Liam Dann: Making sense of Reserve Bank stacking

OPINION:

I wonder who has the worst job right now, All Blacks coach Ian Foster or Reserve Bank Governor Adrian Orr?

Both have faced intense public criticism in recent weeks.

A part of
it’s been the usual anger and reflex stuff. The Kiwis are a grumpy bunch this year.

But when former All Blacks manager Steve Hansen voices his concerns over the All Blacks’ woes, it carries considerable weight.

Similarly, former Reserve Bank Governor Graeme Wheeler publicly expressing concern about the bank’s current strategies deserves particular attention.

Graeme Wheeler, RBNZ Governor from 2012 to 2017, co-authored a piece on global central bank failures – but with some Orr- and RBNZ-specific digging.

He associated himself with Dr Bryce Wilkinson and the article published by economic think tank The NZ Initiative.

If Wheeler hadn’t been involved, it would have been far less newsworthy.

I place a very high value on the economists of the NZ Initiative, but it is important to understand that they have a point of view.

Some would call them neoliberal or right-wing. I think it’s unfair because they have a more nuanced view on many topics.

But when it comes to issues like inflation, they have a classic monetarist view.

This is a view shared by many people whose relationship with the economy was forged in the tumultuous years of the late 1970s and 1980s.

It is so anchored in the thought of a generation that it is sometimes presented as an immutable physical law.

This is not the case. Like any economy, it is political.

The founding father of monetarism Milton Friedman said: “Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can only be produced by a more rapid increase in the quantity of money than in the production.

This is an important observation and should never be overlooked.

But as we have seen with the pandemic, a sudden and catastrophic shock to supply chains can be a massive driver of inflation.

Strict monetarists would argue that real inflation is a symptom of central bank failure to adjust the money supply – but at what cost?

In my opinion, they often downplay the importance of employment in people’s lives.

As individuals, we can handle inflation in ways that we cannot if we suddenly lose our income.

Of course, as we saw in the 1970s, if you leave inflation unchecked for too long, recession and high unemployment will follow anyway. You will end up with the worst of both worlds.

It’s a balancing act.

But we didn’t let inflation go unchecked. We are raising interest rates at an unprecedented rate.

One of Wheeler’s main concerns appears to be that the RBNZ has not sufficiently acknowledged that mistakes have been made regarding the scale and timing of its stimulus policies.

He fears that without proper recognition and analysis, there is a risk of repeating these mistakes.

It seems quite reasonable. When all of this is over, there should be a full review of all our monetary, fiscal and health responses.

But it’s not over yet.

Is the emergence of high inflation in itself proof that our policy response has been a failure?

What is the counterfactual here?

Even economists’ worst forecasts don’t look nearly as bad as the economic meltdown we faced when Covid hit.

No one is predicting double-digit unemployment. Inflation is expected to decline over the next 18 months.

Many of the harshest central bank (and government) critics seem to fear that we are returning to the long-term stagflationary era of the 1970s and 1980s.

These fears seem too emotional to me.

Maybe they will be right. But for now, the jury is still out.

When political critics stray into hyperbole (or when their arguments are picked up and exaggerated by politicians and conservative media commentators), they make it too easy for the left to view them as dinosaurs – old generals fighting the last war.

Constantly confusing concerns about monetary policy decisions with broader cultural issues – like whether central banks should explore responses to climate change or use te reo Māori, does them no favors.

Finance Minister Grant Robertson was quick to accuse The NZ Initiative of hindsight saving.

Its chief executive, Oliver Hartwich, rightly replied that this is not a step back, the NZ Initiative’s stance on monetary policy has been consistent since the start of the pandemic.

But to paint the current economic scenario as significantly worse than any number of counterfactual scenarios is opinion – not fact.

Economics is not a hard science.

Hard science runs real-world experiments over and over in the lab, with controls in place, until it’s accurate to irrefutable degrees.

Economic policy is played once, in real time, and we don’t have to do it again.

The idea that the RBNZ shouldn’t have provided any raises is ridiculous. I don’t think anyone sane disputes that point.

So are we debating the degree of stimulus and the timing of its withdrawal?

It does not seem worthy of such great passion.

In reality, a deeper battle is being played out among the nation’s economists over what role a central bank should play in society.

I guess this is part of the ongoing and fascinating debate about the future of the economy.

We should accept that.

But let’s beware of letting politics polarize positions that are not necessarily so far apart.

The world is too complex for that.