How valid is the intense criticism being pointed at Reserve Bank Governor Adrian Orr? Photo / Mark Mitchell
How valid is the intense criticism being pointed at Reserve Bank Governor Adrian Orr? Photo / Mark Mitchell
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.
Likewise, former Reserve Bank Governor Graeme Wheeler publicly voicing concerns about the bank's current strategies is worthy of careful consideration.
Graeme Wheeler, RBNZ Governor from 2012 to 2017, co-authored a paper about global central bank failures - but with some specific digs at Orr and the RBNZ.
He partnered with Dr Bryce Wilkinson and the paper which was published by economic think-tank The NZ Initiative.
Had Wheeler not been involved it would have been far less newsworthy.
I rate the NZ Initiative economists very highly but it is important to understand that they have a perspective.
Some would describe them as neo-liberal or right-wing. I think that's unfair because they take a more nuanced view on many topics.
But when it comes to issues like inflation, they hold a classical monetarist view.
It's a view held by many whose relationship to economics was forged in the tumultuous years of the late 1970s and 1980s.
It is so embedded in the thinking of a generation that it is sometimes presented as an immutable law of physics.
It isn't. Like all economics, it is political.
Monetarist founding father Milton Friedman famously said: "Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output."
It's an important observation and should never be forgotten.
But as we saw with the pandemic - a sudden and catastrophic shock to supply chains can be a massive driver of inflation.
Strict monetarists would argue that the actual inflation is a symptom of central bank failure to adjust the money supply - but at what cost?
In my view, they often underplay the importance of employment in people's lives.
As individuals we can manage our way through inflation in a way we can't if we suddenly lose our income.
Of course, as we saw in the 1970s, if you leave inflation unchecked for too long then recession and high unemployment will follow regardless. You'll end up with the worst of both worlds.
It's a balancing act.
But we haven't left inflation unchecked. We're raising interest rates at an unprecedented rate.
One of Wheeler's primary concerns seems to be that the RBNZ has failed to adequately acknowledge that mistakes were made around the scale and timing of its stimulatory policies.
He fears without proper acknowledgment and analysis there is a risk of repeating these mistakes.
That seems quite reasonable. When this is all over there should be a comprehensive 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 counter-factual here?
Even the worst-case forecasts of economists don't currently look as bad as the economic collapse we were facing when Covid struck.
Former Reserve Bank Governor Graeme Wheeler. Photo / Mark Mitchell
No one is forecasting double-digit unemployment. Inflation is expected to ease over the next 18 months.
Many of the central bank's (and Government's) harshest critics seem fearful that we are headed back to the long-term stagflationary era of the 1970s and 1980s.
These fears seem overly emotive to me.
Perhaps they will be proved right. But right now the jury is still out.
When policy critics stray into hyperbole (or when their arguments are picked up and exaggerated by politicians and conservative media commentators), they make it all too easy for the left to dismiss them as dinosaurs - old generals fighting the last war.
Constantly conflating concern about monetary policy decisions with broader cultural issues - like whether central banks should explore responses to climate change or use te reo Māori, doesn't do them any favours.
Finance Minister Grant Robertson was quick to accuse The NZ Initiative of hindsight economics.
Its chief executive Oliver Hartwich responded, quite correctly, that it isn't hindsight, the NZ Initiative position on monetary policy has been consistent since the beginning of the pandemic.
But painting the current economic scenario as significantly worse than any number of counter-factual scenarios is opinion - not fact.
Economics is not hard science.
Hard science runs real-world experiments over and over in the lab, with controls in place, until it is accurate to irrefutable degrees.
Economic policy plays out once, in real-time, and we don't get to redo it.
The idea that the RBNZ should have delivered no stimulus at all is ridiculous. I don't think anyone sane is arguing that point.
So are we are just debating the degree of stimulus and the timing of its withdrawal?
That doesn't seem worthy of such great passion.
In reality, there is a deeper battle playing out among the nation's economists, around the role that a central bank should play in society.
I guess that's part of the ongoing and fascinating debate about the future of economics.
We should embrace that.
But we should be wary of letting politics polarise positions that aren't necessarily so far apart.
