Russel Normans performance on Q + A last Sunday was measured, thoughtful and informed. He obviously has a good grasp of macro economics and has a pragmatic approach to solving our current problems. It amuses me that the stronger Russel performs in the economic arena the greater the confusion from the political right. Even the Labour commentator Josie Pagani felt compelled to suggest that the Greens should stick to talking about the environment.
New Zealand's manufacturers are under extreme pressure due to the strength of our dollar, thousands of workers are being laid off (many shifting to Australia) and tourists are not staying as long in New Zealand because of our high exchange rate. The International Monetary Fund believes our dollar is probably overvalued by around 15%.
The independence of New Zealand's Reserve Bank is generally accepted as important, however, it is limited by legislation that focuses on inflation and provides a limited tool box to do much else. According to Russel, the obvious way to deal with our high dollar is through quantitative easing and while this was partly dismissed as "just printing money", it is now common practice internationally and is considered mainstream economics.
While the Neo-Liberal economic approach (that New Zealand still largely follows) deplores intervention, in reality there are no strong economies that are fully hands off, and certainly none as small or as open as New Zealand's. Currency speculators will always move to where they will get the best returns and our country has set itself up for such attention. While we have a stable government and some positive growth, our currency will remain attractive until our export returns are totally compromised and our economic viability declines.
Currency speculation and property investment are similar in that neither activity increases productivity or are necessary for strengthening an economy. It makes sense that if our country isn't competitive in commodity markets or manufactured exports then local investment will shift again to these non productive sectors. Current economic policy is penalising our export industries and causing a further weakening of our economic competitiveness and levels of employment.
Russel's prescription for rejuvenating our economic health includes the following:
- Broading the Reserve Bank mandate so that it can address the exchange rate as well as inflation.
- Reducing our exchange rate through quantitative easing.
- Dealing with the housing asset bubble through a capital gains tax.
Considering the National led Government is only really looking at solutions that have quick returns but have negative long-term consequences, Russel's suggested strategies make good sense. When our net overseas debt has grown to 75% of our GDP through increased borrowing, we are relying on selling 49% of our major state assets and opening access to our mineral wealth (with limited environmental protections and royalties of only 5%) we are heading nowhere fast.
We may not have the same level of government debt as most OECD nations, but our borrowing is still increasing at an alarming rate (more than doubled since National took power). Using "earthquake bonds" generated by the Reserve Bank to finance the Christchurch reconstruction ensures a good use of new money and will reduce borrowing and the pressure on our dollar.
Bill English claims that such an approach will have an impact on our standard of living, but when you balance the availability of cheap imports with maintaining jobs, it obvious where the emphasis should be. Russel makes good sense and, when you compare his approach to that of an earlier New Zealand politician with an Aussie background, there is some historical support for his style of economic thinking. Josie Pagani may have been a little rash when she discounted the possibility of a Green Finance Minister.
Further explanation of the Green's proposals here.