Monetary policy - the silver bullet for economic woes - is at the limits of its power. Photo / Michael Craig
Monetary policy - the silver bullet for economic woes - is at the limits of its power. Photo / Michael Craig
Opinion by Liam Dann
Liam Dann, Business Editor at Large for New Zealand’s Herald, works as a writer, columnist, radio commentator and as a presenter and producer of videos and podcasts.
In fact what's really amazing is the extent to which they have entered the mainstream of economic thinking.
Whether its bank economists, stock brokers and fund managers, there are now few voices in the traditionally right leaning financial world prepared to argue that the system hasn't broken down to some extent.
It brought it all home hearing Reserve Bank Governor Graeme Wheeler make similar observations last week.
It isn't his brief to get involved in domestic politics so Wheeler is more comfortable talking about political dimensions in relation to the US, Europe and UK.
"I think if you take the States and look at what extent have real incomes improved for the median worker - you haven't seen a lot of income growth in the past two decades.
Then you get a global financial crisis and 24 per cent of mortgage holders with negative equity, then you get unemployment rising. What's the Fed to do. It cuts interest rates dramatically and undertakes quantitative easing, its basically trying to inflate the economy," he said.
"If you're not well positioned with assets then you relative wealth is not going to fare well. And I think that has political implications that we've seen in the US and in the UK as well."
We can wait for the next storm and hope for better outcomes or prepare for them now and be ready.
Talking specifically about Europe and Japan, where interest rates are now in negative territory, he was equally frank.
"I think that there are a lot of issues around negative interest rates. It signals that, by and large, central banks have pretty well run out of options."
This week one of his peers, US Federal Reserve San Francisco president John Williams, called for a major overhaul of the system.
"We can wait for the next storm and hope for better outcomes or prepare for them now and be ready," he wrote.
US Federal Reserve San Francisco president John Williams. Photo / Getty Images
Williams suggested two possible changes: raising the Fed's two-percent inflation target, or replacing inflation-targeting with some form of nominal GDP targeting.
Wheeler isn't a fan of changing the rules just yet. He argues there is still no better framework than inflation targeting and that changing the targets can have other negative side effects.
He doesn't say it explicitly but one suspects he has sympathy for the other alternative action being talked up globally - governments spending some money.
Once strident champions of the free-market are now recognising that some form of direct intervention by central government will likely be needed to break out of this cycle.
Aside from the brilliance of referencing economist Maynard Keynes and a pop song by Olivia Newton-John in the same line, the piece confirms the extent mainstream economic views have shifted.
Ambrose Evans-Pritchard, a business columnist in the centre-right UK Daily Telegraph summed it up last week in a piece headlined: "We're all Keynsians now, so let's get fiscal."
Aside from the brilliance of referencing to economist John Maynard Keynes and a pop song by Olivia Newton-John in the same line, the piece confirms the extent to which mainstream economic views have shifted.
Spending your way out of crisis went deeply out of fashion around the time Olivia Newton John was getting physical, in the early 80s.
But in the Great Depression of the 1930s it had merits. Many are now comparing current economic conditions with those of the 30s.
Reserve Bank Governor Graeme Wheeler. Photo / Getty Images
The Reserve Bank did send a signal on this last month when Deputy Reserve Bank Governor suggested the Government might consider revisiting policy on tax and migration.
When you look at the economic shifts across the political axis in the past thirty or so years you can see the whole world moved right in the 1980s.
For many in New Zealand, who were angered and alienated by the big spending excesses of the Muldoon era, that may have seemed like a permanent shift. But orthodoxy changes as the world changes.
Our Government, has been quietly shimmying left on various policy issues, sometimes subtly and sometimes unashamedly borrowing from rivals.
Our Government, has been quietly shimmying left on various policy issues, sometimes subtly and sometimes unashamedly borrowing from rivals. But in pure fiscal terms it remains tight fisted - focused, not unreasonably, on balancing the books and debt repayment.
But in pure fiscal terms it remains tight fisted - focused, not unreasonably, on balancing the books and debt repayment.
New Zealand's relatively solid economic performance out of the GFC, boosted by the dairy boom, has afforded Finance Minister Bill English the luxury of being prudent.
But if these global economic doldrums persist then New Zealand will continue to slide slowly into the monetary policy dead end that other countries find themselves in.
There's still scope for a good political scrap about how best fiscal stimulus should be delivered: infrastructure? social spending? tax-cuts? science and R&D?
It needs to be investment that will drive productivity and underpin more solid economic growth when the stimulus effect has passed.
But it is time to for political leadership on this front. New Zealand has historically been ahead of the curve on economic policy, we should stay there.
