Reserve Bank Governor Adrian Orr. Photo / Mark Mitchell
Reserve Bank Governor Adrian Orr. Photo / Mark Mitchell
Opinion by Toby Moore
OPINION
Amidst the range of looming medium-term policy challenges facing the country, the new coalition Government chose a curious issue to prioritise as one of its first legislative acts.
The Government presented this change as something that would remedy the cost of living crisis that the country has faced in recent years, as New Zealand and other advanced economies absorbed a range of demand-and-supply side shocks.
Unfortunately, the case that has been made for repealing the dual mandate does not stand up to the barest level of scrutiny. Had the Reserve Bank been operating under a single inflation-targeting objective in recent years, it would not have led to any different outcome in current inflation levels. But abandoning the previous requirement to support maximum sustainable employment may well lead to worse economic outcomes for the country in the coming years.
The claim that the dual mandate did not lead to decisions that resulted in higher inflation turns out to be relatively straightforward to establish. The people that made those decisions have stated that is the case. They have done so consistently, without equivocation and on numerous occasions.
In its November 2021 Monetary Policy Statement, the Reserve Bank asserted that employment was above its maximum sustainable level (or in more general terms, unemployment was lower than it thought could be sustained over time). Rather than facing a situation where the Reserve Bank had to think about balancing its dual objectives, the state of the labour market reinforced the Reserve Bank’s decision to tighten monetary policy. That has been the Reserve Bank’s position through to the current day.
Had the dual mandate actually caused the Reserve Bank to stay its hand or to counteract inflation in a half-hearted way, we would expect to see notable differences in its approach compared to other central banks internationally. Instead, the Reserve Bank’s approach has not only been in line with its international counterparts, it chose to tighten earlier and faster than a number of central banks that do have a single mandate.
To claim that the dual mandate did not lead to any different decisions in recent years does not mean that we won’t face situations in future where the dual mandate matters. There were good reasons for shifting to a dual mandate in 2018 and undoing this change could have meaningful negative consequences for economic outcomes in the years to come.
To understand why the dual mandate is important, one needs to consider the issues that were preoccupying economic policy thinkers prior to Covid. Employment recovered extremely slowly following the Global Financial Crisis, in both New Zealand and in other advanced economies. Unemployment rose above 4 per cent in late 2008 and did not return to that level until 2018 - approximately a decade later. The bounce-back in employment during the 1990s was even slower, with the recovery from the Rogernomics recession taking until mid-2004.
During the post-GFC era, inflation was not only subdued, it was consistently falling below its target. This period highlighted an important point – that while people may have strong preferences for lower inflation, low inflation in itself is not a reliable indicator that the real economy is in good shape.
Central banks internationally, including in New Zealand, were slow to respond to this development. On two occasions during the 2010s, the Reserve Bank of New Zealand started tightening monetary policy in anticipation of inflation that never arrived and was forced to reverse course on both occasions. It is hard to avoid the conclusion that historically, monetary policy authorities have tended to exhibit far more urgency when inflation is too high than they do when unemployment is elevated.
While inflation tends to put a burden on all but the wealthiest households, the costs of needlessly high unemployment often go unobserved. Historical data would tell us that those bearing the costs of a slow labour market recovery are disproportionately Māori and Pacific, young people, women and those in particular regions.
The pattern of very slow recoveries in employment also means that New Zealand has spent the vast majority of the past three decades in conditions where there are a significant number of New Zealanders out of work and where the bargaining power of workers has been diminished as a consequence.
Toby Moore is a doctoral candidate at Te Herenga Waka, Victoria University of Wellington, and a former Beehive advisor.
For most of the working lives of anyone born after 1970, the economic environment has been one where workers have been competing with each other for jobs, rather than employers having to truly compete for workers. New Zealand has also spent a relatively small proportion of this time in conditions where the economy’s resources are close to full utilisation and in which there is pressure for both workers and capital to be allocated toward the highest-value activities.
We do not want the economy to be operating above capacity in such a way that would lead to the sort of inflation that the economy has endured in recent years. But nor should we be content with a policy approach that tolerates a weak labour market that keeps us in semi-slump conditions.
There has been no robust case made that repealing the dual mandate would have reduced the costs of inflation over the past two years. But for those groups that have been at the margins of the labour market across recent decades, the likely costs of this change are very real.
Toby Moore is a doctoral candidate at Te Herenga Waka, Victoria University of Wellington, and a former Beehive advisor.
