Gov­er­nor and the Min­is­ter of Fi­nance, with the so-called ‘dual man­date’ to be for­mally cod­i­fied through a Bill to amend the Re­serve Bank Act.

Fed­er­ated Farm­ers is dis­ap­pointed and con­cerned. Rather than in­no­va­tive and new, the change is a step back­wards to the 1970s and 80s, when the bank had a num­ber of ob­jec­tives, and failed ei­ther to con­trol in­fla­tion or to pro­mote em­ploy­ment.

Since 1989, when the cur­rent Act was passed, New Zealand’s mon­e­tary pol­icy has op­er­ated at world’s best prac­tice. Re­views in 2001 and 2007 con­firmed this. More re­cently, it worked well in help­ing get New Zealand through the Global Fi­nan­cial Cri­sis and var­i­ous other eco­nomic shocks over the past decade.

Em­ploy­ment has grown rapidly un­der cur­rent pol­icy set­tings, by 93,000 in the year to De­cem­ber. The labour force par­tic­i­pa­tion rate is a near record 71 per cent, and the rate of un­em­ploy­ment has fallen to 4.5 per cent. If there is con­cern about fu­ture prospects for em­ploy­ment, say around work­force skills, other pol­icy tools are likely to be more ef­fec­tive. There is no com­pelling rea­son why this change had to be made.

Not only is the change un­nec­es­sary, but putting an em­ploy­ment man­date into the Act is risky. It adds a po­ten­tially con­tra­dic­tory mea­sure that could cause con­fu­sion as to what the bank’s fo­cus ac­tu­ally is, and would re­sult in overly loose mon­e­tary pol­icy if em­ploy­ment wins out when in­fla­tion is rising.

There is much un­cer­tainty as to what ‘max­i­mum sus­tain­able em­ploy­ment’ is. Is it zero un­em­ploy­ment, 2 per cent, 4 per cent? With un­cer­tainty comes the op­por­tu­nity for po­lit­i­cal in­ter­fer­ence, as politi­cians weigh in on what they think is the ‘right’ level of un­em­ploy­ment. It will never be too low.

The US and Aus­tralia have been cited as op­er­at­ing un­der dual man­dates, but their man­dates are relics from the past. The US in par­tic­u­lar is not a good ex­am­ple to fol­low, as the im­bal­ances that led to the GFC were caused by overly loose mon­e­tary pol­icy, in­flu­enced in part by too much promi­nence of em­ploy­ment in its de­ci­sion-mak­ing.

Many econ­o­mists seem quite re­laxed, prob­a­bly be­cause they think it’s win­dow dress­ing, and they don’t see things chang­ing much in prac­tice. If so, why make the change? While the sky won’t fall im­me­di­ately, the real test will be when un­em­ploy­ment and in­fla­tion are both rising and the Re­serve Bank is forced to choose. Will the politi­cians re­ally leave the Re­serve Bank to ex­er­cise its judgment?

The Re­serve Bank Act is a cru­cial cor­ner­stone of eco­nomic pol­icy that has served New Zealand well. It is a pity to see it be­ing un­der­mined.

"While the sky won’t fall im­me­di­ately, the real test will be when un­em­ploy­ment and in­fla­tion are both rising and the Re­serve Bank is forced to choose. "

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