I don't think it was intended, but the Reserve Bank governor's speech this week on the bank's response to Covid-19 served more to highlight the limitations of monetary policy than put the listener's mind at rest.
The principle behind lowering interest rates in tough times is that it should encourage businesspeople to invest and grow their businesses and hire more people. More jobs help economic recovery.
The problem is that we already had low interest rates going into this crisis, we have record low interest rates now, and yet the business investment isn't happening. It's like the old "lead a horse to water" scenario, and the evidence is this horse isn't currently convinced of the merits of drinking.
The governor more or less acknowledged that, but then talked about doubling down with options to lower interest rates even further — perhaps even taking them negative. Given the lack of success to date, it is hard to see yet lower rates making any positive difference. I can think of negatives though.
The governor accepted in his speech that the ultra-low interest rates he and other central bank governors have been engineering are massively pumping up asset prices as people search around for any sort of return that's better than the measly amount they get at the bank. He shrugged his shoulders about that and went as far as suggesting it was a feature, not a bug, of the approach, along the lines that people who feel wealthy spend more.
However, problems occur when asset prices get completely out of whack with their underlying value. Either you end up with a market crash, or the gap massively widens between the haves and the have-nots and you get political turmoil, as we saw in Europe and the US after the GFC.
It is frankly jarring that world stock markets are currently testing all-time highs at the same time that economies are doing swan dives and businesses are laying off swathes of workers. A cynic would say central banks have over-reached, and they risk being seen as simply there to protect the asset values of the already wealthy.
Another negative byproduct of current monetary policy settings is the removal of any sort of discipline interest rates would normally bring to government spending. Nobody is arguing governments shouldn't support people's livelihoods during this sort of shock, but there is sensible income support, there is investing in better outcomes; and then there is an orgy of patronage.
New Zealand is now indulging more in the latter, where it is less about what you do than who you know, as was most egregiously but not uniquely demonstrated with a certain school in Taranaki.
The Reserve Bank governor proudly recorded in his speech that the bank's bond purchases were reducing the Government's borrowing costs significantly, of course at the same time as its debt balloons out. I'm not sure the generation that gets to pay back all this borrowing will thank him.
There are roughly three economic tools that can be brought to bear to help an economy recover from a shock like this: monetary policy, fiscal policy, and growth-enhancing economic reforms. The government agencies have front-loaded the first two, to where they are near fully deployed. We now really need to focus on the third.
Economic reform is all about the rules that businesses play under and it's a bit like rugby.
Make the rules too tight or confusing and the game collapses into a bunch of whistle and stop-start time-wasting. Loosen them up, the game flows, points can be scored and jobs created.
We've been going through a big round of tightening of the rules lately. Greater restrictions on farming, on attracting investment from overseas, on exploring for gas, what you can pay new workers, on who can train apprentices, and so on and so on. The game was already slowing down before Covid came along.
Which brings me to the final point I noted about the Reserve Bank governor's speech this week. There was no reference in it to any desired economic reforms to accompany monetary and fiscal policy. And that is despite him acknowledging the limits of his own remit.
Unlike his counterpart in Australia, and virtually all his predecessors in New Zealand, he's not using his independent position to ask for any help.
And he's not alone. We've had nothing from the new Treasury Secretary either. In contrast to all precedent there's been no shopping list of needed economic reforms, nothing. Her contribution to the public economic debate so far has been hard to detect.
Do New Zealand's two leading economic mandarins really believe there is no need for growth-enhancing reforms to help the post-Covid recovery? Do they not have any reform advice for lawmakers in light of the biggest economic shock in living memory?
And what about their political masters? We are approaching an election. What are their ideas to help the economic recovery? Beyond spending I mean.
Where are the plans to encourage the private sector, which is after all by far the largest part of the economy, to invest and grow? The Prime Minister and Finance Minister have occasionally talked of a recovery plan but provided no details. The polls open in four weeks and we don't yet even know their tax policy.
It is clear from the Reserve Bank governor's speech this week that we will soon reach or potentially exceed the limits of what can be achieved from monetary policy and fiscal policy. The downside risks are looking more and more like they could outweigh the upsides.
It is therefore time for a serious discussion about economic reforms that will encourage firms to invest and grow in the post-Covid world. We need a serious growth plan for these unprecedented and serious times — as yet there is no sign of one.