Deborah Coddington: High price of doctor's medicine

It's difficult to admit you were wrong, so I'll take a deep breath. Thirteen years ago I wrote in praise of the Reserve Bank Act's price stability agreement and its single objective of achieving stable prices. Foolishly, I didn't ask why price stability was a noble objective, just accepted that keeping inflation below 2 per cent was a good thing.

Three years later Sir Robert Jones gave me his newly published book - Prosperity Denied: How the Reserve Bank Harms New Zealand - which I dismissed as another example of the good knight cantering in the opposite direction for the sake of a controversial ride. I thought the Governor, Dr Don Brash, was doing a good job. The last thing we needed again in this country was rampant inflation.

But when the current Reserve Bank Governor Dr Alan Bollard lifted the official cash rate for the ninth time in two years, I started to wonder if I'd done Sir Robert an injustice. We don't have massive unemployment, free trade with China has given New Zealanders cheap and plentiful goods, the Labour Government hasn't dramatically reversed much of the Lange-Douglas deregulation and privatisation. So where's the inflation bogeyman we're so terrified of?

Why do we persist in calling a commodity price rise inflation?

At the moment property's to blame - there are more buyers than land and buildings for sale, so prices go up. Dr Bollard wants property prices to fall, so he raises the price of money. I don't get it. Money suppliers are permitted to earn more, but property suppliers aren't.

Lifting the cash rate makes the Kiwi dollar very desirable, so the exchange rate goes up and that really hurts exporters, who are also manufacturers and/or producers. They get squeezed, respond rationally by closing plants and reducing staff, unemployment goes up, productivity goes down, social welfare spending increases, so we get inflation. You could argue the Reserve Bank causes inflation.

How can those who say they support a free-market economy based on supply and demand also support a state-owned institution legally charged with freezing prices?

And here's another question for which I have no answer. Why is it when Sir Robert Muldoon tried to rein in inflation and forced wage and price freezes on us with his 1973 Price Stability Act it was rightly rubbished by the new right as naughty state intervention in the market, but today when essentially the same thing happens, albeit via a different mechanism, we hear not a peep from those same reformers?

The end never justifies the means, or, as Sir Robert Jones puts it in his book, both lethal injection and electric chair have the same result - death sentence.

Last week Dr Bollard raised the cash rate to 7.25 per cent - the highest it's ever been. But two out of three homeowners in New Zealand don't have mortgages and 80 per cent of those who do have mortgages are on a fixed rate of interest. Yet Bollard firmly predicts his intervention means house prices will drop by 5 per cent and reckons he's been "saying this for two years so you'd have to be pretty thick not to get it".

Well, how thick do you have to be to answer me this: New Zealand is hugely dependent on manufacturing, agricultural production and exporting, so why do we tell that sector they're bad people, not needed for wealth creation? Just because good people want to buy property?

Does the Governor seriously think New Zealanders are so thick they'll pay whatever they're charged for a piece of real estate?

At some stage buyers balk and sellers reduce their price. Left alone, the market rights itself, whether it's cabbages, houses, or office space. Anyway, most Kiwis buy emotionally. Will the new baby like this corner room? Can we extend the kitchen?

Dr Brash, if he's reading this, will be asking about the productivity factor. To answer that he only has to look at the number of folk improving the cosmetics of their home. Spending money on garden centres, curtains, builders, hardware, furniture, designer magazines, all the "stuff" that Drs Bollard and Brash think we don't need is actually fuelling productivity.

We fall in love with a place and go to considerable lengths to make it home. That's human behaviour and the very issue ignored by every dry-as-dust economist I've encountered.

Instead of stopping to smell the roses they insist their subject is an inflexible discipline with rigid rules. Their hearts beat cold blood and the whole country suffers.

In the process prosperity is indeed denied. Tax cuts are no use to us while we have this price-stability policy - Dr Brash made sure of that in 1995, and I bet Dr Cullen quietly agrees.

The 0 to 2 per cent inflation rate was set in 1990 on the back of a severely depressed property market. Keeping it there depresses the whole economy and makes us feel as joyless as a Reserve Bank governor.

It's time to debate where we want to go - prosperity and higher wages for everyone, accepting the risk of fluctuating prices, or an economy charging along at full throttle while the Reserve Bank has its feet firmly on the price-stabilising brakes.