Bryan Gould: Broader measures needed to kick-start economy

What Governor Alan Bollard can do is inadequate. Photo / Mark Mitchell

Opinion

Alan Bollard is a big, tall man, but even his shoulders are not broad enough to bear the burdens placed on them.

To point this out is not so much to criticise the Reserve Bank Governor as to lament the role in which he is cast. He is, after all, lumbered with virtually the sole responsibility for what passes in this country for macro-economic policy.

He alone must decide every six weeks on the direction in which monetary policy should be taken. He is given a single instrument - interest rates - and a single target - inflation.

Beyond that, macro-economic policy is virtually non-existent. Little matter that inflation might be low on the list of economic policy concerns, or that cutting interest rates might make little difference to anyone in an economy mired in recession.

Faced with manifold problems, the Governor - with a tiny armoury of largely irrelevant and ineffectual weapons - is on his own.

Little wonder then that in deciding last week what to do about interest rates he should have opted to share the responsibility by talking to the Minister of Finance.

There was, after all, the small matter of continuing recession, with little sign of the much-touted recovery.

And on top of that, the blow of the February 22 Christchurch earthquake.

There was, however, much tut-tutting that the Governor should have opted, by consulting his political masters, to depart from the principle of absolute independence for the Reserve Bank. Many seemed discomforted by the thought the elected Government might be asked to bear some responsibility for the fortunes of our economy.

The doctrine that macro-economic policy is a simple matter of setting interest rates - a task entrusted exclusively to the Reserve Bank - is greatly convenient for the Government. It means, in our present situation, they can disclaim responsibility for a recession that is well into a fourth year.

Not only is it nothing to do with them, but, according to the doctrine, anything they might try to do would be counter-productive.

The paradox is that governments unwilling to intervene in macro-economic policy, on the grounds the economy is best left to look after itself, are likely to end up being more interventionist than they expect.

As the economy languishes because macro-economic policy settings are inappropriate, governments typically resort more and more - and with greater desperation - to micro-economic intervention of various kinds.

So, we find more fiddling with tax rates and labour laws. More target-setting and micro-management for science, research and the delivery of education. And tighter limits on benefits and public spending programmes.

All in an increasingly futile drive to reverse our poor productivity and declining competitiveness.

But surely, it will be asked, the Governor's interest rate cut was a step in the right direction? Well, yes, it had a certain value as a psychological boost and as a small benefit to those with mortgages.

But it is hardly likely to stimulate spending and investment to where recovery really gets under way. That will require measures of a different nature and order of magnitude.

If monetary policy was the key to recovery, we should have seen it by now. We have had falling and historically low interest rates for years and the economy has hardly stirred.

As I and others argued in 2008 and 2009, using monetary policy as the only stimulus to an economy in a recession is like pushing on a piece of string.

The Governor has done what he can, but what he can do is pitifully inadequate and beside the point. His recourse to involving the Minister of Finance last week suggests he might be moving to this view as well.

No one doubts our problems are endemic and that the earthquake has added to the Government's difficulties. But the failure to take any decisive action over a couple of years means the earthquake cannot be identified as the primary cause of our problems.

The Government has contented itself with trying to look after its own finances, and has been happy to let the wider economy look after itself. The paradox is that public finances are the healthiest part of our economy.

Focusing primarily on getting the Government's deficit down, while ignoring the need for a whole-of-economy perspective, has reflected an ideological rather than practical priority. And has left the economy ill-equipped to grapple with its problems - among which, sadly, the consequences of the Christchurch earthquake now loom large.

Surely Governments should be held to account for what they are elected for - providing an effective stewardship of the economy. And the Governor of the Reserve Bank should no longer be abandoned to his lonely and irrelevant vigil.

* Professor Bryan Gould is a former vice-chancellor of Waikato University.