Scoop Election 08: edited by Gordon Campbell

Gordon Campbell on Labour’s new economic plan

April 29th, 2014

As Labour’s shadow Finance Minister David Parker pointed out on RNZ this morning, New Zealand has led the way internationally by making the control of inflation the sole focus of its central bank – with the dire result that when property prices go up in Auckland, the Reserve Bank feels obliged to raise interest rates and clobber families with mortgages and the export sector alike, across the entire country. For two decades now, we’ve learned to co-exist with the weird, self-inflicted damage from policy settings whereby the RB routinely feels impelled to reach for the interest rate lever even when – as now – there is no price inflation whatsoever within the productive part of the economy. Right now, the main side effect of simply relying on interest rate hikes to combat inflation has been to attract foreign speculators, and to kick up the exchange rate – to the further detriment of our exporters abroad, and families with mortgages at home.

Labour’s plan would widen the criteria that the RB should need to consider when it tackles inflation – a requirement entirely in line with the orthodoxy elsewhere. The US central bank for instance, has always and routinely needed to consider unemployment/unemployment factors when setting inflation rates, and yet somehow, this hasn’t stopped capitalism in its tracks. In the last 24 hours alone, the US Federal Reserve has been weighing those wider factors, and this requirement has lead to the kind of policy debate reported overnight in the Financial Times:

When considering labour markets, the Fed has historically raised interest rates when unemployment has dropped to levels below which it would expect a pick-up of inflation – the non-accelerating inflation rate of unemployment, which the Fed believes is about 5.5 per cent. At the average rate of payroll growth of about 200,000 jobs per month in this and prior US economic expansions, the Fed could anticipate reaching the 5.5 per cent unemployment rate in late 2015. This assumes that the percentage of the population working or seeking work, the labour force participation rate, remains unchanged.

This need for the US Fed to consider the impact on unemployment before hiking interest rates leads onwards to a useful policy debate ; as in how, for instance, does the Fed explain the downturn in labour force participation that has occurred during the current expansion? Maybe, some suggest, this reflects the depth of worker discouragement caused by the GFC ; maybe it also reflects the way essential skills have eroded or become obsolete, leaving such people structurally unemployable ? Either way, that debate leads to better policy outcomes. Here in New Zealand, the RB simply saws away on interest rates, and employment issues are not considered before crucial decisions are made.

The main dimension of Labour’s policy is to offer an alternative to the current reliance on interest rate hikes; mainly, by requiring higher contributions to Kiwisaver, as an inflation fighting tool.

We’re going to give the Reserve Bank another mechanism, which is a variable savings rate through KiwiSaver. The Reserve Bank will be able to keep its inflation anchor but instead of that money being lost to you in higher interest rates it will go into your savings. The benefit for the export sector is instead of jacking up interest rates and pushing up the exchange rate you will still control inflation but you’ll have lower interest rates and a better exchange rate.” Mr Parker said it would apply to working people but it would consider excluding those on the lowest incomes.

Right. Instead of paying higher interest rates to Aussie-owned banks and seeing those profits flow offshore, the Labour plan would channel those funds into domestic savings, and take a lot of the current speculator-driven pressure off the exchange rate. Even at the highest rates of Kiwisaver contributions envisaged by Labour, as Guyon Espiner pointed out on RNZ this morning, this would still be well below the level of compulsory superannuation contributions in Australia.

Incidentally, the politics of this debate do have extremely odd elements to them. It is Labour, the nominally centre-left party, that is coming to the rescue of those export businesses that are being clobbered by the exchange rate – at a time when National, the alleged friend of business, is telling those firms to suck it up, and learn better survival tactics. Furthermore, it is National that is crying crocodile tears over the plight of those on low incomes. Finance Minister Bill English for instance, has warned of what he calls the “toxic” outcomes of Labour’s policy, whereby those on lower incomes [i.e. the majority of New Zealanders] would face the tandem impact of higher compulsory Kiwisaver contributions and more expensive imports, if and when the Labour plan succeeded in dropping the exchange rate.

English’s comments were a reminder of what has been a largely hidden dimension of this year’s election strategising. Clearly, a high exchange rate serves the political interests of the Key government, by protecting it from the immediate fallout from a lower exchange rate: which would include, for example, higher petrol prices at the pump, and higher prices for consumables. Most voters are consumers, not exporters – and thus, keeping the dollar aloft serves as a form of Muldoonist economic populism that John Key and Bill English seem very happy to embrace. Cheaper imports underpin spending in the local economy. (On the side, it also makes the imported component of our exports that much cheaper.)

