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Opinion: Sometimes the official explanation seems so flawed that we have to question the orthodoxy.
In the Battle of Bến Tre, during the 1968 Tet Offensive of the Vietnam War, an American Major told the journalist Peter Arnett that “it became necessary to destroy the town to save it.”
In our own battle against inflation, we adopted a similar mentality. To save the economy it became necessary to destroy thousands of jobs, businesses and livelihoods.
The Reserve Bank deliberately engineered a recession to tame inflation. The central bank didn’t do that because it’s stupid, or even because it was blinded by the fog of war, but because it was the only weapon it had.
And let’s be clear: the enemy was evil. Inflation destroys economies.
The most famous example is in the Weimar Republic, where the government printed money to pay striking workers, sparking hyperinflation. A loaf of bread cost 250 marks at the beginning of 1923 and 200,000 million marks at the end of the year.
So, yes, the RBNZ chose the lesser of two evils.
But shouldn’t we be on the lookout for more sophisticated weapons rather than relying on the monetary policy blunderbuss?
Big ideas on economic reform are unlikely to come from the current government. That is not a criticism but a political reality.
The government is hemmed in by the coalition agreements, set in stone late last year. National is squeezed between neoliberal Act and New Zealand First, which (as the name suggests) is an economic sovereignty party.
It falls to Labour, as the main Opposition party, to offer alternatives. The life cycle of Labour’s economic reform agenda has been brutish and short in recent years.
In a maladaptive sequence, Labour spends the midpoint of the electoral cycle investigating ideas, such as wealth or capital gains taxes, before disavowing them in the glare of election year.
This time, as it licks its wounds in Opposition, tax is back on the agenda.
Taxing capital gains is mainstream worldwide and everybody from dry economists, Treasury and the World Bank urges New Zealand to adopt it - but still we resist. Let’s see where Labour gets to this time on that policy.
There is another idea Labour should dust off and look at again. Ten years ago, and long-forgotten by most, Labour’s policy menu included a Variable Savings Rate (VSR).
It’s quite a simple idea and I am genuinely interested to hear why it wouldn’t work, because it looks worthy of debate.
Firstly, you need a compulsory savings scheme. Many countries have them: Australia, Singapore, Hong Kong, India, Israel, Denmark, Chile and the Netherlands, to name a few.
To keep the numbers easy, let’s say you earn $100,000 and the VSR is 5%. Well, $5000 goes into your KiwiSaver that year. If inflation was running hot, the Reserve Bank could raise the VSR, say to 7%.
This would cool the economy as raising interest rates does now, but it has several other advantages.
Firstly, the money is coming back to you in retirement rather than being gifted to your Australian-owned bank. And secondly, you’re providing more capital for pension funds to invest, including in much-needed infrastructure.
A VSR would work alongside monetary policy rather than replace it but would also have the advantage of being a quick-fire weapon.
One of the problems of monetary policy is how sluggish it is. The Reserve Bank can hike the Official Cash Rate but it might be 18 months before you roll off your fixed mortgage to face the higher rate.
People are coming off 3% mortgage rates to 6% rates now - at a time when the Reserve Bank is trying to breathe life into the moribund economy by cutting rates. A VSR could work almost immediately.
Labour quietly ditched the idea after getting thrashed at the 2014 election.
Singapore has a Capital Provident Fund that uses a VSR mechanism. It is mainly a savings and investment fund but it can, and has, been used to heat and cool the economy.
The fund, set up in the mid-1950s, had compulsory payments starting at 5% which were ratcheted up to 25%. But in a recession in the mid-1980s, the rate was cut to 10% to stimulate the economy.
There would be equity issues with a VSR - compulsory savings payments will hurt a lot more on the minimum wage than for a CEO - but these needn’t be insurmountable.
Labour has already started an internal debate about what it is now calling a Capital Income Tax, and former Revenue Minister David Parker is leading the charge. It should consider a VSR, too.
Sure, both ideas will be derided by the current government.
But Labour will not win in 2026 by being National-lite; it tried that in 2023 and failed.
Labour needs some big economic ideas. New Zealand does, too.
Guyon Espiner is an investigative journalist and presenter at RNZ, who hosts TV and radio interview show 30 With Guyon Espiner. He writes a fortnightly column for listener.co.nz
