NZ Herald business editor at large

Liam Dann: Economic centre ground shifts left

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Monetary policy - the silver bullet for economic woes  - is at the limits of its power. Photo / Michael Craig
Monetary policy - the silver bullet for economic woes - is at the limits of its power. Photo / Michael Craig

This economic cycle of low inflation and low wage growth is creating asset bubbles, exacerbating inequality and driving political instability.

The lack of inflation is killing wage growth. Businesses are making gains on costs but reluctant to expand as sales margins fall.

Meanwhile, the cure for all this, low interest rates, comes with the side effect of pushing stored wealth into property and shares.

That drives the inequality as those without access to capital are left behind. It also adds the risk of bubbles bursting and causing another crisis.

Monetary policy - the silver bullet for economic woes of the past 30 years - is at the limits of its power.

These aren't incendiary insights. Not these days.

In fact what's really amazing is the extent to which they have entered the mainstream of economic thinking.

Whether its bank economists, stock brokers and fund managers, there are now few voices in the traditionally right leaning financial world prepared to argue that the system hasn't broken down to some extent.

It brought it all home hearing Reserve Bank Governor Graeme Wheeler make similar observations last week.

It isn't his brief to get involved in domestic politics so Wheeler is more comfortable talking about political dimensions in relation to the US, Europe and UK.

"I think if you take the States and look at what extent have real incomes improved for the median worker - you haven't seen a lot of income growth in the past two decades.

Then you get a global financial crisis and 24 per cent of mortgage holders with negative equity, then you get unemployment rising. What's the Fed to do. It cuts interest rates dramatically and undertakes quantitative easing, its basically trying to inflate the economy," he said.

"If you're not well positioned with assets then you relative wealth is not going to fare well. And I think that has political implications that we've seen in the US and in the UK as well."

We can wait for the next storm and hope for better outcomes or prepare for them now and be ready.
US Federal Reserve San Francisco president John Williams

Talking specifically about Europe and Japan, where interest rates are now in negative territory, he was equally frank.

"I think that there are a lot of issues around negative interest rates. It signals that, by and large, central banks have pretty well run out of options."

This week one of his peers, US Federal Reserve San Francisco president John Williams, called for a major overhaul of the system.

"We can wait for the next storm and hope for better outcomes or prepare for them now and be ready," he wrote.

US Federal Reserve San Francisco president John Williams. Photo / Getty Images
US Federal Reserve San Francisco president John Williams. Photo / Getty Images

Williams suggested two possible changes: raising the Fed's two-percent inflation target, or replacing inflation-targeting with some form of nominal GDP targeting.

Wheeler isn't a fan of changing the rules just yet. He argues there is still no better framework than inflation targeting and that changing the targets can have other negative side effects.

He doesn't say it explicitly but one suspects he has sympathy for the other alternative action being talked up globally - governments spending some money.

Once strident champions of the free-market are now recognising that some form of direct intervention by central government will likely be needed to break out of this cycle.

Aside from the brilliance of referencing economist Maynard Keynes and a pop song by Olivia Newton-John in the same line, the piece confirms the extent mainstream economic views have shifted.

Ambrose Evans-Pritchard, a business columnist in the centre-right UK Daily Telegraph summed it up last week in a piece headlined: "We're all Keynsians now, so let's get fiscal."

Aside from the brilliance of referencing to economist John Maynard Keynes and a pop song by Olivia Newton-John in the same line, the piece confirms the extent to which mainstream economic views have shifted.

Spending your way out of crisis went deeply out of fashion around the time Olivia Newton John was getting physical, in the early 80s.

But in the Great Depression of the 1930s it had merits. Many are now comparing current economic conditions with those of the 30s.

Reserve Bank Governor Graeme Wheeler. Photo / Getty Images
Reserve Bank Governor Graeme Wheeler. Photo / Getty Images

The Reserve Bank did send a signal on this last month when Deputy Reserve Bank Governor suggested the Government might consider revisiting policy on tax and migration.

When you look at the economic shifts across the political axis in the past thirty or so years you can see the whole world moved right in the 1980s.

For many in New Zealand, who were angered and alienated by the big spending excesses of the Muldoon era, that may have seemed like a permanent shift. But orthodoxy changes as the world changes.

Our Government, has been quietly shimmying left on various policy issues, sometimes subtly and sometimes unashamedly borrowing from rivals.

Our Government, has been quietly shimmying left on various policy issues, sometimes subtly and sometimes unashamedly borrowing from rivals. But in pure fiscal terms it remains tight fisted - focused, not unreasonably, on balancing the books and debt repayment.

But in pure fiscal terms it remains tight fisted - focused, not unreasonably, on balancing the books and debt repayment.

New Zealand's relatively solid economic performance out of the GFC, boosted by the dairy boom, has afforded Finance Minister Bill English the luxury of being prudent.

But if these global economic doldrums persist then New Zealand will continue to slide slowly into the monetary policy dead end that other countries find themselves in.

There's still scope for a good political scrap about how best fiscal stimulus should be delivered: infrastructure? social spending? tax-cuts? science and R&D?

It needs to be investment that will drive productivity and underpin more solid economic growth when the stimulus effect has passed.

But it is time to for political leadership on this front. New Zealand has historically been ahead of the curve on economic policy, we should stay there.

- NZ Herald

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NZ Herald business editor at large

Liam Dann is business editor at large at the New Zealand Herald. He has been a journalist for 20 years, covering business for the last 14 of them. He has also worked in the banking sector in London and travelled extensively. His passion is for Markets and Economics, because they are the engine of the New Zealand economy. He hosts The Economy Hub video show every Thursday.

Read more by Liam Dann

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