So far, so good, so unsustainable. In a modern economy, no country can afford to put the interests of consumers ahead of its exporters, long term. At 85 cents to the US dollar, the pain currently being inflicted on our exporters is such that it exceeds any gains in efficiency they’ve been forced to make in order to survive. Sooner or later, the government is going to have to look beyond its own short term political interests, and start to govern in the interests of the country. For now – and just as it has done with respect to the age of superannuation entitlement – Labour is playing the role of the unwelcome guest that has to remind voters that the current policy settings cannot endure. In the old fable, the grasshoppers were more popular – but the ants had the better strategies for survival.


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    1. 7 Responses to “Gordon Campbell on Labour’s new economic plan”

    2. By dan on Apr 29, 2014 | Reply

      I’m going to get weird and say that I want National to win (although I’m voting Green). It’s because I want the chickens to come home to roost during National’s term of office.

      I’m quite tired of the cycle of “Centre-right screws up the economy but bribes people with selloffs, loans and cheap imports, Centre-left comes in, makes the hard decisions, and cleans up the mess, economic illiterates blame Labour because of the short-term consequences of hard but neccessary choices”.

      I want National to win, and then for the consequences of their short-termism to be laid at their feet alone.

    3. By Kat on Apr 29, 2014 | Reply

      You may get your wish Dan. The 10% of the greedy ‘Middle Zealand’ that regularly vote in National govts due to a combination of bribery and fear can be relied upon to storm the ballot boxes again in September.

      Watch out for a re-run of the ‘Dancing Cossacks’ by the trusty trolls of the National party.

    4. By Anthony Limbrick on Apr 30, 2014 | Reply

      This is actually my idea, as originally laid out in an article in Fishhead magazine in 2011. The link is here. If you would like me to comment further on this, I would be happy to.

      Anthony Limbrick

    5. By El Guapo on Apr 30, 2014 | Reply

      To be fair guys, all governments make bribes not just right leaning ones.

    6. By Kat on Apr 30, 2014 | Reply

      Yes, but El Guapo its the added ingredient of fear that makes it pure right topple over…..

    7. By Dave McArthur on May 1, 2014 | Reply

      Gordon, may I humbly suggest it is helpful to look at the bigger picture and ask the following question: what form of capital does KiwiSaver convert our wealth into and how sustainable is this form?
      In brief, KiwiSaver converts our national assets into forms where a global banker oligarchy can squander them in wasteful, polluting, murderous ways. This oligarchy controls all stocks, shares, bonds, commodities and currency trades using supercomputers, “insider” knowledge, superior broadband and legislation that enables them to extract wealth from almost every trade. KiwiSaver is the perfect vehicle for converting our wealth into the fodder of the vast derivatives trades of this oligarchy. It is a recipe for war and misery.

      What do elderly people in NZ really need? During my decades as a meter reader I learned they do not fear starving to death here but they do fear dying of the cold and of isolation and they do fear for their children.
      People who lived through the wars and deprivations of 1914- 1950 taught me that real wealth resides in freehold, warm, insulated, solar oriented dwellings and in freehold intelligent, democratic, local electrical grids (230 volt, telecommunications and transport).
      KiwiSaver is designed to take the wealth that could be invested in such real superannuation systems and convert that wealth plus our dwellings plus our local electrical grids into speculative, debt-generating devices for the benefit of the oligarchy. Note: winter is not here yet and already my room in Wellington is only 16C as I write i.e. below WHO safety guidelines.

      We can each be our own worst enemy and Labour is an exemplar of this truth. It’s reputation for concern for the poor means it can enable excesses in ways that National cannot do. It coats its consumption-waste-pollution imperative with much talk of caring for humanity. Inherent in this imperative is the destruction of resources. In this process money loses its real collateral with the depletion of minerals, clean water, forests etc. This destruction of real wealth is the truer source of inflation. KiwiSaver must thus work to increase inflation.

      Passion and well-meaning become liabilities when we ignore the ingenious capacity of the ego for self-deceit. The truth is KiwiSaver is not about saving but about debt generation. It is not about conservation but about non-conservation. It is not about providing for peace but preparing for war. We are allowing it to become our own worst enemy.

    8. By Joe Blow on May 2, 2014 | Reply

      Sorry to be a grouch about Labour’s new plan but I don’t see how it is going to fix the main inflationary pressure, namely house prices.

      The CPI (main measure of inflation) was up 1.5 percent March quarter, half of that being due to housing and housing utilities:

      More contributions to Kiwisaver ain’t going to fix that in a hurry, but a hike in interest rates on mortgages will definitely dampen the housing market.

      Labour’s other policies around housing are what will make the real different in terms of keeping rampant inflation in the housing market under control.

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