Controlling inflation versus creating jobs: The debate, the ideas, some points to chew on

Published 11 June 2009

The national gdp is 1% negative, Manukau City’s is 2% positive. Unemployment nationally is running at 5-6%, but in apparent contradiction Manukau’s is higher, at 7-8%.


The mayor, Len Brown, is immensely proud of his city, but also keenly aware that, in a recession, while the big companies that make Manukau their home keep totting up dollars, the workforce is more vulnerable.


And so to a debate on Monday night: In difficult economic times, the question was whether to focus on holding down inflation or to shift the emphasis to securing jobs.


Former Reserve Bank governor & National Party leader Don Brash, now listed as an adjunct professor at AUT, and former Labour Finance Minister, now Act MP Sir Roger Douglas took their roles of arguing to keep down inflation seriously, while their partner for the night, Auckland University law professor Jane Kelsey, wondered what she was doing on that side of the fence.


Against them were Labour Party president Andrew Little, Council of Trade Unions secretary Peter Conway & Berl senior economist Ganesh Nana, who I thought presented a less cogent argument for securing jobs ahead of keeping inflation down than the tag team of Dr Don & Sir Roger did for the reverse. The mayor, however, took the temperature at the end of the debate and declared a diplomatic draw.


Point-scoring in a debate doesn’t make a great read, but I noted a few points from the night which are worth considering – and a few that might well be debunked.


Dr Brash started the debate by declaring that all developed countries keep inflation low: “The real issue in monetary policy is this: How can we keep inflation under control and our exchange rate stable?” He said inflation hurts the poor.


“One of the big unresolved issues for all countries is the exchange rate, even for countries that have a fixed exchange rate. Hong Kong’s real rate has moved and jobs have gone across the border.”


Dr Brash made 3 more points:


“Productivity growth over the last decade has been lamentable and if we don’t do anything about that we’re done for”New Zealand has had house price inflation for 20 years, so “it’s not as riskless as you think”New Zealand should give the Reserve Bank governor the ability to vary the excise tax on fuel; the alternative of varying gst, maybe 2-3 times/year, would be a nightmare; Dr Brash has made this point before but it got no traction.


Sir Roger gave this as a debate starting point: “New Zealand has had the lowest unemployment rate in the OECD for years”. He said Government capex created no extra jobs: “It’s job shuffling”. Governments from 1996-2009 had transferred $25 billion from the private sector to Government; not all Government spending was bad, but he asked what individuals might have been able to do with that $28,000/person.


“One of the troubles in politics today is, we argue too much about the means and not enough about the goal.”


Professor Kelsey’s political stance is light years from those of her partners for the night. Her starting point: “Various financial acts have been given quasi-constitutional status by the right” followed by: “Recession is just starting to hit us”.


She commented that the NZ Government budget was given a rating “by some agency that gave AAA to subprime…. Our government is champing at the bit to get the free trade agreement with the US going again, so we can buy more heavily into the model that has failed.”


She figured she ought to support Dr Don & Sir Roger’s view that keeping inflation down should come first, for the moment: “Then we can refocus debate on repealing these laws, then start to look at alternatives.”


The biggest mindshift, perhaps a pivotal point in our society again, was this one noted by Professor Kelsey: In the past 25 years governments had regulated for individuals; before that they regulated for society.


On the pro-jobs side of the debate, Mr Little said strong government was important so it had the ability to intervene. The 80s mantra that “business can do it better” had led to “capitalism unleashed”. He said New Zealand needed to move away from non-productive investment, citing investment in homes in particular, and he noted that, “in any year, more than 50% of wage earners don’t get a pay rise”.


Mr Conway said there were targets to spend on road & rail infrastructure, but not for people: “A set of policies about job creation would be better than focusing on monetary policy & the finance sector.”


Dr Nana picked on having an inflation target range of 0-3%: “Having a specific inflation target distorts.” He said Singapore controlled inflation through its exchange rate. And he answered Sir Roger’s point that money is better in the hands of individuals: “Individuals don’t have good foresight, we don’t tend to have long-term vision.”


He claimed the theory of controlling inflation, having less government & more market hadn’t worked.


It was a debate, so many points get lost in the cut & thrust. But out of it, I figure these points are worth examining if New Zealand is to leap forward rather than to struggle slowly downward:


First is Dr Brash’s argument of using shifts in excise tax as a simple control measure that’s easily adjustedWe talk about productivity, employers crack the whip and employees have had to fight to get their share – while seeing upper levels of management sucking company income out at far higher rates than ever before – but as a country we don’t advance productivity goals that all can aspire toArguments against New Zealanders’ preference for investing in housing are largely spurious: Somebody has to own the housing stock and that stock, like any other, has to pay its way; if individuals don’t invest in houses then institutions will, which may be the same money arriving along a different avenue, but individual attention is often betterThe one issue in housing investment to debate concerns the fairness of tax treatment, but as Dr Brash has indicated with his championing of adjusting excise tax as a control mechanism, tax isn’t always about fairness; there can be incentives for one form of investment – maybe housing, maybe research & development (that’s one New Zealand has done badly for decades)Sir Roger’s point that New Zealand should focus on goals first, means secondProfessor Kelsey’s points on AAA & a free trade agreement are very much about wanting to be part of the winning team, then finding out the win was illusory; for me, it’s about analysing your options well, not just choosing the flavour of the day; so, combining Sir Roger & Professor Kelsey’s points: Setting goals, analysing options, determining meansI didn’t think the points about job creation were presented so well, but it remains there to investigate: Would it be sensible to put a policy of job creation first, in the belief that other factors in the economy would fall into place?Last, the issue of “capitalism unleashed” has the strict among us reaching for regulation, but by nature we are traders so we want at least a measure of capitalism; for me, measures taken by officialdom were at least partly to blame for starting the housing boom around the world and also for accelerating it, which puts a questionmark over regu
ation; “greed is good” will remain a strong driver – and force those less into greed to follow along anyway in fear that they’ll get left behind; company shareholders, institutional investors & corporate managers ought to have looked more rationally at investment decisions through a boom period and put some prudence-based controls in place, but that never happens and it won’t happen next time either.


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Attribution: Manukau debate, story written by Bob Dey for the Bob Dey Property Report.

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