In politics, as in all spheres of life, timing is everything. Take the report into manufacturing released yesterday by the Labour, Greens, New Zealand First and Mana parties. When their inquiry began last October, times were uncommonly tough in the sector. Just last Friday, however, the latest BNZ-Business NZ performance of manufacturing index indicated that it was expanding at its fastest rate since 2003, and at one of the world's highest rates. Equally, a tumbling exchange rate has eased many of the sector's woes. In that context, the report's talk of the killing of manufacturing seemed lame at best.
Yet even if current conditions had mimicked those of eight months ago, the report would have been counted a barren exercise. Its three core recommendations are as flawed as they are predictable. The first wants monetary policy to be aimed at achieving a lower and more stable exchange rate, as well as a lowering of structural costs in the economy, such as electricity prices, and a refocusing of capital investment into the productive economy, rather than housing speculation. Only the third part of that triple jump, which implies a capital gains tax, is worthy of consideration. The other two would simply introduce a new set of problems.
The report talks of a "new orthodoxy" in economic thinking, in which the trade-off between exchange rate controls and inflation is strongly challenged. Under this approach, the Reserve Bank would be forced to focus on the dollar, rather than just price stability. Doing just that in Australia did not, however, prevent that country's currency from taking flight. Indeed, when the pinch went on, the Reserve Bank of Australia demonstrated, rightly, its belief in the overriding importance of inflation control. In time, of course, the Australian dollar bowed to cyclical realities and came back, just like that of this country. Manufacturers in both countries can now benefit from improved exchange rates.
The report's recommendation for a lowering of structural costs in the economy refers specifically to electricity prices. This is a clear nod to the Labour-Green proposal for a single buyer to purchase all electricity generation at what it deems a fair price. Presumably, this is seen as the forerunner of a greater emphasis on central planning. Manufacturers would, of course, applaud lower power costs. But what they would also get would be inefficiencies, unintended consequences and, if history is a guide, blackouts.
The second major recommendation is the introduction of research and development tax credits, with a stronger emphasis on development, as part of a package to stimulate innovation. This is hardly novel thinking. Indeed, as the report notes, there have been regular attempts to increase the relevance and timeliness of applied research, and to bring firms and research institutes together more effectively. It also acknowledges the potential for "gaming" tax credits. In effect, nothing new is advanced.
