An article we published from the Financial Times yesterday made a compelling argument that economic stimulus is, and should be, a permanent policy for governments to follow. The stimulants it referred to are the previously unorthodox monetary injections given by central banks of the United States and Europe after the global financial crisis of 2008.
Twelve years is a long time in economic terms, longer than the usual business cycle. In that time the US has managed to stop creating money by buying its own bonds, called "quantitative easing", but European banks have tried and failed to wean their economies from the teat.
Theory warns that monetary creation will cause inflation if the production of goods and services does not grow at the same rate. But after a dozen years of this stimulus, growth in most economies remains low, and yet inflation has not reappeared.
The Financial Times' commentator, Martin Sandbu, argues there is a lesson to be learned on the bright side of this experience. "First, demand stimulus works," he wrote. "[It] has kept growth on track well beyond the length of typical economic recoveries, and more stimulus has tended to go with more growth. This has pushed unemployment down and created more jobs than observers thought was safely possible. The 'Phillips curve' that warns of inflation rising when labour markets become too tight, has been quiescent.
"Second," he said, "the longer demand keeps expanding the greater the benefits for the least fortunate. In the US and UK recent wage growth has been strongest for those paid the least. In much of Europe, more of the population has a job than ever before."
The article said nothing about the downside of monetary stimulants: very low interest rates that push savings into housing and other assets capable of holding their value.
Housing has become unaffordable for those on average incomes.
That might not be as big a problem in the UK or Europe where home ownership has not always been a widespread aspiration. But in countries such as ours it has been the general aspiration and we should not give it up.
We can never be immune from the monetary policies of larger economies — if our interest rates are too much higher than theirs our dollar will rise and exports will suffer — but if very low interest rates are now accepted as a semi-permanent international phenomenon, our Government needs to find new ways to provide affordable first homes.
This week the Herald reported average Auckland house prices have recorded their largest quarterly increase since the 2017 election. Nationally the increase was even larger, the largest since 2016, the year the previous long price boom finally stalled.
The Reserve Bank lowered its official cash rate drastically last year and a resurgence in house prices was predictable. But it presents a renewed challenge for the Government as holidaying ministers turn their thoughts to election year.