The greens are right to back down on QE. Their critics on the left are wrong to make QE a symbol of progressive orthodoxy.

I argued against the Greens policy because they proposed removing the independence of the Reserve Bank and linked monetary policy decisions to fiscal decisions about what we spend our money on, and because QE isn't right for New Zealand's economy right now.

QE is a useful tool for the Bank to have in its armory, but it is not one to use when we have higher interest rates than the so-called 'zero-bound’ (the point at which interest rates can't be reduced further). If it wanted to do more to encourage spending and stimulate the economy, the Reserve Bank could still lower interest rates before it has to think about printing money.

The problem with our Reserve Bank settings at the moment is that it's illegal for the Bank to look at stimulating the economy; or even to look at wider monetary policy stability such as flows of capital from overseas and the level of the exchange rate. It is solely concerned with achieving 'price stability', although it has to achieve this objective with some regard to 'output'.

Commentators Chris Trotter and Bryce Edwards have attacked the Greens for abandoning the QE proposal. The mistake they make is to see QE as a socialist policy to facilitate more state spending on things like health and education. But that is not what QE is for. 

The point of QE is to stimulate demand when the economy is in a liquidity trap where households and businesses stop borrowing because times are tight and their reduced spending further keeps the screws on the economy. Government is the only player big enough to get out of this trap.

The New Zealand economy is slow, but it is not in a liquidity trap. Monetary policy changes could help to speed up the economy: Changing the loan to value ratio, for example, would help redirect investment out of speculation on the existing housing stock and into more productive parts of the economy. Lowering the OCR would help to influence our dollar lower, creating more exports and easing pressure on our job-rich export substitution industries - at the expense of higher prices.

Because of the potentially inflationary consequences of using monetary policy to promote growth, the Trotter-Edwards attacks on the Greens seem to assume that there is something intrinsically progressive about inflating the economy and reducing the value of money. This is misguided. Advocating for QE isn’t the same as fighting against inequality. The latter is a principle (no compromise), the former is a tool. Indeed,  asset price inflation in the absence of growth can make inequality rapidly worse - ask families who can't hope to buy a first home. This is why these tools need to be deployed with care and not as if they were always right all the time.

Chris Trotter wrote in his latest column that the best kind of politician (he means not those like Russel Norman who changed policies after public criticism) win by ‘calmly explaining (controversial policies) over and over again, finally convincing the voting public of their worth.’  This is plain snobbery. It says to voters - ‘we’re right, you’re wrong. And rather than listen to you, we’ll keep explaining until you realise how stupid you are and how enlightened we are.’

Russel Norman did something much more interesting: He knows there is wide public support for a sustainable and fair economy, and so if the public are rejecting his policy it's not because they reject his principles, but because his policies don't adequately implement the principles. A politicians who knows the difference between principle and policy deserves credit.

The sanctimony of those parts of the left attacking the Greens for ditching QE puts them on the side of ‘we know better than you’ privilege. If the parliamentary left adopted their arguments, it would effectively concede that economic management is unimportant to the left, that symbolic tools were more important than the outcome achieved by misuse of them. That is no way to try to help New Zealanders who need jobs, better incomes and a fairer share of the nation's production. 

Comments (2)

by mikesh on June 24, 2013
mikesh

I doubt whether Russel's "QE" would increase the money supply as the RBNZ would probably respond by curbing bank lending. It would therefore reduce the availability of housing loan monies, and provide interest free money for useful projects like the Christchurch rebuild.

by stuart munro on June 24, 2013
stuart munro

There are some problems with QE overall, as against direct government printing, but the important point is to get the consistently non-performing neo-liberal hacks at Treasury to show their working. Their results to date have been pitiful, discrediting the whole idea of an independent Treasury by failing to respond to serious long-term issues like the housing bubble and our significantly overvalued currency.

The whole idea of an independent Treasury is predicated on a stable economic situation in which the separation of powers can dilute factional interests by dampening volatility. The capture of Treasury by lethargic and obtuse neo-liberals has not smoothed out volatility, they are inflating the Auckland property market like the most shameless hucksters that ever drew breath. Like the GCSB they need to be burnt to the ground, and it is by no means clear that they should be rebuilt afterwards.

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